Porter’s Five Forces of Analysis: How to Determine the Attractiveness of an Industry
- Explain the five forces of Michael Porter and their use in conducting an industry analysis.
The five forces include:
- Competitive rivalry which is concerned with intensity of the industry in terms of size of firms or the number of firms in the industry. If they are large they have the ability to exert pressures on the industry than if they are smaller. Also, if they are not only large but few it will be difficult to complete, as they create a situation where a handful of companies control prices. A new entrant would therefore prefer there are more firms in the industry.
- Barriers to entry that new entrants needs to overcome to gain entry in to the market such as capital expenditure or regulations. A new entrant should consider the number of barriers before entry depending on the type of business.
- Brand loyalty which dictates that some people only purchase from particular company. New entrants have to find strategies to attract customers and gain their loyalty especially if already established companies have already gained their loyalty.
- Threat of substitute products, which are not identical but fulfill same underlying needs. New entrants should not enter into an industry with more substitutes; there is a high threat from the substitute.
- Buyer power referring to strength of buyers determining their ability to exert control over price. If they are more they can have a huge impact than when few. New entrant should evaluate whether they can conform to a certain price or are free to set your own price.
- Control of suppliers where if they are few they have ability to exert control over price, than if they are more due to increased competition between them, therefore it will be in favor of new entrants.
What are the shortcomings this model in analyzing a very diversified and complex business such as Amazon.com?
This model can be applied for analysis in a better way in a simple market structure than in a complex business structure. This is because it is not easy to have a comprehensive description and proper analysis of all five forces in a complex diversified business due to multiple interrelations, product groups, by products and segments. Conducting a narrow focus on specific segments in such a business can bear the risk of missing important elements