WHAT IS 5 FORCES STRATEGY?
Porter's Five Forces is a framework developed by Michael Porter to analyze the competitive forces in an industry and assess the attractiveness of that industry for investment. The framework is based on the idea that an industry's profitability is determined by five key forces:
1.Threat of new entrants: The ease with which new competitors can enter the market and begin offering products or services similar to those of existing players. High barriers to entry can make it difficult for new entrants to gain a foothold in the market, while low barriers can increase competition and pressure existing players to lower prices or improve their offerings.
2.Bargaining power of buyers: The ability of buyers (such as consumers or businesses) to negotiate lower prices or better terms from industry players. High buyer bargaining power can reduce the profitability of industry players, while low buyer bargaining power can allow industry players to charge higher prices or offer less favorable terms.
3.Bargaining power of suppliers: The ability of suppliers (such as raw materials or labor) to negotiate higher prices or better terms from industry players. High supplier bargaining power can increase the cost of goods and services for industry players, while low supplier bargaining power can allow industry players to negotiate more favorable terms.
4.Threat of substitute products or services: The availability of alternative products or services that customers could switch to in place of those offered by industry players. The presence of substitute products can reduce the demand for products and services in the industry, putting pressure on industry players to reduce prices or improve their offerings.
5.Rivalry among existing competitors: The intensity of competition among existing players in the industry.
Porter's Five Forces can be used to assess the attractiveness of an industry for investment and to identify areas where companies can improve their competitive position. To use the framework, an analyst would assess the strength of each of the five forces in the industry and consider how they might change in the future. This can help identify opportunities or threats that may affect a company's profitability.