Porter’s Five 5 Model

In this video, we briefly discuss how Porter’s 5 Forces model can assist entrepreneurs to understand the competitive pressures that lead to shrinking profitability in businesses. The model breaks down this dynamic by identifying 4 separate sources of pressure plus the existing rivalry among competitors.

Bargaining Power of Suppliers.
Number and size of suppliers
The uniqueness of each supplier’s product
Focal company’s ability to substitute

Bargaining Power of Buyers.
Number of customers
Size of each customer order
Difference between competitors
Price sensitivity
Buyer’s ability to substitute
Buyer’s information availability
Switching costs

Threat of New Entrants.
Barriers to entry
Economies of scale
Brand loyalty
Capital requirements
Cumulative experience
Government policies
Access to distribution channels
Switching costs

Threat of Substitute Products.
Number of substitute product available
Buyer propensity to substitute
Relative price performance of substitute
Perceived level of product differentiation
Switching costs

All in all, we can see how this model allows us to single out a series of variables that firms need to keep under control in order to manage the degree of profitability that can be expected in their industry.