Porter’s 5 forces
Definition:
Porter’s 5 forces model is a model that identifies and analyses 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths in order to know the attractiveness of any business. Attractiveness in this context refers to the overall industry profitability. The strongest competitive forces determine the profitability of the industry and become the most important to strategic formulation. Thus, it is essential for managers to understand and apply this useful strategic tool in industry analysis.
Rivalry among existing competitors
The intensity of rivalry is the most obvious of the five forces in an industry that help to determine the extent to which the value created by an industry will be dissipated through head-to-head competition. Rival sellers want to use whatever they have to improve and strengthen their market positions in order to earn profits.
Rivals are jockeying for strategic position. They want to be the market leader since customers only remember no. one. However, when one firm makes a strategic move and succeed, its rivals also respond with offensive or defensive countermoves, such as using price competition, strategic advertising battles, increasing consumer warranties or service, making new products introductions etc.
When most companies in the industry are relatively satisfied with their current situation, the rivalry is weak and the industry can considered to be disciplined. The intensity of rivalry is determined by many factors, such as market growth, switching costs etc. For an instant, in a slow market growth industry, the firms need to fight for market share in order to gain good revenue. Thus, a slow market growth results in greater intensity of rivalry. Generally, the greater the intensity of competitive rivalry is, the lower the overall profitability of an industry is.
Threat of new entrants
New entrants to an industry bring new capacity, the desire...