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Porter's Five Forces of Competition - Coggle Diagram
Porter's Five Forces of Competition
Porter argues that if the forces of competition are strong then industry is less attractive to potential competitors than if forces are weak
Porters five forces can be used by an existing organisation to scan its competitive environment to access its own risk or threats to potential new competition
It can also used by organisations interested in entering a new industry sector to assess the potential ease at which this might be done
The threat of (new) entry
This considers how easy it is for potential new entrants to enter an industry
Power is affected by the ability of organisations to enter a market
If it costs little in time or money to enter a market and compete effectively, if there are few economies of scale in place or if there is little protection for key technologies then new competitors can enter a market quickly and weaken an organisations position
The threat of substitutes
Substitues are products or services that meet approximately the same customer needs but do so in different ways
This threat is better understood by asking how easily a product or service could be substituted with a different type of product or service
Bargaining power of buyers
In some industries the buyers of products or services are very strong, in others they are very weak
The buyer is the immediate purchaser and not necessarily the end user
Where buyers are strong they can demand low prices
Buyer power is influenced by having the potential capacity or capability to self supply
Where there are low switching costs or where there are very few buyers for a product or service and each buyer represents a significant proportion of the buying potential of the market, the buyer will have power
When customers have full transparency of the market, as delivered through internet price comparison engines, their power to negotiate is enhanced
Bargaining power of suppliers
In some industries, a few suppliers dominate, protected through patents or legislation or because the competitive force of the industry are low
Where switching costs between suppliers are high, perhaps because they operate to a different specification or perhaps staff might need retraining, then the power of supplies will be high
The absence of subsitutes increases supply power as buyers have little choice
Competitive rivalry
If the other forces combine to create high rivalry, generally the worse it is for the organisations operating in that industry
One of the factors affecting competitive rivalries the rate at which the market is growing, in fast growing markets, organisations can grow with the market and this reduces rivalry
As growth rates start to define, rivalry increases as organistions compete with each other
If all the competitors in industry are the same size, this situation may lead to intense rivalry especially if buyers or suppliers can trade one off against each other
By identifying the strength and direction of each force, it is possible to assess the strength of the organisation's position quickly, together with its ability to make a profit or maintain profitability in a specific indsutry
Tends to emphasise external forces and the way that an organisation can counter these forces without considering wider factors