Porters 5 Forces analysis is a Business Analysis technique for analysing the external market place within which the organisation operates. The technique helps to identify any pressures which can be applied on to the organisation.
The forces, as defined by Michael Porter, are Supplier Power, Buyer Power, Substitute Products, Market Rivalry and The Threat of New Entrants. These forces are described in more detail below.
What kind of power do the suppliers have over the organisation. Some examples of the power may include:
There is an ultimate threat from suppliers of Forward Integration. Forward integration is when a supplier takes over the business functions of an organisation further down the supply chain. For example a computer manufacturer who typically sold goods to stores who in turn sold to the customer, may consider setting up their own website to sell their products directly - cutting out the middle man.
Buyer power is the flip side of supplier power. What pressures could the buyers from the organisation place upon it. Some examples may include:
The ultimate threat from buyers is that of Backward Integration. Backwards intregration is when a buyer takes ownership of one of it's suppliers. For example a computer manufacturer may take over the supplier who provides it with computer cases. Doing this makes the entire chain more efficient and profitable.
What is the competition like in the market place. How strong is the organisation in comparison to the competition. What pressures could the competition place on the organisation (reducing prices to be more attractive to customer etc).
When we are looking at the threat from new entrants we tend to talk about the barriers to entry. The pressures/forces identified detail what are the things that stand in the way of new entrants entering the market place. Ideally the organisation wants to have as many barriers to entry as possible to make it as difficult as possible for new entrants to join the market.
Substitute products includes any products in the market place which fill a similar need to the product or service provided by the organisation and how easy it is for a customer to switch to a substitute product.
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