5 Forces Industry Analysis

Industry Analysis: 5 Force Model by Michael Porter

Bargaining Power of Suppliers
Bargaining Power of Customers
Threat of New Entrants
Threat of Substitutes
Competitive Rivalry between Existing Players

from the book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." by Michael E. Porter

The following material is from (http://www.investopedia.com/features/industryhandbook/porter.asp)

In his book, Porter identified five competitive forces that shape every single industry and market. These forces help us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry. The following image shows the relationship between the different competitive forces.

Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation

Power of Suppliers - This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power:
There are very few suppliers of a particular product There are no substitutes Switching to another (competitive) product is very costly The product is extremely important to the buyer, they can not do without it The supplying industry has a higher profitability than the buying industry

Power of Buyers - This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power:
Small number of buyers Purchases of large volumes Switching to another (competitive) product is simple The product is not extremely important to the buyer, they can do without it for a period of time. Customers are price sensitive

Availability of Substitutes - What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses to be a serious threat. Here are a few factors that can affect the threat of substitutes:
The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker is likely to switch over to a beverage like tea because the products are so similar. If substitutes are similar, then it can be viewed in the same light as a new entrant.

Competitive Rivalry - And last but not least, this describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:
Many players of about the same size, no dominant firm. Little differentiation between competitors products and services. A mature industry with very little growth. Companies can only grow by stealing customers away from competitors.