Porter 5 Forces

Porter’s Five Forces

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand boththe strength of your current competitive position, and the strength of a position you're considering moving into.
With a clear understanding of where power lies, you can take fair advantage of asituation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.
Conventionally, the tool is used to identify whether newproducts, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations.
Understanding the Tool:Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:
1. Supplier Power: Here you assess how easy it is for suppliersto drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one toanother, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
2. Buyer Power: Here you ask yourself how easy it is forbuyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to thoseof someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability ofyour competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will...