What is Porter´s Five Forces Model


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Porter´s Five Forces Model definition. How to use it

Porter’s Five Forces Model is a framework for analyzing the competitive forces within an industry to determine its attractiveness and potential profitability. The model was developed by Michael Porter, a Harvard Business School professor, and is widely used in business strategy and planning.

The Five Forces Model identifies five key forces that shape the competitive landscape of an industry:

  1. Threat of new entrants: the extent to which new competitors can enter the market and compete with existing companies.
  2. Bargaining power of suppliers: the extent to which suppliers can influence the prices and quality of inputs.
  3. Bargaining power of buyers: the extent to which buyers can influence the prices and quality of products or services.
  4. Threat of substitute products or services: the extent to which customers can switch to alternative products or services.
  5. Intensity of competitive rivalry: the extent to which existing competitors are competing aggressively for market share.
Clase de Business English sobre Porter´s Five Forces Model

Source: graph courtesy of https://einvestingforbeginners.com/porters-five-forces-daah/

To use Porter’s Five Forces Model, a company can analyze each of these forces in its industry and identify the key factors that are driving competition and profitability. This analysis can help a company develop a strategic plan to address the challenges and opportunities in its industry.

Example – Textile industry analysis

For example, let’s consider the textile industry and how Zara, Mango, GAP, and Primark compete within this industry. Here’s a brief analysis of each of the five forces:

  1. Threat of new entrants: The textile industry has relatively low barriers to entry, which means that new competitors could enter the market easily. However, the cost of establishing a strong brand and supply chain could be a significant barrier to entry.
  2. Bargaining power of suppliers: Textile manufacturers depend on a variety of raw materials, such as cotton and synthetic fibers, which could be subject to price fluctuations based on supply and demand. However, large textile companies like Zara and Mango can use their buying power to negotiate lower prices and better quality from suppliers.
  3. Bargaining power of buyers: Customers have a high level of bargaining power in the textile industry because there are many retailers to choose from and low switching costs. This means that companies need to differentiate their products and offer competitive prices to attract and retain customers.
  4. Threat of substitute products or services: The textile industry faces competition from alternative materials, such as leather, polyester, and other synthetic fabrics. However, the availability and cost of these alternatives can vary, which could affect their attractiveness to customers.
  5. Intensity of competitive rivalry: The textile industry is highly competitive, with many players vying for market share. Companies like Zara and Mango differentiate themselves through their brand image, product design, and supply chain efficiency. Meanwhile, companies like GAP and Primark compete on price and volume.

Based on this Five Forces analysis, Zara and Mango appear to be well-positioned to compete in the textile industry due to their strong brand image, supply chain efficiency, and product differentiation. However, companies like GAP and Primark may face more challenges due to their focus on price and volume, which could limit their ability to differentiate their products and capture market share.

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