Porters five forces model

 Porters five forces model

Porters five forces model explain how five factor affects an industry’s profitability and business attractiveness. The five forces are explained below.

• Competition among existing firms: cut throat competition among businesses in an industry decreases the profitability and attractiveness of business. On the contrary the profitability and attractiveness of business is high when there is very minimal competition among existing firms. When competition is high the expense of product positioning is high and the profit margin is low.

• Threat of substitute products: there is no certainty in a consumer’s preference and when the risk of shift of preference to substitute products is high the profitability of an industry is low. For instance cement industry in Nepal has no close substitutes and hence the profitability of cement industry is high. There is always the threat for coco cola and Pepsi that consumers may shift to non-carbonated drinks.

• Bargaining power of customers: when the bargaining power of customers is high the profitably of an industry is low and vice versa. For example a customer’s bargaining power in purchase of very basic needs is low whereas the same customers bargaining power in non-basic goods are high. The availability of substitute goods, competition etc. affects the bargaining power of customers.

•  Bargaining power of suppliers: When the bargaining power of suppliers is high the profitability of business and industry is low and vice versa. For instance India as a supplier to Nepal has high bargaining power as Nepal has very minimal choices.

• Threat of potential entrants: when there is high threat of new potential entrants in an industry the industry profitability is low. The potentiality of new entrants is affected by barriers and ease of entry for new businesses in an industry.