Porter’s Five Forces consists of forces that affect a company's ability to make profits and serve its customers. Hence, Porter’s Five Forces can be used to assess the attractiveness of entering new markets through five key determinants:
1. Bargaining power of customers: the bargaining power of customers is the customer’s ability to pressure the firm to lower its sales price. It also takes into consideration buyer price sensitivity and buyer switching costs.
2. Threats of new entrants: markets that yield high returns will attract new firms. New entrants eventually decrease profitability among all firms in the industry. The most attractive type of industry to be the leader in is one where the barriers to entry (patens, legal rights) are high.
3. Bargaining power of suppliers: suppliers of raw materials, labor, and services can hold power over a firm if there are a limited number of substitutes. An example of this is a union demanding high wages for skilled work. Suppliers may choose to refuse to work with a firm or charge high prices for services.
4. Competitive rivalry within an industry: there is always the need for sustainable competitive advantage though innovation. There is also competition between online and offline companies in the modern age of the Internet.
5. Threat of substitute products: tap water is a substitute for Coke but Pepsi is a competitor’s product. Therefore, substitutes shrink the whole industry (soft drinks) while a competitor’s product just decreases one firm’s share of the market¹.
Three of the five forces described above refer to competition from external forces (competitive rivalry in the industry, threats of new entrants, and threats of substitute products) while two of the threats are internal (bargaining power of suppliers and bargaining power of buyers).
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