Porter's 5 forces model is a powerful methodology used to analyze the level of competence of a definite sector, allowing us to detect opportunities and threats as well as a forecast of profitability in the medium or long term. The higher of level of competition, lower is the possibility of obtaining high returns, on the other hand, sectors with low competition levels are excellent niches where we can obtain high returns.
The model of the 5 competitive forces was developed and presented in 1979 by Michael Porter, resulting in a strategic analysis model essential during the process of developing the strategy of any company or institution
Poter's 5 forces model exploits the competition of any sector in 5 clearly differentiated forces:
Products /services substitute
Bargaining power of suppliers
Bargaining power of customers
Rivalry of competitors
The detailed analysis of each of these 5 forces will allow us to carry out a complete scan of the sector in which our company is located or in the sector where we want to introduce ourselves.
In this force we analyze the degree to which new competitors can enter to compete within a sector, this force is intrinsically related to the degree of profitability presented by the sector as well as the presence or not of entry barriers that facilitate or hinder the arrival of new competitors.
Those sectors that provide high rates of return combined with nonexistent entry barriers as well as the absence of powerful competitors will be the perfect combination for the entry of new companies that compete for a piece of the market. On the other hand, the existence of entry barriers or the presence of leading companies will mark the capacity for the integration of new companies into the sector.
Imagine that we want to create a new company that competes in the aircraft manufacturing sector, the initial financial outlay for both the hiring of engineers and specialists in the sector as well as the gigantic facilities needed for construction, turn out to be such a high economic barrier to entry that only few companies are dedicated to this business
This force analyzes the presence in which existing developing products / services can perform the same functions or expand them from the point of view of the clients, regardless of the sector that comes from.
The computer is a clear example of a substitute product that eliminated all the companies dedicated to the manufacture of the old typewriters. High-speed trains are replacing all commercial flights between cities whose distances are less than 600 km, App like Uber, Amazon or Airbnb are replacing business models established for years ...
As products and / or services substitute appear, the attractiveness and profitability of the sector diminish, even tending to disappear if they are not reinvented.
It refers to the degree of power that providers and suppliers have within a certain sector, for example in the sector of the distribution of high-end mobile telephony are the suppliers themselves / manufacturers such as Apple or Samsung which impose both the price and the channels of distribution of their products, becoming the supplier in the authentic actor of the business.
The greater the bargaining power of the suppliers, the lower the profitability and attractiveness of the sector.
In this case, the power that the clients have over the company or over a certain sector is analyzed, those companies that work exclusively or with a production greater than 80% towards a single client will have a low bargaining power given that the lack of orders by the client can mean the bankruptcy or cessation of the activity.
Likewise, in the sectors where there is a multitude of supply in the face of low demand, it is the clients themselves who impose the prices, quality standards, etc ...
The greater the bargaining power that customers have, the lower profitability and attractiveness the sector will have.
It refers to the degree and type of rivalry that develops between the various companies that compound the sector, its not the same a sector whose companies consistently rival the price of their products, that those companies that rival high innovation products and standards of quality. In the first case the profitability of the sector will be very low while in the other case the profitability of the sector will be high but the investment in R&D as well as in the productive process and selection of materials will be high.
In the mid-1990s and after a revision of Porter's model Adam Bradendenburguer and Barry Nalebuff added a sixth force called the complementers.
The complementers are products and / or services outside of the main sector which are compatible and improve the value of the products and / or services sold by a certain sector, that is, they are complements of the main industry.
There are many complementers in the various existing sectors, for example an operating system (software) is a necessary complement to any computer (hardware), oil is a complement of automobiles that use combustion engines.
The impact on the sector of a complementer obeys directly of the dependency between the main product and the complementing one.
For example, if the price of oil increases dramatically affects the price of airline tickets, in this case airlines can choose to pass the increase or part of it to customers or can choose to directly assume the price increase against of the benefits of the sector, in the first case it is possible that customers opt for other more economical means of transport affecting the demand of the sector, in the second case it will reduce the benefits of the global profitability of the sector.
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