The Five Forces Analysis is a framework for business management, introduced by Porter in 1979. This analysis tests the effects of forces close to a company that includes the ability of those forces to meet customers’ needs and provide profits. A change in each of these forces will require the company to regain and re-evaluate the market.
Buyer’s Power: The buyer’s power is so long that the buyer has a great deal of choice, and at a time when there is not much choice. As a supplier of goods and services, organizations are keen to reduce purchaser power. Vendor Power: Vendor Power is too long for the buyer to have a small choice (on who to buy from); and when it’s low, buyers have a lot of choices. The power of the seller and the buyer’s power are the opposite of each other. The threat of replacement of a good or service depends on the buyer’s orientation for replacement, the buyer’s change cost, the level of awareness of the different products, as well as the additional cost of the replacement function. This threat is high when there are many alternative products and services and it’s low when there is not much choice to choose.
Threat of new entrants: The threat is high when new entrants to the market are easy to enter, and at a low level there is a significant ban on entry. Competition and the like among existing rivals: when there is high competition in the market, and at a low level, there is more competition.
Porter’s Five Forces Framework is a tool for analyzing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of its profitability. An “unattractive” industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching “pure competition”, in which available profits for all firms are driven to normal profit levels. The five-force perspective is associated with its originator, Michael E. Porter of Harvard University.