Porters Five Forces Force One: Rivalry Rivalry is the level of aggressive, competitive behaviour in the industry.

This is determined by several factors, including No. of firms. Rivalry should be higher when there are more firms and lower when there are fewer firms. Growth Rate. Rivalry increases as the rate of market growth slows down, i.e. as markets become more mature. Level of fixed costs. When firms have a high level of fixed costs they need higher minimum levels of trade in order to be profitable, and thus must compete more. Level of perishability/storage costs. When produce is expensive to store and/or perishes easily, there is a strong incentive for firms to sell quickly and this increases rivalry. The lower the perishability/storage costs, the lower the level of rivalry. Levels of product differentiation. The less different the products of different firms, the greater the rivalry, as they can take one anothers customers. With higher levels of differentiation, rivalry is lower. Size of exit barriers. When firms can leave an industry easily they will tend to leave rather than endure very high levels of competition. Hence, the greater the exit barriers, the greater the level of rivalry. Level of innovation and change. Industries that change rapidly have greater risk for incumbents. Incumbents need to be more aggressive in trying to minimize their risks and have to try to make sure that other firms suffer as a result of the change more than they do. Hence the higher the level of change, the more rivalry, and the more competition.

Force Two: Threat of Substitutes The easier it is for the buyers of the firms produce to switch to a substitute product, the more competition there will be. Factors that determine the threat of substitution include Smallness of switching cost. There is usually a cost associated with switching to a new product, for example the cost of finding a new supplier or learning how to use the new product. The greater the cost, the lower the threat that buyers will substitute. Willingness of buyer to switch. Buyers may also be psychologically willing or unwilling to switch. If there are nonprice reasons why the buyer likes buying from the firm, such as personal relationships, the buyer is unlikely to be willing to switch. In general, the greater the willingness of buyers to switch, the greater the threat of substitution. Availability of produce with comparable price and performance. For many products there are other products with comparable price and performance. The greater the degree to which these are available, the higher the threat of substation. Degree of commodification. The degree to which

Force Three: Buyer Power The third force is the amount of power that buyers have relative to the firms in the industry. The more power buyers have relative to the firms, the more competitive the market will be. Factors determining buyer power include Concentration of buyers. The larger and fewer the buyers, the more power they have to dictate terms and the more competitive the industry will be. Level of information asymmetry. If buyers have more and better information about prices and market conditions than firms, buyer power increases

 Level of price sensitivity of buyers. Faced with price increases, demand falls for some products more than others. When buyers are more price sensitive, buyer power is greater, and when they are less sensitive, firm power is greater. Level of threat of forward integration. Forward integration is the process why which buyers start to produce what they need themselves, instead of buying it. When there is a real prospect that buyers can do this, their power is increased. The greater the threat of forward integration, the greater the level of buyer power. Force Four: Supplier Power The fourth force is supplier power the level of power that the businesses that supply the firms have. The greater the level of supplier power, the more competitive the market will be. Factors determining the level of supplier power include Concentration of suppliers. The larger and fewer the suppliers, the more power they have to dictate terms and the more competitive the industry will be. Ability of suppliers to trade in small volumes. If suppliers have low minimum levels of sales that they need to be profitable, it is easier for them to turn down business and thus influence the terms of business. The lower the minimum trading volumes, the greater the supplier power. Level of differentiation of inputs. When the inputs that the firms use are undifferentiated (commoditylike) the first have relatively more power. The more differentiated the inputs, the greater the level of supplier power. Cost of switching suppliers. Sometimes switching suppliers has a financial cost, for example if staff have to be trained how to use the new input. The greater the switching cost, the greater the supplier power. Level of threat of backward integration. Backward Integration is when the supplier decides to start using their produce to make what the firm produces, instead of

just selling the product to the firm in effect entering the firms industry. The more credible the threat of backward integration, the greater the level of supplier power. Force Five: Barriers to Entry The final force is the level of barriers to entry impediments to new firms entering the market. The lower the barriers to entry, the more competitive the industry will be. Factors determining barriers to entry include: Level of capital requirements. If a business requires very little capital to start, barriers to entry will be low. Other things being equal, the lower the capital requirement, the lower the barriers to entry. Level of branding and differentiation. Some product markets are made up of quite differentiated offerings and some markets are moreorless commodity markets. The more differentiated the product market, the harder it is to enter (i.e. the greater the barriers to entry). Level of access to inputs/suppliers. The easier it is to acquire the supplies and other inputs needed in the industry, the easier it is to enter the market. Lack of regulatory obstacles. Some markets, such as banking, tend to be highly regulated and it is hard for new firms to enter the market for this reason. Some are unregulated and in these it is easy for new firms to enter. The greater the level of regulatory obstacles, the greater the barriers to entry. Level of economies of scale. Some kind of businesses must be carried out relatively larger scale to be economical (those with a lot of fixed assets), and some can be done at any scale. When there are no benefits to working at scale, it is easier for new firms to enter. The lower the level of economies of scale available in the industry, the lower the barriers to entry. Ease of distribution. If produce is relatively easy to distribute, it becomes easier,

other things being equal, for new firms to enter the market. When distribution is requires special capabilities or investments it is harder for new firms to enter. The greater the ease of distribution, the lower the barriers to entry. Prevalence of absolute cost advantages. Some firms in some industries have absolute cost advantages over their competitors as a result of unique resources, relationships and technology. In this case, entering these industries is more difficult. In general, the lower the prevalence of absolute cost advantages, the lower the barriers to entry. Ease of skill acquisition. In some industries, the technical skills needed by firms are easily acquired, in some they are hard to acquire. The easier it is for new entrants to acquire the new skills, the lower the barriers to entry. Inability of incumbents to retaliate. In some industries, incumbents have powerful