Porter’s Five Forces Model is an effective tool for management when observing and reacting to
an industry’s competitive environment. The model helps a manager decide whether or not the firm
should remain in or leave an industry, provides reasoning for the increase or decrease of resource
commitments, and helps evaluate improvements needed to give a competitive advantage for a firm
(Dess, McNamara, & Eisner, 2016). The five basic competitive forces are threat of new entrants,
bargaining power of buyers, bargaining power of suppliers, threat of substitute products and services,
and the intensity of rivalry among competitors in a particular industry. The structure of this model
observes how profitability and growth are determined by the organization of an industry.
The first of the five forces is the threat of new entrants. The threat of new entrants refers to the
possibility of a new company entering an industry and taking away profit and return from other firms
(Dess et al, 2016). A profitable industry attracts new businesses and this in turn can drastically affect the
established firms of an industry. Entry barriers make it more difficult for new entrants. The factors that
determine this threat of entry are economies of scale, product differentiation, capital requirements,
switching costs, access to distribution channels, and cost of disadvantages independent of scale. Next is
the bargaining power of buyers which refers to the influential buyers that pressure profits and prices
and play competitors against one another. According to Dess, McNamara, and Eisner, “the power of
each large buyer group depends on attributes of the market situation and the importance of purchases
from that group compared with the industry’s overall business” (Dess et al, pg. 54). The factors that
affect the power of the buyer are how few there are, the size of the firm, and the price sensitivity of the
firm (Kasi, 2017).
