Question

Explain 5-Forces Model. Draw diagram to explain the model.

Answer 1

Porter's five force model helps explain the fact that why different business are working at different profit rates in the market. It is used to help the company analyze their corporate strategy as well as the market strategy that can be used. These forces are used to measure the intensity and profitability in the market.

These five forces are:

Competitive rivalry: One has to look out for rivals in the particular market. They have to judge their rivals on the grounds of what strategy they are using, what price cuts are they maintaining and what marketing strategy is used to get the consumers and suppliers. It is obvious that if there is not good deals to lure the suppliers and the consumers, they will go else where. This includes number of rivals, quality of rivals and customer loyalty.

Powers of suppliers: Suppliers can affect the profit of a company on a very large scale, when there are a lot of suppliers it is easy to choose from. However with lesser suppliers, you have to be dependent and this puts them in a stronger position in the profit making. The number of suppliers, size of suppliers and your cost of changing are all taken into concern.

New Entries: The ease of new entries will affect your position in the market. If it is too easy to enter your market you have to be dynamic to change frequently to give good competition. It is necessary to understand the economies of scale the new entries are working at. The cost they incur and the strategies they use.

Buyer power: They are the ultimate profit giver for you, it is important that you have to understand their size, their taste and preferences, price sensitivity and also the cost of change. It is therefore important to understand that at what cost and price will they choose a substitute over your product.

Threat of substitute: The cost of change of the substitute and the relative price has to be understood. You need to judge the technology used by product substitutes and also at what cost are they operating. This has to be done regularly to retain consumer reach and loyalty.

The following picture depicts the model :