Porter’s Five Forces Analysis

Before starting a business, it is crucial for any entrepreneur to understand the general business environment through external environmental analysis. This helps identify opportunities and threats that may affect the business while assessing factors influencing industry profitability and competitive actions.

One widely used tool for analyzing the industry environment is Porter’s Five Forces Analysis, developed by Michael E. Porter of Harvard Business School. This framework helps assess the competitive strength and position of a business within the industry, ultimately enhancing long-term profitability.

The Five Forces of Industry Competition

1. Threat of New Entrants

   Profitable markets attract new businesses, increasing competition and reducing profitability. The lower the barriers to entry—such as costs and time required to start a business—the greater the threat to existing companies.

2. Power of Buyers

   Customers can influence pricing based on their number and importance. When buyers are few but hold significant importance, they can demand lower prices, affecting the company's profitability.

3. Power of Suppliers

   Suppliers control the cost of raw materials and essential goods. A small number of suppliers means businesses rely heavily on them, allowing suppliers to increase prices and impact profit margins.

4. Threat of Substitutes

   Alternative products or services that can replace existing ones pose a threat by limiting a company's ability to increase prices. Competitors offering superior substitutes weaken market position.

5. Intensity of Competitive Rivalry

   The level of competition within an industry determines market strength. A large number of competitors offering similar or lower-priced products increases competition, reducing the company's market power.

By analyzing these forces, businesses can develop strategies to strengthen their competitive position, mitigate risks, and enhance long-term profitability.