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If there are only one or two suppliers of an essential input product, for example, or if switching suppliers is expensive or time consuming, a supplier group wields more power.
Powerful customers can use their clout to force prices down or demand more service at existing prices, thus capturing more value for themselves.
Over time, buyers or suppliers can become more or less powerful.
Technological or managerial innovations can make new entry or substitution more or less likely.
The threat of entry also depends on the capabilities of the likely potential entrants.
Actually, entry brings new capacity and pressure on prices and costs.
A Five Forces analysis can help companies assess which industries to compete in—and how to position themselves for success.
The Five Forces determine the competitive structure of an industry, and its profitability.
Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. Porter's Five Forces is a business analysis model that helps to explain why different industries are able to sustain different levels of profitability. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company.
Frequently used to identify an industry's structure to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness. The model was originally published in Michael Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal.
An industry with strong barriers to entry is an attractive feature for companies that would prefer to operate in a space with fewer competitors.