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Porter’s Five Forces is an analysis scheme created by Harvard Business School professor Michael E. Porter.  Using this analysis tool, business managers can gauge the level of competition within their company’s industry and thus assess current and potential lines of business.  The ultimate goal in this analysis is to help managers set their profitability expectations, because profitability decreases as the competition level increases. 

Three of the five forces relate to the industry participants.  The other two relate to the vertical participants – the suppliers and consumers.

  1. The first force analyzes the ease of entry for new participants in the marketplace. If entry is easy, then this factor indicates a high level of competition.
  2. The second factor evaluates the number and activity of a company’s rivals. Obviously, the more established rivals, the greater the competition.  However, a manager also needs to assess the likelihood that any one rival can dominate the market to the detriment of all the other participants.
  3. The third factor is the possibility of a new good or service coming onto the market and eroding sales of established products. 
  4. The fourth factor is the bargaining power of the industry suppliers.  If there are few suppliers who provide a scarce resource, competition may get heavy for that resource, thus increasing costs and eroding profits. 
  5. The fifth and final factor is the consumers’ bargaining power.  If the consumer has a strong bargaining position then this will drive down prices for the finished good and erode profitability. 
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