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Porters Five Forces A MODEL FOR INDUSTRY ANALYSIS The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries However numerous economic studies have affirmed that different industries can sustain different levels of profitability part of this difference is explained by industry structure Michael Porter provided a framework that models an industry as being influenced by five forces The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability These five competitive forces are - The threat of entry of new competitors new entrants - The threat of substitutes - The bargaining power of buyers - The bargaining power of suppliers - The degree of rivalry between existing competitors Threat of New Entrants New entrants to an industry can raise the level of competition thereby reducing its attractiveness The threat of new entrants largely depends on the barriers to entry High entry barriers exist in some industries eg shipbuilding whereas other industries are very easy to enter eg estate agency restaurants Key barriers to entry include - Economies of scale - Capital investment requirements - Customer switching costs - Access to industry distribution channels - The likelihood of retaliation from existing industry players Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels The threat of substitute products depends on - Buyers willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes Bargaining Power of Suppliers Suppliers are the businesses that supply materials other products into the industry The cost of items bought from suppliers eg raw materials components can have a significant impact on a companys profitability If suppliers have high bargaining power over
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