Porter's Five-Force model Essay Example | Topics and Well Written Essays - 500 words

Porter's Five-Force model - Essay Example It is crucial for any international business to critically study the competitive environment of the industry. The number of close substitutes, availability of resources, buying power of the consumers, threat of new entrants and the level of rivalry between existing firms must be studied closely to determine whether the industry would present the firm with a favorable and profitable environment. Porter’s Five forces model allows a firm to critically analyze each and every factor in the respective elements of industry competitiveness noted above (Swaan et al, 1999). Porter describes five forces which affect the industry’s competitiveness. The Threat of Substitute Products available in the market determines the power which a business may have in the industry. If the product is a generic one which has high substitutes in the market, the industry will be considered as highly competitive. Similarly, high level of close substitutes means that the buyers’ cost of switching is low and imposes a high threat to the firms. Besides this factor, all the factors are included in Figure 1 (Swaan et al, 1999). Likewise, if the buyers in the industry have a high negotiating power, the firms will be lead to lower their profit margins and the prices. A high negotiating power means that there would be less number of buyers as compared to the number of sellers in the market. Also, switching costs would be low and the products would be common rather than differentiated. Simultaneously, when there are fewer suppliers in the market who sell highly technical or hard to procure raw materials, they would have more negotiating power (Swaan et al, 1999). The ability and the ease of new entrants in the market also say how much competition a firm can expect in the future. With all these specifics, comes rivalry between firms. If one promotional campaign is followed aggressively by competing firms, the rivalry would be high. Similarly, the level of product