cHAPter 2 (poRters 5 Forces mODel)

 What is the Five Forces analysis? 


Five Forces analysis model definition by Vernon Prior (The Language of Business Intelligence): “Five forces industry analysis helps to assess and manage the long-term attractiveness of an industry. It is designed to explain the relationship between the five dynamic forces that affect an
industry’s performance; these are the:

• intensity of competitive rivalry;
• threat from new entrants;
• threat from substitutes;
• bargaining power of buyers;
• bargaining power of suppliers.


Threat of Entry: Determinants

  In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.Then,Capital requirements (raw materials, technology…).Economy of sale one of the threat of entry.Best practices IT is new bank must offers online paying bills,acccout monitoring to complete.


Rivalry Determinants: 

The competition among rival drives profit to zero.The competition is not perfect and firms strive for a competitive advantages over the rivals.If the rivals among firms is low,industry consider to be disciplined.For example Projected industry growth (fight for market shares).Best practices in IT reduce cost by using effective supply chain.

Determinants of Supplier Power: 

The supplier power is a producing industry requires raw materials  labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits.Besides that supplier concentration,density,switching costs,Forward integration threats,presence of substitute threats.Best practices IT for example b2b marketplace ,private exchange allow a single buyer to posts it needs and then open the bidding to any supplier who would care to bid.


Determinants of Substitution Threat: 

Substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices..Best practices  IT is eletronic products with same functions different bands.


Determinants of Buyer Power:

 The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopoly - a market in which there are many suppliers and one buyer.Best practices of IT is loyalty program in travel industry.For example rewards on free airline tickets or hotel stays.