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Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute goods or services that can be used in place of a company's products or services pose a threat. Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company's product, and a company's power can be weakened.
Understanding Porter's Five Forces and how they apply to an industry, can enable a company to adjust its business strategy.
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What Are Porter‘s Five Forces?
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.
Five Forces analysis is frequently used to identify an industry's structure to determine corporate strategy.
The...
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Power of Customers
It is affected by how many buyers or customers a company has, how significant each customer is, and how much it would cost a company to find new customers or markets for its output.
A smaller and more powerful client base m...
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Competition in the Industry
The first of the five forces refers to the number of competitors and their ability to undercut a company.
The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company.
Suppliers and buyers seek out a co...
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Power of Suppliers
The next factor in the five forces model addresses how easily suppliers can drive up the cost of inputs.
It is affected by the number of suppliers of key inputs of a good or s...
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Potential of New Entrants Into an Industry
A company's power is also affected by the force of new entrants into its market. The less time and money it costs for a competitor to enter a company's market and be an effective competitor, the more an established company's position could be significantly weakened.
An industry with strong...
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