The Porter’s Five Forces model is a tool used to analyze the intensity of industry rivalry and helps to explain why different industries sustain varying profitability levels. The tool is important to both the prospective entrepreneurs and those who have already ventured into a certain industry. The prospective entrepreneurs use the tool to analyze the attractiveness and potential profitability of the industries while those with already established businesses use the model to formulate strategies aimed at increasing the competitiveness of the firm. The Porter’s Five Forces model examines five factors which are the primary determinants of the competitive power of the business (Roy 50). The factors are the intensity of competition, the bargaining powers of the suppliers, bargaining power of the buyers and the threat of new entrants and substitutes.
The threat of new entry refers to the ease of new competitors to venture into the industry. The main determinants of the threat of new entrants include the cost and time of entry, economies of scale and cost advantages enjoyed by the existing firms, technology protection, specialist knowledge and barriers to entry into the industry. The second factor which is the intensity of competition is dependent on factors such as the quality difference of the firm’s products, a number of competitors, consumer loyalty and the amount of switching costs involved. Supplier power refers to the ability of the suppliers to alter the cost of inputs (Hill and Jones 450). The bargaining power of the suppliers depends on the number of suppliers, the uniqueness, and size of the service, ability to substitute the suppliers or products and the cost involved when changing suppliers…..