Five Forces Analysis (or Five Forces Model) is the work of Michael E. Porter. It is a way of analyzing the industry and its risks. The model works with the five elements (Five Forces). The principle of this method is a forecasting of the development of the competitive situation in analyzed industry, based on the estimate of the potentital behavior of the subjects and objects involved in a given market and forecasting of the risk of imminent business from their side:
- Rivalry among existing firms - their ability to affect the price and offered quantity of given product/service
- Potential entrants - the possibility that they enter the market and affect the price and offered quantity of given product/service
- Suppliers - their ability ot affect the price and offered quantity of necessary inputs
- Buyers - their ability to affect the price and demanded quantity of given product/service
- Substitutes - price and offered quantity of products/services are at least partially able to replace given product/service
In essence, the basics of the model are consistently based on microeconomics - from market analysis, firm behavior and consumer behavior.
On the picture, there is a model of Five Forces according to Michael E. Porter (adjusted).
Note: If we want to get the model even closer to microeconomics, we can add to the original model two more dimensions:
- Government behavior - industry regulation
- Complements market - offered price and quantity
In the case of complements, it actually takes into account the situation in the related markets (e.g. oil price affects the demand for cars).
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