The Five Forces Analysis, developed by Michael Porter, facilitates the marketer to compare competitive environments. As in the case of the PEST (Political, Economic, Social and Technological) analysis, it is a tool for environmental audit. The Five Forces Analysis, however, is geared toward an SBU (Strategic Business Unit), which is effectively a single business. The Five Forces Analysis is concerned with factor groups or areas that are relevant to stand-alone businesses.
Threat of Entry
This factor is associated with the economies of scale, which refers to purchasing in bulk. Threat of entry also looks at advantages the stand-alone business will have in respect to specific knowledge or personal contacts that larger organizations may not have access to. This factor is concerned with any future laws that the government may implement that will weaken the single businesses competitive edge. Threat of entry is also concerned with how easy or not it will be for the business to gain access to distribution channels.
The Power of Buyers
The power of buyers refers to the amount of pressure customers can exert on a business. The power of buyers is considerable when there are a few significant players, but this power dwindles in situations where there are many small suppliers of goods. In the case of small suppliers, the cost of moving your business from one to another is low.
The Power of Suppliers
Suppliers are in a powerful position when their product or brand is well known and sought after. If two or more powerful brands amalgamate, their position as a newly formed mega-supplier becomes even more powerful. In these cases the customer has limited bargaining potential.
The Threat of Substitutes
This factor is concerned with substitution of need, which refers to one product no longer being purchased because of the availability of another product. This principle holds true for services as well, as in the case of fewer patients making use of a dentist because of the availability of improved toothpaste brands. The threat of substitutes also refers simply to situations where one product is no longer purchased because another exists and is preferred.
Competitive rivalry refers to the situation when both buyers and suppliers are looking to gain control over a market in which a number of substitute products or services exist. Although all of the five factor groups have bearing on each other and are therefore all important, competitive rivalry is often considered to be a central factor in business environment analysis.