Porter’s Five Forces for Industry Analysis
Porter’s Five Forces is a framework for analyzing five of the major competitive elements that shape an industry. Developed by Michael E. Porter, the model can help an investor understand the strengths and weaknesses of an industry to assess its potential for profitability or “attractiveness”. An unattractive industry is one that limits profitability due to competitive forces.
The components of Porter’s Five Forces include: (1) Industry competition (2) Threat of new industry entrants (3) Threat of substitute products or services (4) Bargaining power of customers (5) Bargaining power of suppliers. These forces, according to Porter, make up the “micro environment” of the elements that impact how a company serves its customers and to what extent it can be successful. Fundamental investors often apply Porter’s model to a particular industry when evaluating opportunities.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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