What are Porter's five factors?

While analyzing any company for investment, we are surrounded by many questions, such as what factors to analyze. One of the most important criteria to take care of is long-term profitability and sustainability. To gauge that, we can use a list of five factors that affect the long-term profitability of a company. Here is a list of the five factors, which were proposed by Professor Michael Porter in his famous book-‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’:

 1.The threat of new entrants: If it is difficult to enter the industry for newer entrants due to high initial cost or government regulations, the existing companies will have long-term profitability as they will be at a lower risk of newer entrants eating up their profits.

 2.Level of intra-industry rivalry: Low level of intra-industry rivalry between existing market participants is good for long term profitability.

 3.The threat of substitutes: If there are fewer substitutes of the product the company is making or if substitutes are not cost-efficient, then the company possesses pricing power, where they can increase the price of their products without worrying about customers switching to a substitute.

 4.Bargaining power of suppliers: Having more suppliers in the supply chain of the industry, in which the company operates, is beneficial for the company’s long term profitability. With more number of suppliers, the bargaining power of suppliers is reduced and the company can protect its profit share from being eaten up by the suppliers.

 5.Bargaining power of buyers: When the company operates in an industry with a large number of potential buyers for its products, buyers have less bargaining power, thereby making the long-term profitability sustainable.

So, the next time you want to analyze a company for long-term investment, checking these five factors will keep casualties away from you.