FIVE COMPETITIVE FORCES OF INDUSTRY
Michael Porter has postulated that the intensity of competition in an industry is determined by its underlying economic structure1. And he further contends as we saw above, that the industry structure is shaped by five basic competitive forces: the threat of new entrances into the industry, the bargaining power of suppliers to the industry, the threat of substitute products or services, the bargaining power of customers or buyers, and the Rivalry among Existing Firms. The figure shows these competitive forces.
The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).
? buyer propensity to substitute
? relative price performance of substitutes
? buyer switching costs
? perceived level of product differentiation
The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).
? the existence of barriers to entry (patents, rights, etc.)
? economies of product differences
? brand equity
? switching costs or sunk costs
? capital requirements
? access to distribution
? absolute cost advantages
? learning curve advantages
? expected retaliat ...