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 retaliation by incumbents
• government policies
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals
compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.
• number of competitors
• rate of industry growth
• intermittent industry overcapacity
• exit barriers
• diversity of competitors
• informational complexity and asymmetry
• fixed cost allocation per value added
• level of advertising expense
• Economies of scale
• Sustainable competitive advantage through improvisation
The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also
affects the customer's sensitivity to price changes.
• buyer concentration to firm concentration ratio
• degree of dependency upon existing channels of distribution
• bargaining leverage, particularly in industries with high fixed costs
• buyer volume
• buyer switching costs relative to firm switching costs
• buyer information availability
• ability to backward integrate
• availability of existing substitute products
• buyer price sensitivity
• differential advantage (uniqueness) of industry products
• RFM Analysis
The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as
expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g.
charge excessively high prices for unique resources.
• supplier switching costs relative to firm switching costs
• degree of differentiation of inputs
• presence of substitute inputs
• supplier concentration to firm concentration ratio
• employee solidarity (e.g. labor unions)
• threat of forward integration by suppliers relative to the threat of backward integration by firms
• cost of inputs relative to selling price of the product.
This five forces analysis is just one part of the complete Porter strategic models. The other elements are the
value chain and the generic strategies.
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 retaliation by incumbents
• government policies
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals
compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.
• number of competitors
• rate of industry growth
• intermittent industry overcapacity
• exit barriers
• diversity of competitors
• informational complexity and asymmetry
• fixed cost allocation per value added
• level of advertising expense
• Economies of scale
• Sustainable competitive advantage through improvisation
The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also
affects the customer's sensitivity to price changes.
• buyer concentration to firm concentration ratio
• degree of dependency upon existing channels of distribution
• bargaining leverage, particularly in industries with high fixed costs
• buyer volume
• buyer switching costs relative to firm switching costs
• buyer information availability
• ability to backward integrate
• availability of existing substitute products
• buyer price sensitivity
• differential advantage (uniqueness) of industry products
• RFM Analysis
The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as
expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g.
charge excessively high prices for unique resources.
• supplier switching costs relative to firm switching costs
• degree of differentiation of inputs
• presence of substitute inputs
• supplier concentration to firm concentration ratio
• employee solidarity (e.g. labor unions)
• threat of forward integration by suppliers relative to the threat of backward integration by firms
• cost of inputs relative to selling price of the product.
This five forces analysis is just one part of the complete Porter strategic models. The other elements are the
value chain and the generic strategies.
