Michael Porters 5 Forces
Bargaining Power of Customers:
Threat of New Entrants:
Threat of Substitute Products:
Bargaining of Suppliers:
Cometetive Rivalry within the Industry:
Threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. Note that this should not be confused with competitors' similar products but entirely different ones instead. For example, Pepsi is a substitute for coke as, if the price of Coke were to rise above the price of Pepsi, it is possible that the Coke drinker would substitute Pepsi for Coke.
Bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.
Bargaining power of suppliers
The bargaining power of suppliers is also described as the 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, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.
Intensity of competitive rivalry
Threat of new competition
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
- The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
- Economies of product differences
- Brand equity
- Switching costs or sunk costs
- Capital requirements
- Access to distribution
- Customer loyalty to established brands
- Absolute cost
- Industry profitability; the more profitable the industry the more attractive it will be to new competitors.