Porter’s 5 Forces Model of Competition
The intensity of competition in an industry is rooted in its underlying economic structure and goes well
beyond the behavior of current competitors. The state of competition depends on five basic competitive
forces shown below. These factors affect the elasticity of the demand curve, though some affect the long run
vs. the short run. That is, potential entrants affect the long run demand curve in that they may change the
industry structure from being more like an oligopoly versus perfect competition
1. Threat of new entrants
2. Bargaining power of buyers
3. Threat of substitute products of services
4. Bargaining power of suppliers
5. Rivalry among existing firms
Threat of entry
Barriers of entry
a. economies of scale
b. product differentiation
c. capital requirements
d. switching costs
e. access to distribution channels
f. cost disadvantages independent of scales
1. proprietary
2. favorable access to raw materials
3. favorable locations
4. government subsidies
5. learning curve
g. government policy
Bargaining power of buyers
a. Buyer purchases large volumes relative to the seller sales
b. Buyer purchases are a significant portion of the buyer’s total costs
c. The product it purchases from the industry are standard or undifferentiated
d. Face few switching costs
e. Product is unimportant to the quality of the buyers’ products or services
f. Buyer has full information
Threat of Substitutes
a. Switching costs
b. Buyer propensity to substitute
c. Relative price performance of substitutes
Intensity of rivalry among existing competitors
a. numerous or equally balanced competitors
b. slow industry growth
c. high fixed or storage costs
d. lack of differentiation or switching costs
e. capacity augmented in large increments
f. diverse competitors
g. high strategic states
h. high exit barriers
Supplier power
a. few suppliers
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