Michael E Porter
THE five competitive forces — entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors — reflect the fact that competition in an industry goes well beyond the established players. Customers, suppliers, substitutes, and potential entrants are all “competitors” to firms in the industry and may be more or less prominent depending on the circumstances. Competition in this broader sense might be termed extended rivalry. All five competitive forces jointly determine the intensity of industry competition and profitability. For example, even a company with a strong market position in an industry where potential entrants are no threat will earn low returns if it faces a superior, lower-cost substitute. Even with no substitutes and blocked entry, intense rivalry among competitors will limit potential returns. Different forces take on prominence, of course, in shaping competition in each industry. The underlying structure of an industry should be distinguished from the many short-run factors that can affect competition and profitability in a transient way. For example, fluctuations in economic conditions over the business cycle influence short-run profitability. Although such factors may have tactical significance, the focus of the analysis of industry structure, or “structural analysis,” is on identifying the basic, underlying characteristics of an industry rooted in its economics and technology that shape the arena in which competitive strategy must be set.