The Porter's Five Forces framework sets out various factors to consider when trying to understand the competitive landscape within a particular industry, with a view to supporting analysis around the attractiveness of that industry in terms of the opportunities it provides to generate profitability.
\nThe framework proceeds on the assumption that competition is strongly influenced by the nature of the rivalry between existing competitors, the extent to which substitute products or services are available, the extent of the bargaining power of suppliers or buyers, and the extent to which barriers to entry might mitigate the threat of new competitors emerging.
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Rivalry among existing competitors
\nThis \"force\" refers to the level of competition between existing companies within the industry. Strong rivalry may result from strong buyer/weak supplier power and could indicate that firms aggressively compete to steal customers.
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Threat of substitute products or services
\nThis \"force\" focuses on the extent to which \"substitute\" products or services exist within the industry. A substitute product is one the customer can buy from another industry to satisfy the same (or a similar) need. As customers can choose to buy the product from another industry, this decreases the potential for profit in the industry being analysed. For example, an industry analysis of the airline industry would have to consider the threat of the train, bus and ferry industries. The threat of substitutes is high when (for instance): the substitutes are cheaper; the substitutes are of a higher quality; and there is a low switching cost for consumers.
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Bargaining power of suppliers/buyers
\nThese \"forces\" have been explained in detail in the Business Situation Framework section and can affect whether a firm is likely to succeed if it decides to enter a new market.
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Barriers to entry/threat of new entrants
\nThis \"force\" focuses on the extent to which there are \"barriers to entry\" that make it more difficult for new businesses to enter the industry. When the barriers to enter an industry are high, the threat of new competitors entering the market is lower (as it is more difficult to enter that industry). This can mean that existing companies within the industry have a higher potential to generate profit.
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