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analysis five forces of framework
growth as the number
and size distribution of competitors in the market.18
Five forces theory also argues that for any one of the competitive forces, the causes of
competitive intensity are multidimensional. In assessing the intensity of rivalry, for
example, seller concentration does have a role, although our interpretation would focus
more on the balance of competitors (the more balanced, the more rivalry). But the
intensity of rivalry also depends on a series of other dimensions, including, for example,
the industry cost structure. Where variable costs are low, strong pressures are created to
cut price in order to contribute to fixed cost. With such a cost structure, even a
concentrated industry can exhibit strong rivalry. Switching costs are another important
influence on rivalry. Where it is easy for customers to shift from one supplier to another,
the effect of concentration is mitigated.
The five forces methodology involves analysis on an industry-by-industry basis, and
does not rest on the determination of the relevant market. Every industry is different,
16 There is an extensive literature on five forces analysis that is beyond the scope of this article to
summarize here. The early references are M.E. Porter, Interbrand Choice, Strategy, and Bilateral
Market Power (1976); M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (1980).
17 Brandenburger and Nalebuff have appropriately stressed the role of complementary products in
competition, and some have suggested complementary products as a sixth force (A. Brandenburger &
B. Nalebuff, Co-opetition, (1996)). However, complementary products do not directly influence the
health of competition, but affect it indirectly through the influence of complements on the five forces.
The presence of a complementary product is neither good nor bad for competition per se. It depends
on how the complement influences, for example, barriers to entry or the power of the customer.
18 There is substantial empirical support for the importance of this broader set of industry attributes for
competition.
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both in terms of the relative influence of the forces and the array of drivers of each force.
This approach, which squares with actual industry competition, has been well accepted in
corporate practice and in management consulting firms to assess the nature of industry
competition.
Figure 6 Assessing the Health of Competition: Five Forces Framework
Threat of Substitute
Products or
Services
Threat of New
Entrants
Rivalry Among
Existing
Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Source: M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors 187
(1980).
Many of the elements of the five forces approach have been known to or used in
economics for a long time. Also, many of the considerations raised in the five forces
model appear somewhere in current merger analysis. Five forces analysis is different in
how, when and why the model is applied. Current antitrust analysis first determines the
relevant geographic and product market, then uses its tools to analyze competitive effects.
Current analysis starts with seller concentration as the principal metric. Other
considerations are brought in, both only later and secondarily. Five forces analysis, on
the other hand, avoids the first step by going straight to analyzing competitive effects in
any and all submarkets deemed relevant by customers and competitors. It views seller
concentration as only one and not the most important determinant of rivalry. It brings in
all five forces as equally important. [next page]