Porter’s five-forces model of competition is useful for determining the nature and intensity of an industry’s competition. Competitive pressures exist between each of the outer forces and the rivalry among competitors. The rivalry among competitors is the strongest of the five forces. This rivalry may cause price wars between competing firms if the industry is centered on price competition. Other sectors compete on product offerings. In this situation, each company tries to market a product with the best selection of features. Some competitors may also expand their customer service or introduce a new product.
The potential entry of new competitors is based on the barriers to entry, and the typical reaction current firms will take when a new company tries to enter the industry. Some barriers to entry include economies of scale, special supplier relations, benefits of learning and experience curves, government regulation, trade restrictions or tariffs, specific technological or industry knowledge, customer loyalty, or capital requirements.
Competitive pressures also come from substitute products. The strength of competition from substitutes depends on whether there are substitutes available at a reasonable price if alternatives are similar in quality and value, and if it is easy to switch to substitute products.
Supplier bargaining power and supplier-seller collaboration can also create competitive pressures. Supplier bargaining power is increased when what is being supplied is in short supply, and companies need to get what is needed quickly. In this case, the supplier can extract favorable terms for itself. Suppliers also have additional bargaining power if they can market the item cheaper than other suppliers. However, if the company dealing with suppliers is a significant customer, suppliers will have less bargaining power.
Separately, buyer bargaining power is also a source of competitive pressure. Buyers have bargaining power when they are a sizeable major customer when it does not cost much to switch brands when there are few well-informed buyers. Usually major customers such as Wal-Mart bargain for lower prices because of the high quantities they order.