Michael Porterhas identifiedfive forcesthat determine the intrinsic long-runattractiveness of a market or market segment: industry competitors, potentialentrants, substitutes, buyers, and suppliers. The threats these forces pose are asfollows:1.Threat of intense segmentrivalry— A segment is unattractive if it alreadycontains numerous, strong, or aggressive competitors. It’s even moreunattractive if it’s stable or declining, if plant capacity must be added in largeincrements, if fixed costs or exit barriers are high, or if competitors have highstakes in staying in the segment. These conditions will lead to frequent pricewars, advertising battles, and new-product introductions and will make it
expensive to compete. The cellular phone market has seen fierce competitiondue to segment rivalry.2.Threat of newentrants—The most attractive segment is one in which entrybarriers are high and exit barriers are low. Few new firms can enter theindustry, and poorly performing firms can easily exit. When both entry and exitbarriers are high, profit potential is high, but firms face more risk becausepoorer-performing firms stay in and fight it out. When both entry and exitbarriers are low, firms easily enter and leave the industry and returns arestable but low. The worst case is when entry barriers are low and exit barriersare high: Here firms enter during good times but find it hard to leave duringbad times. The result is chronic overcapacity and depressed earnings for all.Theairline industryhas low entry barriers but high exit barriers, leaving allcarriers struggling during economic downturns.3.Threat ofsubstitute products—A segment is unattractive when there areactual or potential substitutes for the product. Substitutes place a limit onprices and on profits. If technology advances or competition increases inthese substitute industries, prices and profits are likely to fall. Air travel hasseverely challenged profitability for Greyhound and Amtrak.4.Threat ofbuyers’ growing bargaining power—A segment is unattractive ifbuyers possess strongor growing bargaining power. The rise of retail giantssuch as Walmart has led some analysts to conclude that the potentialprofitability of packaged-goods companies will become curtailed人 人 人 人 人.Buyers’ bargaining power grows when they become more concentrated ororganized, when the product represents a significant fraction of their costs,when the product is undifferentiated, when buyers’ switching costs are low,when buyers are price-sensitive because of low profits, or when they canintegrate upstream. To protect themselves, sellers might select buyers whohave the least power to negotiate or switch suppliers. A better defence isdeveloping superior offers that strong buyers cannot refuse.5.Threat ofsuppliers’ growing bargaining power—A segment is unattractiveif the company’s suppliers are able to raise prices or reduce quantity supplied.Suppliers tend to be powerful when they are concentrated or organized, whenthey can integrate downstream, when there are few substitutes, when thesupplied product is an important input, and when the costs of switchingsuppliers are high. The best defences are to build win-win relationships withsuppliers or use multiple supply sources.