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13
Competitive advantage – Porter's five forces model 
The 
competitive environment
is structured by five forces: 
barriers to entry
; 
substitute products
; the 
bargaining power of 
customers
; the bargaining power of 
suppliers
; 
competitive rivalry
.
In discussing competition, Porter (Porter, 1980) distinguishes between factors which characterise the 
nature of competition. 
(a) 
In one industry compared with another 
(eg the chemicals industry compared with the clothing 
retail industry), some factors make one industry as a whole potentially more profitable than 
another (ie yielding a bigger return on investment). 
(b) Factors 
within a particular industry 
lead to
 
the competitive strategies that individual firms might 
select. 
Five 
competitive forces 
influence the state of competition in an industry, which collectively determine 
the profit (ie long-run return on capital) potential of the industry as a whole. 
Learn them.

The threat of 
new entrants 
to the industry 

The threat of 
substitute 
products or services 

The bargaining power of 
customers

The bargaining power of 
suppliers

The 
rivalry 
amongst current competitors in the industry 
13.1 The threat of new entrants (and barriers to entry to keep them out) 
A new entrant into an industry will bring extra capacity and more competition. The strength of this threat 
is likely to vary from industry to industry and depends on two things. 

The strength of the 
barriers to entry
. Barriers to entry discourage new entrants. 

The 
likely