Bargaining power of suppliers. The concentration of suppliers and the availability of substitute suppliers are significant factors in determining supplier power. The sole supplier of engines to a manufacturer of small airplanes will have great power for example. The determinants of supply power are: the differentiation of inputs; Switching cost of suppliers and firms in the industry; Presence of substitute inputs; Supplier concentration; importance of volume to supplier; cost relative total purchase in the industry and impact of inputs in cost or in differentiation.
Threat from substitutes. Substitutes products are indirect competitors that can undermine demand prices. There are different types of substitutes such as alternative products, new products, elimination of needs, generic substitution and abstinence.
Rivalry among competitors. Rivalry among competitors is influenced by the preceding four forces, as well as by cost and product differentiation. Intense competition is most likely characterized by: Excess production capacity; Standardized products or services; Many competitors and Low growth. The framework of the five forces help firms to scan their microenvironment because it allows a firm to see through the complexity and pinpoint those factors that are critical to competition in its industry, as well as to identify those strategic innovations that would most improve its industry’s – and its own- profitability. The five forces framework does not eliminate the need of for creativity in finding new ways of competing in an industry. Instead, it directs managers’ creative energies toward those aspects of industry structure that it’s most important to long-run profitability. The framework aims, in the process, to raise the odds of discovering a desirable strategic innovation.
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