The five forces of competition framework that was elaborated by the Professor of Harvard business school Michael Porter stays one of the most popular tools of industrial analysis. The original Porter's competitive forces model illustrates five forces which may influence company's behaviour in a competitive market. This model of the evaluation of industry appeal supposes that one should analyze the following five forces: the rivalry between existing sellers in the market; the power exerted by the customers in the market; the potential threat of new sellers entering the market; the impact of the suppliers on the sellers; the threat of substitute products becoming available in the market.
Understanding the reasons of these five forces will give companies the opportunity to create the necessary strategies in order to become successful in a market. Porter's five forces model has contributed to the study of competition as it suggests that rivalry is only one of several forces that determine industry's attractiveness with its high rate in industries with the possibility of substitute products introduction (Porter 1980).
Force 1: The rivalry between existing sellers in the market. The degree of rivalry.
It is necessary to point out that theoretically any industry which brings the profit higher the average one (or which gives the return of capital higher than its cost) attracts the unlimited number of new sellers. In practice, the mass invasion of the industry will not take place if it is protected from the invasion with the help of entry barriers. High demands towards the initial capital, the scale economy, the advantage of absolute cost (the advantage of the standard value of production gained by the first sellers at the expense of privatization of the cheapest sources of raw materials or at the expense of ‘minimum training'), popular brand name and consumers' loyalty, access to channel diffusion, state and judicial barriers, and repressions on the part of existing companies in this industry may serve as entry barriers.
The degree (or the intensity) of rivalry helps to define the way the value of the industry is dissipated in the process of competition. The general level of competition in the industry is defined with the help of competition concentration, the variety of competitors (the higher the difference between the competitive companies, the less comfortable this industry is for its participants); differences of products (if there are almost no differences between products, the struggle for a consumer will be stronger, and thus, the industry will not be so comfortable for its participants); exit barriers (for example, if the cost for capacity is high, and the most part of it will be lost when leaving the industry, then the participants are less inclined to leave this industry; this circumstance leads to the excessive concentration and low margin in the industry); economy of scale (if the potential economy at the expense of production scale is significant, companies are inclined to an aggressive pricing policy in order to achieve necessary sales); the proportion between constant and direct costs (if the part of constant costs is significantly higher than the part of direct costs concerning the prime cost of product or service, companies will be inclined to sell additional units at any price, which covers direct costs; in this case the results for the industry can be the worst ones).