Porter's Five Forces
The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. I. Rivalry In the traditional economic model, competition among rival firms drives profits to zero. Economists measure rivalry by indicators of industry concentration. If rivalry among firms in an industry is low, the industry is considered to be disciplined. When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry is influenced by the following industry characteristics: V.
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