Porter's five forces

Corporate strategy framework developed by US Harvard Business School academic Michael Porter. Porter asserted that in order for companies to understand and challenge the competitive markets they operate in, and for them to develop appropriate corporate strategies, they need to recognize five competitive forces. These are: the entry of new competitors – new competition requires a response, the expenditure on which could reduce profits; the threat of substitutes – the presence of viable alternatives to a product or service in the marketplace means the price a company can charge will be limited; the bargaining power of buyers – customers who have bargaining power will use it, reducing profit margins and profitability; the bargaining power of suppliers – if suppliers have power they will increase prices and adversely affect profitability; and rivalry among existing competitors – increased competition leads to increased research and development expenses, higher marketing costs, or price reductions, all of which impact adversely on profits.