Five Forces Model of Competition

• The five forces model of competition is an analytical tool used to help firms find the industry that is the most attractive for them.
• The five forces model of competition encompasses several variables and tries to capture the complexity of competition.
• The five forces model suggests that an industry’s profitability is a function of interactions among five forces.
• In other words, an industry's profitability is 


  the rate of return on invested capital relative to its cost of capital
• Firms use the five forces model to identify the attractiveness of an industry as well as the most advantageous position for the firm to take in that industry, given the industry’s structural characteristics.
• the attractiveness of an industry is

  measured by its profitability potential
• The five forces:

  potential entrants to the industry

  product substitutes

  suppliers

  buyers

  competitive rivalry among firms currently in the industry