Rivalry Among Competitors - Michael Porter's Five Competitive Forces Model

Michael porter's five competitive forces model is a framework used to understand the structure of an industry. The five competitive forces are bargaining power of buyers, bargaining power of suppliers, threat of substitute, threat of new entrants and rivalry among existing firms. Each of the five forces impacts the average rate of return for the firms in an industry by applying pressure on industry profitability.

First, buyers can suppress the profitability of the industry from which they purchase by demanding price concessions or increase in quality . If the industries only have few buyers, they can force the suppliers for lower cost and thus affect the profitability of the industry. In 2006, there are 3million of smokers in Malaysia which is a large amount of buyers, thus, the buyers not able to forces the supplier to lower price. Thus, suppliers able to have the power to control the price to gain the large profit from the market.

Second, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. When there are only few suppliers of a product, the suppliers will have the advantages in bargaining. In Malaysia, there are only few suppliers of cigarettes such as British American Tobacco (Malaysia) Berhad and Japan Tobacco International. Thus, these suppliers have the power on the prices of cigarettes and buyers have to follow the prices set due to they don't have much choices. The cigarettes suppliers in Malaysia have high power as there are fewer substitutes for buyer to choose.

Third, threat of substitutes defined as the price that consumers are willing to pay for a product depends in part on the availability of substitute products . When the product have close substitute, the industry profitability is suppressed since consumers have others substitute when the price of product raise or the quality decreased. In cigarettes industry, there is quite some brand of cigarettes which is close substitute with each others. When the brand that a smoker usually consumes such as Dunhill increased in prices or decreased in quality, the smoker may prefer other brands of cigarettes, for example, Pallmall. Thus, a cigarette supplier cannot simply raise it price but need to increase their quality in order to reduce the likelihood of customer switch to a substitute product.