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Adapted from Porter, M. (1980). Competitive strategy. New York: Free Press.
You can distill down the results of PESTEL and microenvironment analysis to
view the competitive structure of an industry using Michael Porter’s five forces. Here
you will find that your understanding of the microenvironment is particularly helpful.
Porter’s model attempts to analyze the attractiveness of an industry by considering
five forces within a market. According to Porter, the likelihood of firms making
profits in a given industry depends on five factors: (1) barriers to entry and new entry
threats, (2) buyer power, (3) supplier power, (4) threat from substitutes, and (5)
rivalry.
[3]
Compared with the general environment, the industry environment has a more
direct effect on the firm’s strategic competitiveness and above-average returns, as
exemplified in the strategic focus. The intensity of industry competition and an
industry’s profit potential (as measured by the long-run return on invested capital) are
a function of five forces of competition: the threats posed by new entrants, the power
of suppliers, the power of buyers, product substitutes, and the intensity of rivalry
among competitors.
Porter’s five-forces model of competition expands the arena for competitive
analysis. Historically, when studying the competitive environment, firms
concentrated on companies with which they competed directly. However, firms must
search more broadly to identify current and potential competitors by identifying
potential customers as well as the firms serving them. Competing for the same
customers and thus being influenced by how customers value location and firm
capabilities in their decisions is referred to as the market
[4]
microstructure. Understanding this area is particularly important because, in recent
years, industry boundaries have become blurred. For example, in the electrical
utilities industry, cogenerators (firms that also produce power) are competing with
regional utility companies. Moreover, telecommunications companies now compete
with broadcasters, software manufacturers provide personal financial services,
airlines sell mutual funds, and automakers sell insurance and provide financing. In
[5]
addition to focusing on customers rather than specific industry boundaries to define
markets, geographic boundaries are also relevant. Research suggests that different

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