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geographic markets for the same product can have considerably different competitive
[6]
conditions.
The five-forces model recognizes that suppliers can become a firm’s
competitors (by integrating forward), as can buyers (by integrating backward).

Several firms have integrated forward in the pharmaceutical industry by acquiring
distributors or wholesalers. In addition, firms choosing to enter a new market and
those producing products that are adequate substitutes for existing products can
become competitors of a company.
Another way to think about industry market structure is that these five sets of
stakeholders are competing for profits in the given industry. For instance, if a supplier
to an industry is powerful, they can charge higher prices. If the industry member
can’t pass those higher costs onto their buyers in the form of higher prices, then the
industry member makes less profit. For example, if you have a jewelry store, but are
dependent on a monopolist like De Beers for diamonds, then De Beers actually is
extracting more relative value from your industry (i.e., the retail jewelry business).
New Entrants
The likelihood of new entry is a function of the extent to which barriers to
entry exist. Evidence suggests that companies often find it difficult to identify new
[7]
competitors. Identifying new entrants is important because they can threaten the
market share of existing competitors. One reason new entrants pose such a threat is
that they bring additional production capacity. Unless the demand for a good or
service is increasing, additional capacity holds consumers’ costs down, resulting in
less revenue and lower returns for competing firms. Often, new entrants have a keen
interest in gaining a large market share. As a result, new competitors may force
existing firms to be more effective and efficient and to learn how to compete on new
dimensions (for example, using an Internet-based distribution channel).
The more difficult it is for other firms to enter a market, the more likely it is
that existing firms can make relatively high profits. The likelihood that firms will
enter an industry is a function of two factors: barriers to entry and the retaliation
expected from current industry participants. Entry barriers make it difficult for new
firms to enter an industry and often place them at a competitive disadvantage even
when they are able to enter. As such, high-entry barriers increase the returns for
existing firms in the industry.
[8]
Buyer Power
The stronger the power of buyers in an industry, the more likely it is that they
will be able to force down prices and reduce the profits of firms that provide the
product. Firms seek to maximize the return on their invested capital. Alternatively,
buyers (customers of an industry or firm) want to buy products at the lowest possible
price—the point at which the industry earns the lowest acceptable rate of return on its
invested capital. To reduce their costs, buyers bargain for higher-quality, greater
levels of service, and lower prices. These outcomes are achieved by encouraging
competitive battles among the industry’s firms.
Supplier Power
The stronger the power of suppliers in an industry, the more difficult it is for
firms within that sector to make a profit because suppliers can determine the terms

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