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In describing the factors are involved in determining levels of competitive intensity, Michael Porter has listed costs; number of companies competing for a flat market; perceptions of differences between products; and the costs associated with exiting a particular industry.
Porter develoeped what are called his "Five Forces," a model representing the variables that affect the competitiveness of a particular market. In his Competitive Strategy: Techniques for Analyzing Industries and Competitors, he described these "five forces" in terms of a solar system, wherein the number of industry competitors are at the center of that system, like the Sun in our Solar System. Around that center -- the number of companies competing against each other -- are the other four "forces":
-- The number of new companies that may enter the competition;
-- The number of suppliers involved;
-- The number of buyers or customers involved; and
-- The potential for product substitution.
Basically, Porter's "Five Forces" are the normal factors involved in a free market economy, where fundamental principles of supply and demand dominate. Porter, however, goes well beyond the simplistic model of "supply and demand" to illustrate the vastly greater number of variables that come into play in the marketplace.
The more demand for a specific product, the more competition there should be to supply that demand. The more a company "tinkers" with the underlying product to differentiate it from those of its competitors, the more it may affect the intensity of the competition by drawing away customers. The more customers or buyers there are, the more "sales" there are to go around, thus diminishing the level of intensity. And, of course, unit cost is manipulated according the dynamics involved in this model.
These are the principles Porter's uses in demonstrating levels of intensity in competition.
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