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Porter's Five Forces - The Framework

Explained

A Guide to Analyzing Competitiveness Using Michael

Porter's Strategic Model

By the Mind Tools Content Team

Porter's Five Forces is a simple but powerful tool that you can use to identify the main sources of

competition in your industry or sector.

When you understand the forces affecting your industry, you can adjust your strategy, boost your

profitability, and stay ahead of the competition. You can take fair advantage of a strong position

or improve a weak one, and avoid taking wrong steps in the future.

In this article and video, we explore each of Porter's Five Forces and show you how to use them.

This will help you to analyze your organization's strengths and weaknesses, and to identify

critical factors that may affect your profitability.

Contents

• Introduction to Porter's Model

• Porter's Five Forces FAQs

• Who Created the Five Forces Model?

• What Are Porter's Five Forces?

1. Competitive Rivalry

2. Supplier Power

3. Buyer Power

4. Threat of Substitution

5. Threat of New Entry

• How to Use Porter's Five Forces Model

• Porter's Five Forces Example

• Criticism of Porter's Five Forces Model

Porter's Five Forces FAQs

What is the purpose of Porter's Five Forces?

Porter's Five Forces model can help you to analyze the attractiveness of a particular industry,

evaluate investment options, and assess the competitive environment in your market.

How do you use Porter's Five Forces?

Think about each force in turn, and how it applies to your industry. Gather data on each force,

and use it to help inform your future strategic decision making. Read more in the section How to

Use Porter's Five Forces Model.

What are the benefits of using Porter's Five Forces?

Porter's Five Forces allows you to gain valuable insights into your current market, or one that

you're considering moving into. This can help you to develop a strategy to succeed.

Who Created the Five Forces Model?

The tool was created by Harvard Business School professor Michael Porter

Since its publication in 1979, it has become one of the most popular and highly regarded

business strategy tools.

Porter recognized that organizations like to keep a close watch on their rivals, but, in his Harvard

Business Review article, 'How Competitive Forces Shape Strategy,' he encouraged business

leaders to look beyond the actions of their competitors and examine the forces at work in their

wider business environment. [1]

What Are Porter's Five Forces?

According to Porter, there are five forces that represent the key sources of competitive pressure

within an industry They are:

1. Competitive Rivalry.

2. Supplier Power.

3. Buyer Power.

4. Threat of Substitution.

5. Threat of New Entry.

He described them further in his later article, "The Five Competitive Forces That Shape

Strategy." [2]

Porter stressed that it's important not to confuse these five forces with more fleeting factors, such

as industry growth rates and government interventions. According to Porter, those are examples

of temporary factors, while the Five Forces are permanent parts of an industry's structure.

Let's take a look at Porter's Five Forces in more detail.

1. Competitive Rivalry

The first of Porter's Five Forces looks at the number and strength of your competitors. Consider

how many rivals you have, who they are, and how the quality of their product compares with

yours.

In an industry where rivalry is intense, companies attract customers by cutting prices

aggressively and launching high-impact marketing campaigns. This can make it easy for

suppliers and buyers to go elsewhere if they feel that they're not getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one else is doing what you do,

then you'll likely have tremendous competitor power, as well as healthy profits.

Example

If you were setting up a haulage business, you'd likely be entering a crowded market. You'd have

to consider many potential rivals, how much they charged, and whether they were able to

discount deeply. You'd also need to think about their resources: you might be setting up to

compete with international logistics companies, as well as local competitors

Remember that at this point the analysis should focus on your potential rivals. Only start thinking

about your own offer when you've got your data together on the competition.

Note that Michael Porter developed his Four Corners Model

all about competitor behavior. You can find out more about that in our article.

2. Supplier Power

Suppliers

gain power if they can increase their prices easily, or reduce the quality of their product. If your

suppliers are the only ones who can supply a particular service, then they have considerable

supplier power. Even if you can switch suppliers, you need to consider how expensive it would

be to do so.

The more suppliers you have to choose from, the easier it will be to switch to a cheaper

alternative. But if there are fewer suppliers, and you rely heavily on them, the stronger their

position – and their ability to charge you more. This can impact your profitability, for example, if

you're forced into expensive contracts.

Example

Let's say your business idea was to manufacture electronic devices. You'd have to assess your

supply options for a range of specialist components. If one supplier dominated the components

market, then they could raise their prices without worrying about their own competitors. This

might affect the viability of your product.

3. Buyer Power

If the number of buyers is low compared to the number of suppliers in an industry, then they

have what's known as "buyer power." This means they may find it easy to switch to new, cheaper

competitors, which can ultimately drive down prices.

Think about how many buyers you have (that is, people who buy products or services from you).

Consider the size of their orders, and how much it would cost them to switch to a rival.

When you deal with only a few savvy customers, they have more power. But if you have many

customers and little competition, buyer power decreases.

Example

Buyer power is a significant factor in food retail. Think of large supermarkets that operate in a

crowded, highly competitive market. This market has changed dramatically with the arrival of

cheap, no-frills food discounters. Shoppers have strong buyer power here. That's why

supermarkets have coupon schemes, loyalty cards, and aggressive discounting – to capture the

largest share of buyers.

These organizations in turn have strong buyer power with their own suppliers, using their

influence to drive down the cost of food at the manufacturing level.

Tip

Judging how to price your product to attract the customers you want, and to protect your brand,

requires great skill. Find out more in our article about Kotler's Pricing Strategies

.

4. Threat of Substitution

This refers to the likelihood of your customers finding a different way of doing what you do. It

could be cheaper, or better, or both. The threat of substitution rises when customers find it easy

to switch to another product, or when a new and desirable product enters the market

unexpectedly.

Example

If your organization makes medical instruments, you may find your position being threatened by

the rise of 3D printing. This enables instruments to be made from a wide range of materials,

sometimes at a fraction of the cost of traditional methods. If a competitor gets it right, it can

weaken your position and threaten your profitability.

5. Threat of New Entry

Your position can be affected by potential rivals' ability to enter your market. If it takes little

money and effort to enter your market and compete effectively, or if you have little protection

for your key technologies, then rivals can quickly enter your market and weaken your position.

However, if you have strong and durable barriers to entry, then you can preserve a favorable

position and take fair advantage of it. These barriers can include complex distribution networks,

high starting capital costs, and difficulties in finding suppliers who are not already committed to

competitors.

Existing large organizations may be able to use economies of scale to drive their costs down, and

maintain competitive advantage over newcomers.

If it costs customers too much to switch between one supplier and another, this can also be a

significant barrier to entry. So can extensive government regulation of an industry.

Example

Even industries that seem to be well protected against new entry can prove to be vulnerable. For

many years, high-volume air travel was in the hands of a relatively small number of established

airlines. The barriers to entry were formidable. Start-up costs were high, routes and take-off slots

were mostly grabbed by the big operators, and the industry was strictly regulated.

Even so, some small operators did manage to break into the market, mostly by offering no-frills,

low-cost travel to popular destinations, and taking advantage of reduced regulation. These

smaller, more agile operators now hold strong positions in the industry, particularly in short- to

medium-haul travel.

The Five Forces are brought together in figure 1, below.

Figure 1 – Porter's Five Forces

How to Use Porter's Five Forces Model

To use the model, start by looking at each of the five forces in turn, and think about how they

apply in your industry. (Mind Tools subscribers can see figure 1, above, and copy the

subheadings. They can also download a handy template.)

Next, write down the forces that are at play in your industry, and summarize the size and scale of

each on your diagram. An easy way to do this is to use a single "+" sign for a force that's

moderately in your favor, or a "-" sign for a force that's moderately against you.

Use "++" for a force that's strongly in your favor, or "--" for one that's strongly against. For a

neutral force, you can use "o." (An example of this method can be found in figure 2, below.)

Finally, think about how your analysis will likely impact you. Few situations are perfect.

Nonetheless, analyzing your industry using Porter's Five Forces can help you to think through

what you could change to improve your competitive position and increase your profitability.

What's more, if you find yourself in a structurally weak position, the model can help you to think

about what you can do to move into a stronger one.

Porter's Five Forces Example

In this section, we'll look at a full worked example of Porter's Five Forces model to help you

make effective business decisions. You'll also find short examples of applying each of the Forces

separately in the sections above.

Our worked example is based on a fictitious business owner called Martin. He's deciding

whether to switch his focus to something in agriculture, as he likes the idea of hands-on work, in

a rural environment, supplying people with something they really need. He carries out a Five

Forces analysis to help him decide whether to buy a farm and start a new enterprise – and meets

some surprises!

Adapted with permission from Harvard Business Review. From "How Competitive Forces Shape

Strategy" by Michael E. Porter, March 1979. Copyright © 1979 by the Harvard Business School

Publishing Corporation; all rights reserved. [1]

Martin's analysis has raised a number of "red flags" that previously he didn't know existed. For

example:

• The threat of new entry is quite high. If anyone looks as if they're making a sustained

profit, new competitors can come into the industry easily, reducing profits.

• Competitive rivalry is extremely high. If someone raises prices, they'll quickly be

undercut. Intense competition puts strong downward pressure on prices.

• Buyer power is strong. Again this can put a strong downward pressure on prices.

• There is some threat of substitution. There's some cross-product substitution and

ability to import food.

Unless Martin is able to find some way of changing this situation, it looks like the farming

industry is a very tough market to compete and survive in. Maybe he'll need to specialize in a

sector of the market that's protected from some of these forces, or find a related business that's in

a stronger position.

Criticism of Porter's Five Forces Model

Despite its enduring popularity, Porter's Five Forces model has come in for considerable

criticism in recent years. In particular, critics have pointed to its age, lack of flexibility, and the

fact that it doesn't take account of new technology.

You can read more about this in our article Pitfalls of Porter's Five Forces

.

Key Points

Porter's Five Forces Model is an important tool for understanding the main competitive forces at

work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint

areas where you can adjust your strategy to improve profitability.

According to Porter, the five main forces that can impact the competitiveness of an industry are:

• Competitive Rivalry: the strength of competition in the industry.

• Supplier Power: the ability of suppliers to drive up the prices of your inputs and raw

materials.

• Buyer Power: the strength of your customers to drive down your prices.

• Threat of Substitution: the extent to which different products and services can be used

in place of your own.

• Threat of New Entry: the ease with which new competitors can enter the market (and

potentially drive down your prices).

By thinking about how each force affects your organization, and by identifying its strength and

direction, you can quickly assess your competitive position.

You can then look at what strategic changes you need to make to deliver long-term profit.