Porter’s Five Forces

Porter’s Five Forces is a strategic analytical tool that is used to assess the level of intensity of competition in the industry. The tool can also be applied to evaluate the balance of power in the industry. Developed by a famous strategy guru Michael Porter[1], the framework assumes that the level of intensity of competition in the industry.


Porter's Five Forces Analysis


Threat of new entrants

High level of profit in a market or industry attracts new companies to join the industry affecting the level and pattern of competition in the marketplace. Theoretically, firms should be able to enter and exit to maintain the nominal level of profits. In practice, however, there is a range of factors that may emerge as a barrier for firms aiming to enter an industry. Specifically, the threat of new entrants depends on the following set of factors:

  1. Economies of scale.
  2. Product differentiation
  3. Capital requirements.
  4. Customer switching costs
  5. Access to distribution channels
  6. Legal and regulatory barriers
  7. Expected retaliation from existing businesses
  8. Time of entry
  9. Specialist knowledge
  10. Cost advantages
  11. Technology protection


Bargaining power of buyers

Buyer bargaining power is associated with the extent of impact customers can have on the industry. The stronger the buyer, the greater his ability to reduce prices and/or increase the quality of products and services. The following set of factors determine bargaining power of buyers:

  1. Size and concentration of buyers compared to suppliers
  2. Buyers’ price sensitivity
  3. Product differentiation
  4. Switching costs
  5. Information about products and services
  6. Buyer’s ability to go for substitute products and services


Bargaining power of suppliers

Supplier bargaining power forms the nature of supplier-manufacturer relationships. Suppliers with strong bargaining power are able to sell raw materials for higher prices with direct implications on the levels of profit to be generated by manufacturers. Supplier bargaining power depends on the following:

  1. Number of suppliers
  2. Size of suppliers
  3. Differentiation of products provided by suppliers
  4. Uniqueness of products and services provided by suppliers
  5. Switching costs
  6. Forward integration
  7. Importance of volume to supplier
  8. Cost of supplies relative to selling price of products
  9. Ability of the firm to substitute suppliers
  10. Strength of the distribution channel


Threat of substitute products and services

Firms have less bargaining power if substitutes exit to their products and services. Substitutes can be direct or indirect and the threat of substitute products and services depends on the following set of factors:

  1. Existence of close substitutes
  2. Existence of indirect substitutes
  3. Switching costs
  4. Perceived level of product differentiation
  5. Buyers’ propensity to substitute
  6. Performance and quality of substitute products and services


Rivalry among existing firms

The level of intensity of competition in the industry determines the level of its profitability. The more competitive is the industry, the more difficult for firms to maintain and increase their market share. The following set of factors determine the extent of rivalry among existing firms:

  1. Rate of growth of the industry
  2. Number of competitors and the balance between them
  3. Diversity of competitors
  4. Differentiation of rival products and services
  5. Differences in quality among competing firms
  6. Switching costs
  7. Excess capacity and exit barriers
  8. Brand equity
  9. Level of advertising expenditure
  10. Degree of transparency
  11. Differences in marketing efficiency among competing firms

Porter’s Five Forces as a tool to assess competitive environment has some shortcomings as well.  It is a backward-looking model that provides a picture of the state of things within the industry at some point in the past. The model cannot be used to make long-term plans because of the highly dynamic nature of the business environment.

Furthermore, Porter classifies its five forces into broad terms.  For example, bargaining power of suppliers may vary depending on the type of resources suppliers offer. However, if you attempt to conduct are more comprehensive analysis by dividing the five forces into sub-forces, the framework becomes complex to apply with very little practical benefits.

Porter’s Five Forces as a framework assumes that industries can be clearly defined, so that they can be analyzed separately. In reality, however, interconnection between industries is becoming more complex and it is hard to tell where one industry ends and other starts. For instance, Alphabet Inc. operates in a wide range of sectors such autonomous cars, biotechnology, cloud computing, computer hardware, corporate venture capital, healthcare, software and sectors. For Alphabet Inc. all of these industries are inter-connected and they are based on artificial intelligence (AI).

Last, but not least, not all five forces are equal for all industries, a fact largely ignored by the model. For most industries, there will be one or two forces that outweigh all the others.

This portal contains samples of Porter’s Five Forces analyses of many multinational enterprises as part of Company Reports.



[1] Porter, M.E. (1979) “How Competitive Forces Shape Strategy” Harvard Business Review, March 1979