Strategy & competition
Porter's Five Forces
A structural analysis of the five competitive forces that determine an industry's long-run profitability, and therefore where and how a business can defend or improve its position.
Also known as Five Forces analysis, Industry structure analysis. First set out by Michael E. Porter in 1979; the primary source is cited in full below.
- Format
- Structural model
- Level
- Corporate · Business unit
- Best for
- Analyse the environment · Position against competitors · Assess risk
- Decision stage
- Diagnose · Explore options
- Difficulty
- Intermediate
- Time to apply
- Half a day for a serious first pass; longer with primary research.
Plate · The model
The components
Rivalry among existing competitors
The intensity of head-to-head competition in the industry. High rivalry, especially price-based rivalry, transfers value directly to customers and erodes industry profitability.
Signals of strength
Numerous or equally balanced competitors · Slow industry growth · High fixed costs or perishable capacity · High exit barriers · Undifferentiated offerings competing on price
Threat of new entrants
The likelihood that new players enter and bid away profitability. The threat depends on entry barriers and on the retaliation entrants can expect from incumbents.
Signals of strength
Low capital requirements · Weak economies of scale · Little brand loyalty or switching cost · Easy access to distribution · Light regulation
Bargaining power of suppliers
The ability of suppliers to capture value by charging more or providing less. Powerful suppliers squeeze industry margins from the input side.
Signals of strength
Supplier base more concentrated than the industry it sells to · No substitute inputs · High switching costs for industry participants · Credible threat of forward integration · Industry is not an important customer to the supplier group
Bargaining power of buyers
The ability of customers to force prices down or demand more value. Powerful buyers capture the industry's value for themselves.
Signals of strength
Concentrated buyers purchasing in volume · Standardised, undifferentiated products · Low switching costs for buyers · Price-sensitive buyers under margin pressure themselves · Credible threat of backward integration
Threat of substitutes
Products or services from outside the industry that meet the same underlying need a different way. Substitutes cap the prices an industry can sustainably charge.
Signals of strength
Substitute offers an attractive price-performance trade-off · Buyer's cost of switching to the substitute is low · Substitute comes from a high-profit industry able to invest · The need can increasingly be met in-house or not at all
When it earns its keep
- You are entering, exiting or investing in an industry and need to judge whether it can sustain attractive returns before you commit.
- Margins are under pressure and you want to diagnose which structural force is squeezing them, rather than guessing.
- You are setting competitive strategy and need to know where the industry's profit pool sits and who has the power to claim it.
- A regulatory, technological or supply change is reshaping the industry and you want to reason about who gains and who loses.
And when it doesn't
- The question is about one competitor rather than the industry. Five Forces analyses structure, not individual rivals; use competitor analysis or wargaming for that.
- The industry boundary is genuinely unclear or collapsing, for instance during rapid convergence. Define the industry first or the analysis will mislead.
- You need a view of your own internal capabilities. Pair it with VRIO or Value Chain analysis; Five Forces looks outward only.
- Speed matters more than depth. A full Five Forces run takes real research; for a quick orientation, PESTEL or a SWOT may serve better.
How to run it
Before starting, gather the inputs the analysis depends on:
- A clear definition of the industry being analysed, including its geographic and product scope.
- Data on competitors: number, relative size, growth rates, fixed-cost structures and exit barriers.
- Knowledge of the supplier base and buyer segments, including concentration and switching costs on each side.
- An honest view of substitutes, including indirect ones from outside the obvious competitor set.
- Evidence on entry barriers: capital requirements, economies of scale, regulation, brand loyalty, access to distribution.
- 1
Define the industry
Set the boundary deliberately: which products, which customers, which geography. Most bad Five Forces analyses fail here, by drawing the industry either so wide the forces blur or so narrow that real threats sit outside the frame.
- 2
Identify the players behind each force
List the actual competitors, suppliers, buyers, potential entrants and substitutes. Name names. An analysis that never gets more specific than 'suppliers have moderate power' has not been done yet.
- 3
Assess the strength of each force
Work through the structural drivers of each force in turn (concentration, switching costs, differentiation, barriers, relative price-performance of substitutes) and judge it weak, moderate or strong, with evidence.
- 4
Determine the overall industry structure
Step back and ask which one or two forces truly govern profitability here. Porter is explicit that the forces are not equally important in every industry; the analysis should identify the binding constraint.
- 5
Test for change
Ask how each force is trending. Industry structure is comparatively stable but not fixed; technology shifts, regulation and consolidation all move the forces over time.
- 6
Decide how to act
Use the findings to position the business where the forces are weakest, to exploit change in the structure, or, where feasible, to reshape the structure in your favour. The analysis is only finished when it changes a decision.
Reading the result
A structured judgement of industry attractiveness: a strength rating and supporting evidence for each of the five forces, an identification of the one or two forces that govern profitability, and the strategic implications for positioning.
- Strong forces mean value flows away from industry incumbents; weak forces mean incumbents can retain it. The profit potential of the industry is set by the strongest forces, not the average.
- Look for asymmetries: a force that is strong for the industry may be weak for a well-positioned firm, and that gap is where strategy lives.
- Treat the trend as seriously as the level. A moderate force that is strengthening matters more than a strong force that is fading.
A worked example
An independent executive-coaching practice weighs a move into board-governance advisory
A UK leadership-coaching practice with a strong personal brand is considering extending into board-effectiveness and governance advisory work for mid-sized firms. Before investing in the offer, the founder runs a Five Forces analysis on the UK governance-advisory industry to judge whether it can sustain attractive margins for a small entrant.
- Rivalry among existing competitors
- Moderate. The market is fragmented: Big Four consultancies at the top, many boutique advisers below. But offerings are differentiated by reputation and relationship rather than price, which softens rivalry. Few players compete head-to-head for the same mid-market boards.
- Threat of new entrants
- Strong. Barriers are low: little capital, no licensing requirement, and any experienced director or coach can declare themselves a governance adviser tomorrow. Credibility and referral networks are the only real barriers, and they take years rather than money.
- Bargaining power of suppliers
- Weak. The key input is the adviser's own expertise. Associates and psychometric tools are plentiful and substitutable, and no supplier group holds meaningful power over a practice of this kind.
- Bargaining power of buyers
- Strong. Boards buy infrequently, compare several advisers, and increasingly run procurement through professional buyers. For mid-sized firms the spend is discretionary, so price scrutiny is real and switching costs are near zero.
- Threat of substitutes
- Moderate to strong. Boards can substitute with NED-led internal reviews, institute checklists and self-assessment tools, or increasingly capable AI-assisted evaluation products. None fully replaces an experienced independent adviser, but each caps what can be charged.
The read. The governing forces are buyer power and the threat of entry, and both push the same way: undifferentiated governance advice will be squeezed. The analysis says enter only with a sharply differentiated, reputation-led offer that raises buyer switching costs, for example a proprietary governance standard with ongoing accreditation rather than one-off reviews. Structure, not effort, will decide the margin.
Pitfalls
- Defining the industry to fit the answer you want. Draw the boundary first, on evidence, and let the analysis fall where it falls.
- Rating every force 'moderate' and concluding nothing. The value is in identifying the binding force and what drives it.
- Treating the model as a static snapshot. Porter's own 2008 restatement stresses analysing how the forces are changing.
- Confusing intensity of competition with attractiveness of competitors. The framework analyses industry structure, not whether particular rivals are well run.
- Listing growth rate, technology or government as forces. Porter treats these as factors that act through the five forces, not forces in themselves.
What the critics say
The model underplays cooperation and complements. Brandenburger and Nalebuff argued from game theory that complementors act as a sixth force shaping industry value, a critique Porter answered by treating complements as a factor influencing the five forces rather than a force in its own right.
Brandenburger, A. M. and Nalebuff, B. J. (1996) Co-opetition. New York: Doubleday.
Coyne and Subramaniam argued the framework rests on assumptions that often fail: that buyers, suppliers and rivals do not collude or interact strategically, that structural advantage is the source of value, and that uncertainty is low enough to plan against.
Coyne, K. P. and Subramaniam, S. (1996) 'Bringing discipline to strategy', The McKinsey Quarterly, No. 4.
In fast-moving or converging industries the assumption of stable industry boundaries weakens, and the analysis can date quickly. Dynamic-capability and ecosystem perspectives argue firm-level adaptability matters as much as industry structure.
Work it through
Rate each force for your industry, capture the evidence behind the rating, then read the overall structure. Your entries persist for this browser session and can be copied out as Markdown or printed.
The reading · 0 of 5 forces rated
Rate all five forces and the reading appears here.
Run it as a workshop
Draw the industry boundary before the room opens, on evidence, not on the answer you want the analysis to reach; a badly drawn boundary invalidates everything built on top of it. Print or draw the five-forces diagram large enough for the group to annotate directly onto it.
Running order
| Confirm and defend the industry boundary | 15 min |
| Work each force in turn with evidence, not impression | 75 min |
| Rate each force and capture the evidence behind the rating | 20 min |
| Identify the binding force and what actually drives it | 20 min |
| Agree what the analysis changes about strategy | 20 min |
| Total | 2h 30m |
You will need
- A large printed or drawn five-forces diagram
- Whatever market, supplier and customer data was gathered beforehand
- Coloured dot stickers for rating each force live
- A parking-lot sheet for contested boundary calls
Traps to avoid
- Defining the industry to fit the answer someone already wants. Settle the boundary first and let the analysis fall where it falls.
- Rating every force 'moderate' and calling it done. The value is in identifying the one binding force, not scoring all five evenly to avoid an argument.
- Treating the result as a permanent snapshot. Note explicitly how each force is moving, not just where it sits today.
- Letting the loudest person in the room set every rating. Ask for evidence behind each score before it goes on the diagram.
Sources and further reading
- Porter, M. E. (1979) 'How Competitive Forces Shape Strategy', Harvard Business Review, 57(2), March–April 1979. ↗
- Porter, M. E. (2008) 'The Five Competitive Forces That Shape Strategy', Harvard Business Review, 86(1), January 2008. ↗
- Porter, M. E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
- Harvard Business School, Institute for Strategy and Competitiveness: The Five Forces. ↗