What Is Porter’s Five Forces?
Porter’s Five Forces is a framework used to evaluate the competitive intensity of an industry and understand how attractive (or risky) it is to operate in.
It examines five key forces that shape profitability:
👉 Threat of New Entrants
👉 Bargaining Power of Suppliers
👉 Bargaining Power of Customers
👉 Threat of Substitutes
👉 Industry Rivalry
This helps determine whether a company can earn strong, sustainable profits in that industry.
Why Porter’s Five Forces Matters
- Helps evaluate if entering/staying in an industry is worthwhile
- Identifies where competitive pressure comes from
- Guides market entry, pricing, and positioning strategy
- Determines long-term profitability potential
- Used heavily in due diligence, market analysis, and strategy consulting
It is one of the most widely used industry analysis tools in the world.
The Five Forces (Core Structure)
1. Threat of New Entrants
How easy is it for new players to enter the industry?
High when:
- Low capital requirement
- Few regulatory barriers
- Easy to access suppliers/distributors
- Low customer loyalty
- Technology widely available
Low when:
- Strong brand loyalty
- High upfront costs
- Economies of scale
- Strong IP/patents
- Strict regulations
High threat = existing players face ongoing pressure.
2. Bargaining Power of Suppliers
How much power suppliers have to raise prices or reduce quality.
High when:
- Few suppliers
- Unique inputs
- High switching costs
- Suppliers can forward integrate
- No substitute inputs
Low when:
- Many suppliers
- Inputs are standardized
- Low switching cost
High supplier power → higher costs for the company.
3. Bargaining Power of Customers
How much influence customers have over pricing and terms.
High when:
- Customers are price-sensitive
- Low switching cost
- Many alternatives
- Purchases are high-volume
- Little product differentiation
Low when:
- Strong brand loyalty
- Differentiated products
- High switching cost
- Fragmented customers
High customer power → pressure on margins.
4. Threat of Substitutes
The likelihood of customers switching to a different type of solution.
High when:
- Many alternative products
- Lower-priced substitutes
- Similar functionality
- Switching is easy
Low when:
- Few alternatives
- High switching costs
- Substitutes are lower quality
High substitution threat → limits pricing power.
5. Industry Rivalry
Intensity of competition among existing players.
High when:
- Many competitors
- Slow industry growth
- High fixed costs
- Low differentiation
- Frequent price wars
- High exit barriers
Low when:
- Few players
- Differentiated offerings
- Growing market
- Strong brand loyalty
High rivalry → lower overall profitability.
How to Apply Porter’s Five Forces (Step-by-Step)
1. Define the industry clearly
Analyze the correct segment (e.g., budget airlines, not all airlines).
2. Rate each force as high / medium / low
Based on data, competitor info, and market dynamics.
3. Identify the strongest pressures
Which force is most restricting profitability?
4. Map implications for strategy
Examples:
- High customer power → strengthen differentiation
- High supplier power → diversify suppliers
- Strong rivalry → target niche segments
5. Recommend strategic actions
Address risks and leverage industry opportunities.
Mini Example: Five Forces Case
Industry: Fast-food delivery
Client: Online delivery platform
New entrants: Medium
Tech barriers low, logistics moderately difficult
Supplier power: Low
Many restaurants available
Customer power: High
Low loyalty, price-sensitive, easy switching
Substitutes: Medium
Cooking at home, dine-in options
Rivalry: Very high
Heavy discounting, many players
Conclusion:
Industry is competitive and margin-constrained → platform must differentiate via convenience, speed, and exclusive partnerships.
Common Mistakes to Avoid
- Mixing company-level issues with industry issues
- Treating all industries as identical
- Ignoring geographic differences
- Not quantifying the severity of each force
- Using outdated assumptions
- Not linking the analysis to a strategic recommendation
Five Forces is only useful when tied to decisions.
Where Porter’s Five Forces Is Used
- Market entry decisions
- Industry attractiveness assessments
- Competitive strategy
- Pricing strategy
- Due diligence
- Corporate planning
- Case interviews
It’s a timeless framework for understanding competitive pressure.