Five Competitive Forces
(Porter)

Outside-in Business Strategy. Explanation of Five Competitive Forces of Michael Porter.

Five Competitive Forces (Porter)What is the Five Forces model of Porter? Description

The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:

  1. Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
  2. Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
  3. Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
  4. Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
  5. Rivalry among the existing players. Does a strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size.

Sometimes a sixth competitive force is added:

  1. Government.

Porter's Competitive Forces model is probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking Outside-in.

 

Threat of New Entrants depends on:

  • Economies of scale.
  • Capital / investment requirements.
  • Customer switching costs.
  • Access to industry distribution channels.
  • Access to technology.
  • Brand loyalty. Are customers loyal?
  • The likelihood of retaliation from existing industry players.
  • Government regulations. Can new entrants get subsidies?

Threat of Substitutes depends on:

  • Quality. Is a substitute better?
  • Buyers' willingness to substitute.
  • The relative price and performance of substitutes.
  • The costs of switching to substitutes. Is it easy to change to another product?

Bargaining Power of Suppliers depends on:

  • Concentration of suppliers. Are there many buyers and few dominant suppliers? Compare: Kraljic Model.
  • Branding. Is the brand of the supplier strong?
  • Profitability of suppliers. Are suppliers forced to raise prices?
  • Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets).
  • Buyers do not threaten to integrate backwards into supply.
  • Role of quality and service.
  • The industry is not a key customer group to the suppliers.
  • Switching costs. Is it easy for suppliers to find new customers?

Bargaining Power of Buyers depends on:

  • Concentration of buyers. Are there a few dominant buyers and many sellers in the industry?
  • Differentiation. Are products standardized?
  • Profitability of buyers. Are buyers forced to be tough?
  • Role of quality and service.
  • Threat of backward and forward integration into the industry.
  • Switching costs. Is it easy for buyers to switch their supplier?

Intensity of Rivalry depends on:

  • The structure of competition. Rivalry will be more intense if there are lots of small or equally sized competitors; rivalry will be less if an industry has a clear market leader.
  • The structure of industry costs. Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed.
  • Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry.
  • Switching costs. Rivalry is reduced when buyers have high switching costs.
  • Strategic objectives. If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely "milking" profits in a mature industry, the degree of rivalry is typically low.
  • Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.

Strengths of the Five Competitive Forces Model. Benefits

  • The model is a strong tool for competitive analysis at industry level. Compare: PEST Analysis
  • It provides useful input for performing a SWOT Analysis.

Limitation of Porter's Five Forces model

  • Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy). See: Core Competence
  • The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations. See: Parenting Advantage
  • From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
  • Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. See: Disruptive Innovation
  • Sometimes it may be possible to create completely new markets instead of selecting from existing ones. See: Blue Ocean Strategy

Overview of the Book "Competitive Strategy"

  • In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
  • In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
  • In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

Book: Michael E. Porter - Competitive Strategy -

 

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Recent User Comments
siddique Abdul-Samad - Ghana Porter and Demand and Supply "What differences or relations are there between Porter's five forces and market demand and supply?"    0
 - South Africa How does Information Technology alter Porter's 5 Forces "How does Information Technology alter each of the five competitive forces in Porter's five forces model?"    6
Wasike - Kenya Other forces "We also have other forces that operate together with Porters model. I.e. Government, Society and natural phenomena. These other three factors can be a threat or an opportunity to any business venture. Government with its legal policies, society with its demands and pressures on organizations, and natural disasters. Take an example of a slaughter house in dry areas where cows are dying out of draught, a textile company in Nakuru where cotton growing in Kenya collapsed because the government allowed the importation of second hand clothe, talk of a mining company that requires the residents to leave their land for another settlement and yet the residents are feel cheated out of the deal. Therefore, in industry competitiveness, Government, society and natural phenomena can not be ignored."    2
 - Lebanon Porter's 5 Forces and the Credit Crunch Crisis "Irrespective of the type of your business, be it a public or a private company, a Product or Services oriented, National or International; all businesses operates within an Ecosystem that changes dynamically and is tightly interconnected. Nothing happens in a Vacuum nor by pure luck. Applying the Porter’s 5 Forces, is your best bet to understand the dynamics of your business and challenges that you are currently facing and will face in the future. It takes a deep understanding of the concept thus, and a lot of experience to master such tool. Ultimately, you will reap the benefits of an effective and powerful tool that will change the way you do business forever. Following years of practice, I find the Porter’s model to be an ideal approach that foster for a true systemic thinking and process, one that is much needed today than ever before in spite of the credit crunch crisis and world economic turndown. "    -2
Shelly - UK Disadvantages of the 5 Forces "Are there any known disadvantages of the 5 Forces from Porter?"    6
Best User Comments
Jane - US Assumptions "The Five Forces model has two basic premises. The first is that the goal of a business is long-term profitability. The second is that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Competition is rooted in an industry's economic structure."    69
Radhi - Zimbabwe Porter's 5 Forces "This article was well written. I find it helpful for my MBA studies and exams"    50
Faraday - Netherlands 5 Forces in the public sector "The profitability (such as more students & diploma's) in the education sector is becoming increasingly a predicament for the public sector. It would be therefore a challenge to interpret and apply the 5 forces model for the public sector."    32
Jay - US Industry Analysis model "Another name for the Five Forces model by Porter is: Industry Analysis model."    31
SanjaKHamilton - Canada 5 forces and supplier marketing "The 5 forces model doesn't take in to account supplier's marketing strategy especially investement in to advertizing and branding which can certainly sway supplier's power away and create a brand new environment. Otherwise it's a good model...."    26
Namathanga - Malawi 5 Forces Mode "I find it quite challenging but beneficial to apply the model to a public institution in my dissertation for Msc in Strategic Management"    26
Naveen Ahuja - India Goverment Force in Porter's Five Forces "Who can give an explanation of the government factor in Porter's Five Forces? What is it? Who introduced it?"    25
Jan Demacker - Netherlands It's a tool "Ladies and gentlemen. IT IS A TOOL, nothing more. And just like ANY tool, it is as good or bad as the person using it. The explanation above is alright. People do get the general idea of Porter's Model. (I needed to refresh as marketing isn't my thing and I do prefer this explanation over my university's)"    20
Kudzai Nyangoni - S. Africa Porter's 5 Forces Model "Michael Porter's 5 Forces Model is about the best model I know that provides a comprehensive basis for analysing elements that affect a business. If used carefully with other methodologies such as SWOT Analysis, PESTELG, BCG matrix, Core competency analysis, etc, one is able to craft a competitive and sustainable business strategy. Remember a good strategy is as good as the credibility of the information used and how well these methodologies are applied. "    20
Richard - Ghana Generic competitive forces "Small businesses in Ghana are constantly battling these forces, yet most of their owners have little knowledge on how to deal with them. It would be great if we could explain these forces to some small business owners."    20

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Compare with: Porter Competitive Advantage  |  Four Trajectories of Industry Change  |  Parenting Advantage  |  Core Competence  |  The Value Net, Co-opetition  |  Delta Model  |  Resource-Based View  |  BCG Matrix  |  Growth Phases  |  Distinctive Capabilities  |  Organizational Configurations  |  3C's  |  Porter Diamond Model  |  Bricks and Clicks  |  Twelve Principles of the Network Economy  |  Vertical Integration  |  Horizontal Integration

 

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  ●  (Nigeria) How does Information Technology alter Porter's 5 Forces "It may affect Porter's 5 Forces but not totally, considering that there are inherent factors which cannot be manipulated digitally. Any outcome will be an assumption; which may not be absolute. So, it takes a lot of understanding of the environment for which the 5 forces model is applied."
  ● Hemant Johri (India) The dynamics of the forces may be changed "The 5 competitive fundamental forces do not change with IT. They remain the same. However: IT may change the dynamics of these forces. What IT does is listed below:
1. It can make information available at higher speed.
2. As a tool it provides speed and accuracy in preparation, processing and analysis of available data.
3. When applied in an industry it can lead to transformation or innovation of processes. This may provide competitive advantage to the firm either in terms of cost reduction or by disruptive innovation."
  ● Jimish Shah (India) 4 ways in which IT alters Porter's 5 Forces "1. IT may increase the buyers bargaining power as information of substitutes and prices are easily available.
2. IT can help bring suppliers and the firm together and work in collaborative mode. This will be an added advantage for the firm over its rivals.
3. Software packages like CRM, SRM, PLM can improve the competitive position of the firm and increase collaboration between all the entities in the Supply Chain.
4. IT can be used to improve processes and efficiency. This can help the firm to be cost effective and technologically advanced. This will increase the barriers for entry for new entrants."
  ●  (Mexico) Add Stakeholders Concept "I recommend to review the concept "STAKEHOLDERS" besides the 5 Forces once you have to ask for opportunities and forces, regarding Labor Markets, Communities, Universities that feed professionals, Media, Banking and Insurance Companies, Environmental Agencies, Non Govt. Organizations, Tax Agencies, all Stakeholders providing opportunities and forces as long as they are related to the company of course."
  ●  (Albania) The validy of Information Technology "I think that IT can influence all of the five forces but we must be careful about information how sure it is. Also: is the technology good enough like it is? And: can it help me to do something in my business? And: how much will be the costs to my budget to use this technology... And: some technologies have a life time and have to be substituted or changed..."
  ● Muder Chiba (India) Information Arbitrage "Essentially, the same points that the other are making... It would affect decision-making using the model insofar that the better users of IT would be able to gain superior leverage. This leverage would come about through faster information flows, enhanced data interconnections / trend spotting and superior information sharing for decision-making."
  ● Kwame Yeboah (Ghana) IT does alter Porter's 5 Forces "Which ever way one looks at it, IT DOES alter the 5 forces (compared to the traditional forms in which it does).
THREAT OF NEW ENTRANTS: Since the power of the internet has made the world a global village, it is easier for our Chinese brothers (for example) to reach people in Ghana with textile products for instance, hence competing with the industry here in Ghana.
THREAT OF SUBSTITUTES: India is offering a substitute to the expensive American data entry clerk's services by working online at a much cheaper cost to the American employer (via the internet)
BARGAINING POWER OF SUPPLIERS: There are many more suppliers now than those from ones immediate locality or country so suppliers aren't that powerful any longer.
INTENSITY OF RIVALRY: There is surely more rivalry now. Zenith bank is now in Ghana (along side several other Nigerian banks) and they don't only reach me through the local media but also through CNN! The local banks have no choice but to sit up!"

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  ● Tom (US) Assumption in Porter's 5 Forces "Yet another major assumption of Porter's Five Forces Framework is that he views all industries as based on COMPETITION. However there are important exceptions on this view, such as for example in the automotive industry, where strong COLLABORATION between assemblers and their suppliers have turned out to be very beneficial for all parties. The same may be the case for knowledge-intensive industries, since knowledge sharing increases its overall value. Furthermore, Edward Freeman argues that the economic paradigm of competition should be replaced by the more sustainable paradigm of collaboration with stakeholders."
  ● Danny (UK) Assumption: Product Markets... "There is yet another important assumption in the Porter Model: that firms are competing only in PRODUCT OR SERVICES MARKETS (where firms compete for customers). However firms are actually competing in two markets. The other one being: FACTOR MARKETS(where firms compete for resources). These resources can include a variety of tangible and intangible assets, and even stakeholders such as shareholders-investors, banks-creditors, employees-talent, managers, the media,etc. Often this competition for stakeholders is cross-industry!"

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  ● Mitesh (Australia) Porter's five forces analysis "Its a good article for those who want guidance on how to conduct industry analysis for an organisation or for any academc purpose."

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  ● Patricia (UK) Five Forces for Local Authorities "Has anyone tried to use the tool applied to a local authority? If yes - was it useful?"

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  ● jihan (Dubai) HR "could i have this copy"

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  ● rajesh (india) research "it was very informative"
  ● Reza (Iran) 5 Forces Questionnaire "Who can provide a questionnaire that helps to assess the competitive forces using the Porter model?"

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  ● Abdur Rob (Bangladesh) Example Goverment Force in Five Forces "I can't tell you who introduced this 6th Force, but the example below can justify the reason.
Nowadays, many Governments have established regularity bodies. As an example, in Bangladesh, Bangladesh Telecom Regularity Commission (BTRC) fixed the price ceiling (BTD 0.25 - BDT 2.00) for cellular phone. This is one of the forces for the cellular operators to maintain this price range."
  ● Alchui (Singapore) Government and 5 Forces "The Government plays the role of "Caregiver/Policeman" who regulates the economy [See Porter's Diamond of National Advantage]. Government "provides" the land space for development, upgrading and funding schools and skills, size of population and labour force, attract foreign investors, encourage entrepreunership, regulates the imports and exports, regulates the industries and its business policies, etc. The Government will "nurture" the growing industries, thus some firms/industries benefit from this force more than the others."
  ● Dr. Uditha Liyanage (Sri Lanka) FiveForces "Government, the proposed sixth factor may well impact all five factors. Moreover, the 5 forces have to be placed within a context or framework, a key element of which is the Government."
  ● Anders Nystrom (Sweden) The 6th force "I have a background in systemical thinking, the theories of sociotechnical systems. Generally to handle forces you have to define borders of different levels of systems as a first step. Porter´s model is defined as the market and this 6th force is just one of several forces on the level above the market, e.g. nations or EU. Another force on the level above is institutional conmpetition, there are more (is another story). The forces on the level above effect the whole market system at the same time and in similar ways."
  ● K. Gopalakrishnan (India) Govt. as the 6th Force "I had modified the Five Forces of Porter with Government as the 6th Force for my pharmaceutical management students in ies college, bandra, mumbai long back. In pharma business this is very relevant and this was well accepted by pharma professionals who came to know about this modification of the 5 forces."
  ● Stefan Guenther (Germany) Government as the 6th Force "I work in the financial industry and particularly in my field the existence and activity or non-activity of whatever regulatory body is quite visible right now and will no doubt play a more important role in the future, thus defining the playing field and the rules for actors. In the investment industry I regard this 6th force as one of the most important ones, more than new market entrants in this market under pressure."
  ●  (India) Re: Government sixth factor? "If you give a chance of reading the Book 'Only the Paranoid Survive' by Andy Grove, he explains the role of the government as a sixth force. The HBR article of January 2008 by Porter, disagreed with all the views and in toto of the whole process, he says that the government is not a force which enduces us to understand the industry profitability but, an important factor. Remember he says that the factors are nothing but complementors as proposed by Grove and disagreed by Porter.... Porter in his competitive advantage of Nations gives a much better outlook to the role of the government in this regard, Thanks and regards."
  ● Deb M (Singapore) Role of Government "Government Forces can either be categorized as a Business Entity like in a state control enterprise or as a Barrier. In most countries given its executive & legislative power Government acts as a barrier (read: regulator)."

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  ●  (UK) Only Porter's 5 forces is not enough "I would like to disagree on excessive dependence on Porter's 5 forces for formulating any strategy. I agree with Jan, and would like to add on that this TOOL must be used only to get a better picture and NOT to conclude any strategy. It gives you a good idea but of very basic nature. Any business, no matter what its nature is, is exposed to these basic forces and this tool only helps is to recognize them. You might want to include other tools (Margaret Peteraf’s model) and other tools and theories to see a better picture. In such a dynamic and uncertain world, no one tool or theory will be sufficient. So, I would rather advice a cocktail than a straight-up."

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