Five Forces Porter

Knowledge Center

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:

6. 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

Forum Forum discussions about the Five Forces (Porter) | Five Forces Analysis. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Five Forces (Porter) | Five Forces Analysis Share your knowledge here (or ask a question)   5 Forces in Emerging Industries How can Porter's five forces model be applied within emerging industries?... 64   1 comments Government as 6th 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?... 40   14 comments MEDIA as the 7th Force in Porter's Five Forces The Media could be added as a seventh force as it would complement the Porter model of 5 forces. The media today have become an inevitably interwoven phenomenon in our personal and organizational live... 38   16 comments Industry Analysis model Another name for the Five Forces model by Porter is: Industry Analysis model.... 38   1 comments Strengths of Porter's Five Forces Model Porter's' five force model is an excellent tool that is applicable to most areas of business along with its complement the PESTLE analysis. It allows current and potential business owners to crit... 28   1 comments Evolution in our Expectations of Business and Porter's 5 Forces Model One thing that does not easily float to consciousness is that over time, there has been an evolution in our expectations of business and in particular how we define RESPONSIBLE business business behav... 22   1 comments Bargaining Power of Buyers. Examples What precisely is bargaining power of buyers? Can you cite an example? Thank you.... 20   5 comments How to Deal with Competitors in Five Forces Analysis? Okay I understand the five forces, but when I'm trying to apply the model, where do I place other competitive rivals of the firm? For example, if I am doing a five force analysis on supermarkets,... 18   3 comments There are More than Porter's 5 Forces! We also have other forces that operate together with Porters model. For example Government, Society and natural phenomena. These other three factors can be a threat or an opportunity to any business... 12   2 comments Why Porter's Monitor Consulting Company Failed In 1983, Michael Porter co-founded his consulting company, the Monitor Group. In November 2012, Monitor was unable to pay its bills and filed for bankruptcy. One would think a strategy consulting firm... 10   1 comments Does Competition Increase the Need for Segmentation? When a market becomes more and more competitive, does that require more emphasis on market segmentation? In other words: is increasing competition conducive to segmentation?... 8   1 comments The New Industrial Economics School Industrial Economics (IE) involves the study of firms, industries and markets. It looks at firms of all sizes and a any industry, typically analyzing the decision making at the levels of the individua... 5   1 comments 🔥 NEW Porter's 5 Forces Framework in Non-competitive Situations? Hi, what part of Porter's five forces framework is inappropriate for non-competitive situations? I appreciate your help. Thanks.... 3   3 comments

Best Practices The best, top-rated topics about the Five Forces (Porter) | Five Forces Analysis. Here you will find the most valuable ideas and practical suggestions. Assumptions of the Five Forces Model. Limitations The Five Forces model has two basic premises: The first one is that the goal of a business is long-term profitability. The second one is that the intensity of competition in an industry is n... 99   4 comments Substitutes and the Five Forces Model I am interested in '(innovative) substitutes' such as: 1. New inventions (e.g., mobile phones as communicators) 2. New applications of existing products (e.g., internet on mobile phones) ... 25   6 comments 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?... 24   10 comments Business Networking: Forces are Getting Connected I think, there is an interesting phenomena around us due to business networking. Can't we say that the basic model has now evolved into a more integrated one? I believe the 'forces' are now getting co... 22   14 comments Measuring / Calculating the Five Forces of Porter? Hi, can somebody help me how to calculate the co-efficients for each of the five forces. I understand all of the 5 forces might not be having the same weight. Also it would differ by industry.... 17   14 comments

Expert Tips Advanced insights about the Five Forces (Porter) | Five Forces Analysis. Here you will find professional advices by experts. Influence of Internet Impact of Internet on Industry In his article called "Strategy and the Internet" (HBR, March 2001) M. Porter takes his Industry Structure framework one... 5 Forces model is a snapshot Analyzing industry structure Note that the 5 forces framework of Porter is a snapshot, a photo of the current industry's structure. At least equally ... The Role of Competitors in Strategy and Business Failures Competitive Strategy, Competitive Environment, Competitive Intelligence, Industry Analysis Gilad (2014) researched in what way and to what extent competitors do matter. Many people believe that competitors are o... Five Forces in knowledge firms Knowledge-intensive Firms In an article in the Journal of Business Strategy (Vol. 26, no.4, 2005) Norman Sheenan makes a few interesting observati... Five Forces in e-Banking Online Banking In an article in Services Marketing Quarterly (2006, Vol. 28 Issue 2), Alan D.Smith writes that strategically, the use o...

Information Sources Various sources of information regarding the Five Forces (Porter) | Five Forces Analysis. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Five Forces overview Overview Presentation Porter’s Five Forces Model of Industry - Structure and Competition. By Cliff Bowman & Timothy Devinney.... Typologies and Strategies of Co-opetition Co-opetition, Strategic Partnerships, Strategic Collaboration, Strategic Clusters Presentation about Co-opetition thereby especially focusing on the typologies and strategies of co-opetition. It include... 5 Forces Assessment 5 Forces Self-Assessment Industry Analysis: The Five Forces. By Cole Ehmke, Joan Fulton, and Jay Akridge. This publication describes the five for... How Businesses can Use Information Technology (IT) in Strategic Ways Strategic Management, Information Technology This presentation looks at Information Technology from a strategic point of view. In other words, it discusses in what w... 7 Steps for Creating a Strategic Business Plan Strategic Planning, Strategic Management, Business Planning, Business Plan Presentation about strategic planning and business planning, including the following sections: 1. What is a business pl... Interview Porter: How to Apply the Five Forces Framework? Applying the 5 Forces for Fundamental Industry Analysis Interview Michael E. Porter, Professor at Harvard University on The Five Competitive Forces That Shape Strategy. Topics:... Interview Michael Porter: Getting Started with the 5 Forces and Involving Everybody Initial Understanding of Industry Analysis Interview Michael E. Porter, Professor at Harvard University on The Five Competitive Forces That Shape Strategy. Topics:... Interview Porter: The Basic Notion of the Five Forces Initial understanding of the Five Competitive Forces Interview with Michael E. Porter, Professor at Harvard University on The Five Competitive Forces That Shape Strategy Pa...

Research Links Jump to further research sources regarding the Five Forces (Porter) | Five Forces Analysis. News Videos Presentations   Books Academic More

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  |  Strategic Management

Return to Management Hub: Decision-making & Valuation  |   Finance & Investing  |  Marketing  |   Strategy & Innovation  |  Supply Chain & Quality

More Management Methods, Models and Theory