Porter’s 5 Forces is a strategic framework for analyzing the competitive forces that define the shape of a given industry, and an individual business’s ability to compete within this market. It provides a sense of just how challenging any given business sector may be to enter and compete in, and how attractive and profitable the field may ultimately be to business leaders considering pursuing new ventures.
As a small-business owner, a Five Forces analysis can help you get a better sense of an industry’s overall structure and level of competition, and how to shape corporate strategy when taking these factors into an account. First developed and pioneered by Harvard Business School professor Michael E. Porter in the 1970s, it’s a working model that many organizations still use today.
Here’s a comprehensive breakdown of how Porter’s Five Forces method works—and how to make its basic principles work for you.
What Are Porter’s Five Forces?
A Porter’s Five Forces analysis is often used to help guide a company’s overall business strategy and help it uncover ways to build or extend its competitive advantage. As the name implies, Porter identified five overarching forces that influence the shape many global markets and industries. These forces include:
1. Competition Within the Industry
This force looks at how challenging the competition is in your market, including the number of rivals you face, how well-differentiated their products and services are, and how well-developed and capable their organizations are. As you might imagine, the more competitors there are and more commoditization in offerings that exist, the more demanding and less attractive a market will be.
2. Bargaining Power of Suppliers
This force looks at how easy or difficult it is for suppliers to drive up prices. Relative bargaining power here can be influenced by the total amount of suppliers of each vital business ingredient or input, how uniquely-differentiated their offerings are, the suppliers’ relative size and strength, and how costly it would be to shift your services from one vendor to another.
Performing a Five Forces analysis provides a better understanding of where the power truly lies in a given market—and how to effectively compete within it.
In other words: This component of the model asks you to consider how vital the goods and solutions are that suppliers provide, and how expensive and challenging it would be if you were forced to replaced them.
3. Bargaining Power of Customers
This gives you a sense of how challenging or simple it is for buyers to drive prices down, how important these buyers are to your company, and the relative cost of these buyers switching from one supplier (you) to another (your competitors). For example, if your industry is home to only a few large and powerful buyers, they’ll often wield significant power to dictate terms.
4. Threat of Substitute Products or Services
If you’re in a market where many substitutes exist, it increases competitive pressures and boosts the odds that customers will be willing to switch to alternatives, especially if prices increase. The more substitutes there are, the less power that suppliers wield, and the less attractive a market will appear to those looking to compete within it.
5. Threat of New Market Entrants
Profitable and growing markets tend to attract new entrants, which increases competition and can undermine your profitability. Unless significant barriers to entry exist, or your company possesses significant protection against competitors (like proprietary technologies or patents), growth in new market entrants will cause profitability to decline as competition rises.
By examining these forces, you can measure the intensity of competition that you might face in a particular field. You can also get a sense of how profitable and attractive any potential ventures in your industry may be. Performing a Five Forces analysis provides a better understanding of where the power truly lies in a given market—and how to effectively compete within it.
Key Learnings from a Five Forces Analysis
Conducting an analysis using Porter’s Five Forces framework and assigning values such as “Low, Medium, and High” to each attribute can help you get a quick snapshot of where and when a market opportunity is worth pursuing. Used as a strategic planning tool, it can help you answer questions like:
- Should I enter a given market or industry?
- Do I need to acquire additional resources and capabilities before doing so?
- What type and degree of competition might I expect to face?
- Who holds the power and influence in my chosen sector?
- Where do opportunities exist to tap into existing market dynamics or disrupt current solutions by adopting new technologies and paradigms?
- Just how profitable might new ventures be here—and what are the odds I'll wind up seeing any profits?
- Which business strategies can I adopt if I hope to be competitive?
As you go about conducting a Five Forces analysis, you’ll also want to take external events and outside factors into account. How might continuing supply chain disruptions, challenges in the labor market, shifting geopolitical climates, increasing government regulation or the ongoing emergence of new technologies impact your business plans?
If there’s one thing that Porter’s Five Forces framework asks business leaders to do, it’s to take a big-picture view of an industry, think several steps ahead—and engage in more futuristic and critical thinking. Implement this methodology within your strategic planning process, and you can be better equipped to compete within any given market, or adapt to ongoing industry changes, no matter what tomorrow brings.
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