In This Article
Introduction
Developed by Michael Porter in 1979, the Five Forces framework is one of the most influential tools for industry analysis. It helps managers understand the competitive forces that shape industry profitability and develop strategies to improve their competitive position.
The central insight is that competition extends beyond direct rivals to include four other forces that collectively determine industry attractiveness and long-term profitability.
Force 1: Competitive Rivalry
The intensity of competition among existing firms in the industry.
Rivalry is HIGH when:
- Many competitors of similar size
- Slow industry growth (fighting for share)
- High fixed costs (pressure to fill capacity)
- Low differentiation (compete on price)
- High exit barriers (firms stay even when unprofitable)
- Diverse competitors with different strategies
Example: Airlines
High rivalry due to similar services, high fixed costs, price transparency, and perishable inventory (empty seats can't be stored).
Force 2: Bargaining Power of Suppliers
The ability of suppliers to raise prices or reduce quality.
Supplier Power is HIGH when:
- Few suppliers dominate the market
- No substitutes for the input
- Switching costs are high
- Suppliers can forward integrate
- Industry is not important to suppliers
- Input is critical to buyer's product
Example: Intel
Intel had high supplier power in PC industry due to few alternatives, high switching costs, and strong brand ("Intel Inside").
Force 3: Bargaining Power of Buyers
The ability of customers to drive down prices or demand more value.
Buyer Power is HIGH when:
- Few buyers purchase large volumes
- Products are undifferentiated
- Switching costs are low
- Buyers can backward integrate
- Purchase is significant portion of buyer's costs
- Buyers are price-sensitive
- Full information about alternatives
Example: Walmart
Walmart has enormous buyer power over suppliers due to its massive purchasing volume and ability to switch suppliers easily.
Force 4: Threat of Substitutes
The availability of alternative products that serve the same need.
Substitute Threat is HIGH when:
- Substitutes offer better value (price-performance)
- Switching costs are low
- Buyers are willing to switch
- Substitute industry is highly profitable
Force 5: Threat of New Entrants
The ease with which new competitors can enter the industry.
Barriers to Entry
| Barrier | Description |
|---|---|
| Economies of Scale | Large-scale operations reduce costs |
| Capital Requirements | High investment needed to compete |
| Brand Identity | Established brands have loyal customers |
| Switching Costs | Customers locked into current suppliers |
| Access to Distribution | Channels controlled by incumbents |
| Government Policy | Licenses, regulations, patents |
| Expected Retaliation | Incumbents likely to fight back |
Applying the Framework
Steps for Analysis
- Define the industry boundaries clearly
- Assess each force (High/Medium/Low)
- Identify key drivers of each force
- Determine overall industry attractiveness
- Develop strategies to improve your position
Strategic Responses
- Position: Find position where forces are weakest
- Exploit changes: Anticipate shifts in forces
- Reshape forces: Change industry structure in your favor
Conclusion
Key Takeaways
- Five forces determine industry profitability
- Rivalry: Competition among existing firms
- Supplier power: Ability to raise prices or reduce quality
- Buyer power: Ability to drive down prices
- Substitutes: Different products meeting same need
- New entrants: Threat from potential competitors
- Strategy: Position, exploit changes, or reshape the forces
- Framework helps identify where to compete and how to win