Porter's five forces
Porter's five forces is a framework for analyzing industry structure and competitive dynamics, identifying five fundamental forces that determine an industry's profitability and attractiveness: competitive rivalry, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and threat of substitutes (Porter M.E. 1979, p.137)[1]. Why are some industries highly profitable while others struggle? Airlines compete intensely on price and earn razor-thin margins. Pharmaceutical companies enjoy periods of near-monopoly pricing. Software platforms often display winner-take-all dynamics. Porter's framework explains these differences through the structural forces shaping competitive intensity.
Michael Porter introduced the model in his 1979 Harvard Business Review article "How Competitive Forces Shape Strategy." The framework revolutionized strategic thinking by shifting attention from individual competitors to the underlying industry structure that determines competitive behavior. Despite claims that digital disruption has rendered the model obsolete, 2024 research confirms it retains relevance—particularly in industries less susceptible to rapid technological change.
The five forces
Each force affects industry profitability:
Competitive rivalry
Intensity among existing competitors. How aggressively do firms compete?[2]
Determinants. Number and size of competitors, industry growth rate, exit barriers, product differentiation.
Impact. High rivalry drives down prices and margins. Digital transformation has intensified rivalry—93% of companies now pursue digital-first strategies.
Threat of new entrants
Potential competitors. How easily can new firms enter the industry?[3]
Barriers to entry. Economies of scale, capital requirements, brand loyalty, access to distribution, government regulation, switching costs.
Impact. Low barriers invite new competition, limiting profitability. High barriers protect incumbents.
Bargaining power of suppliers
Supplier influence. Can suppliers command premium prices or restrict supply?[4]
Determinants. Supplier concentration, switching costs, differentiation, forward integration threat.
Impact. Powerful suppliers capture value that might otherwise go to the industry. The 2024 Federal Reserve survey found 29% of small businesses still experiencing supply chain disruptions.
Bargaining power of buyers
Customer influence. Can buyers demand lower prices or better quality?[5]
Determinants. Buyer concentration, purchase volume, product standardization, switching costs, price sensitivity.
Impact. Powerful buyers extract concessions, reducing industry profitability.
Threat of substitutes
Alternative solutions. Are there different ways customers can meet the same need?[6]
Determinants. Price-performance of substitutes, switching costs, buyer propensity to substitute.
Impact. Substitutes cap prices and profits. Video streaming substituted for DVD rental; ride-sharing substitutes for car ownership.
Conducting the analysis
Effective application involves:
Define the industry. Be specific—industry boundaries matter for analysis accuracy.
Assess each force. Gather data on force strength; rate as high, medium, or low.
Identify drivers. Understand what factors determine each force's strength[7].
Evaluate overall attractiveness. Consider the combined impact of all forces.
Develop strategy. Position the company to defend against forces or reshape them.
Limitations
The framework has boundaries:
Static analysis. Industry structures change over time; the model captures a snapshot.
Disruption blind spots. May not anticipate radical technological change[8].
Excluded factors. Doesn't explicitly address complementors, regulatory dynamics, or internal capabilities.
Simplification. Industry boundaries increasingly blur in digital ecosystems.
| Porter's five forces — recommended articles |
| Competitive advantage — Strategic management — Industry analysis — SWOT analysis |
References
- Porter M.E. (1979), How Competitive Forces Shape Strategy, Harvard Business Review, March-April, pp.137-145.
- Porter M.E. (2008), The Five Competitive Forces That Shape Strategy, Harvard Business Review, January.
- Magretta J. (2012), Understanding Michael Porter, Harvard Business Review Press.
- HBS Institute for Strategy and Competitiveness (2024), The Five Forces.
Footnotes
- ↑ Porter M.E. (1979), How Competitive Forces Shape Strategy, p.137
- ↑ Porter M.E. (2008), Five Competitive Forces, pp.25-28
- ↑ Magretta J. (2012), Understanding Michael Porter, pp.45-62
- ↑ HBS Institute (2024), The Five Forces
- ↑ Porter M.E. (1979), How Competitive Forces Shape Strategy, pp.139-141
- ↑ Porter M.E. (2008), Five Competitive Forces, pp.29-32
- ↑ Magretta J. (2012), Understanding Michael Porter, pp.89-104
- ↑ HBS Institute (2024), The Five Forces
Author: Sławomir Wawak