Porter’s Five Forces of Competition

by Jim Wilkinson on July 24, 2013 in WikiCFO

See also:
SWOT Analysis
Threat of New Entrants
Supplier Power
Buyer Bargaining Power
Threat of Substitutes
Intensity of Rivalry
Complementors (Sixth Force)
Marketing Mix (4 P’s of Marketing)
Porter’s Five Forces of Competition Definition
Porter’s 5 forces framework is used for strategic industry analysis. It was
developed in 1979 by Michael Porter, Harvard Business School professor.
Michael Porter’s five forces of competition can be used to examine and
analyze the competitive structure of an industry by looking at 5 forces of
competition that influence and shape profit potential. Furthermore, Porter’s
five forces of competition have become a central concept
to business theory.
Porter’s 5 forces industry analysis does more than look at a company’s direct
competitors. It looks at multiple aspects of the industry’s competitive
structure and economic environment, which includes the bargaining power
of buyers, the bargaining power of suppliers, the threat of new entrants,
and the threat of substitute products. The idea is to look at each of these
factors and determine the degree to which they increase competition in the
industry. If the forces are strong, then they increase competition. Whereas if
the forces are weak, then they decrease competition. Porter’s five forces
definition can be utilized by any business. In addition, it can be applied to
any industry.
Download the External Analysis whitepaper to gain an advantage over
competitors by overcoming obstacles and preparing to react to external
forces, such as it being a buyer’s market.
Environment of Industry
 The competitive environment of an industry has a strong influence on the
performance of businesses within that industry. Porter’s five forces defined
whether an industry is attractive or unattractive from the perspective of
a company competing in that industry. Porter’s 5 forces of competition
provide an excellent method to consider an industry before entrance.
An attractive industry is one which offers the potential for profitability. If
a company uses Porter’s 5 forces industry analysis and concludes that the
competitive structure of the industry is such that there is an opportunity for
high profits, then the company can elect to enter that industry or market.
Or, if the company is already competing in that industry or market, then it
can use the competitive forces Porter created to determine its optimal
position within the marketplace.
An unattractive industry is one which does not offer the potential
for profitability. If a company uses the five forces Porter created and
concludes that the competitive forces in the industry are too strong or
unfavorable, then that company may choose not to enter that industry or
market. Or, if the company is already competing in that industry or market,
then it can use Porter’s 5 forces model to find the best possible strategic
placement in it.
5 Forces of Competition
Michael Porter’s 5 competitive forces:

1. Threat of new entrants

2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of substitute products
5. Intensity of rivalry among competitors
Sixth Force
Sometimes a sixth force is added to the competitive forces Porter
conceptualized. The model is called Porter’s Six Forces. The sixth force of
competition is:

6. Complementors
 As you’re evaluating your competition using Porter’s five forces of
competition, don’t skip evaluating all external factors that can impact and
potentially destroy your company. Download the External
Analysis whitepaper to learn how to start.

Porter’s Five Forces Example

Analyzing Porter’s five forces example does not always yield a simple or
straightforward evaluation of the attractiveness and profitability of an
industry. Some of the forces may be strong, increasing competition and
decreasing profit potential, while other forces may be weak, decreasing
competition and increasing profit potential. The results may be conflicting
and the interpretation depends on the particular business and the particular
industry. However, for the sake of simplicity, there is an overall attractive
industry structure and an overall unattractive industry structure. Porter’s
five forces model is merely a framework.
According to Michael Porter’s five competitive forces industry analysis, an
attractive industry has the following characteristics. The threat of new
entrants is low. The bargaining power of suppliers is weak. Then the
bargaining power of buyers is weak. The threat of substitute products is low.
Finally, the intensity of rivalry among industry competitors is low.
Complementary products or services are unavailable. If Porter’s forces of
competition are as described above, then the industry is attractive and there
is profit potential.
According to Porter’s 5 forces of competition, an unattractive industry has
the following characteristics. The threat of new entrants is high. Then the
bargaining power of suppliers is strong. The bargaining power of buyers is
strong. The threat of substitute products is high. Finally, the intensity of
rivalry among industry competitors is high. Complementary products or
services are unavailable. If the forces of competition are as described above,
then the industry is unattractive and there is limited profit potential.
Porter’s Analysis – Attractive Industry
The following indicates an attractive industry:

 Threat of entrants is low

 Threat of substitute products is low
 Bargaining power of buyers is low/weak
 Bargaining power of suppliers is low/weak
 Intensity of rivalry among existing firms is low
Porter’s Analysis – Unattractive Industry
The following indicates an unattractive industry:

 Threat of entrants is high

 Threat of substitute products is high
 Bargaining power of buyers is high/strong
 Bargaining power of suppliers is high/strong
 Intensity of rivalry among existing firms is high
Porter’s 5 Forces Strengths
The 5 forces of competition is a strong tool for conducting an in-depth
analysis of the competitive structure of an industry. Furthermore, Porter’s 5
forces model can be used to complement a SWOT analysis. In addition, the 5
forces framework is useful in strategic planning and can help
a company determine whether or not to enter an industry or market by
evaluating the potential for profitability.
Porter’s 5 Forces Weaknesses
Porter’s 5 forces of competition have a few weaknesses and limitations.
First, the model underestimates the influence of a company’s core
competencies on its ability to achieve profit. It, instead, assumes the
industry structure is the sole determining factor. Then Porter’s 5 forces
definition is difficult to apply to large multinational corporations with
synergies and interdependencies achieved from a portfolio of businesses.
Additionally, the five forces framework assumes there is no collusion in the
industry. Finally, Porter’s analysis doesn’t consider the possibility of creating
a new market.
As you use Porter’s five forces of competition to shape profit potential, it’s
important to expand analysis by evaluating the entire external
environment. Download the free External Analysis whitepaper to overcome
obstacles and be prepared to react to external forces..
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