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Porter's Five Forces |

Model, Analysis &
Examples
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Bill Goodman, Beth Loy

Learn about Porter's Five Forces model. Identify
Michael Porter's Five Forces with examples, and
examine how to conduct a Five Forces analysis for an
industry. Updated: 11/21/2023
Frequently Asked Questions

What are the five elements in Porter's Five Forces?

The five elements in Porter's Five Forces are:

1. Competitive Rivalry.
2. Threat of New Entrants
3. Bargaining Power of Suppliers.
4. Bargaining Power of Customers.
5. Threat of Substitute Products.

What is the main objective of the Five Forces

model?

The main objective of the Five Forces model is to

analyze the performance of an industry and determine
its competitiveness. Such an analysis enables
companies to identify their position in the industry and
develop strategies that would improve their
competitive advantage and profitability.

How do you do a Porter's Five Forces analysis?

Porter's Five Forces analysis can be conducted by

asking the following questions based on the five
forces:

1. How well does the company perform against its

competitors to retain its customers?
2. How easy is it for new competitors to enter the
market?
3. How much power do the suppliers in an industry
have to control their terms, such as price,
quality, and supply quantity?
4. What influence do the customers have in
determining how the industry responds to their
needs in terms of quality and price?
5. Do customers have easy access to substitute
products?

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Table of Contents
What are Porter's Five Forces?
Porter's Five Forces Model
Five Forces Analysis
Porter's Five Forces Example
Lesson Summary

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What are Porter's Five Forces?

Porter's Five Forces model is a framework that
weighs the economic might of industry. It depicts and
scrutinizes five forces in an industry responsible for its
performance or failure and asserts that the five forces
are accountable for determining a market's
competitive strength. The framework was invented in
1979 by Michael E Porter, a theorist and an
economist of the Harvard Business School. The five
forces that Michael Porter proposed in his theory are
competitive rivalry, the threat of new entrants, the
bargaining power of suppliers, the bargaining power of
customers, and the threat of substitutes.

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Porter's Five Forces Model

The model forms an essential part of an industry's
structure and is essential for firms who want to join or
grow in an industry. Michael Porter's Five Forces are:

1. Competitive rivalry: This is the force that

focuses on the number and capacity of potential
competitors. Firms consider the number of rivals
in the market, the quality of their products
before deciding to enter an industry, and the
best method to attract customers. The intensity
of competitive rivalry in an industry will
significantly affect profitability and the industry's
attractiveness to a company.
2. Threat of new entrants: Porter outlined that the
more profitable a market is, the more it will
attract new entrants, leading to an increase in
suppliers. This threat of an increasing number of
new entrants into an industry will eat into the
market share of the companies in that industry
and significantly affect their profitability. Thus,
the profitability of the market will decline as
more entrants join.
3. Bargaining power of suppliers: The ease of
switching from one supplier to another and the
number of available suppliers are pivotal in the
profitability of an industry. An analysis of the
quality of products from different suppliers is
also essential. The more suppliers with quality
products, the easier it is to gain great discounts
or switch from one supplier to another, and the
more profitable it is for companies.
4. Bargaining power of customers: This is
evident in an industry where the number of
buyers is fewer than that of sellers. Firms ought
to weigh how easily buyers can purchase
products from their rivals when setting their
prices. If there are fewer buyers than suppliers,
charging higher prices would cause buyers to
switch to cheaper products from their
competitors.
5. Threat of substitute products: The market's
attractiveness is threatened and lowered by the
possibility of a cheaper substitute. The power of
suppliers weakens when a close substitute is
introduced to the market as customers are likely
to switch to the more affordable substitute, thus
reducing profitability.

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Five Forces Analysis

The Five Forces model can be used to analyze an
organization's position in an industry. It shows how
well the company performs against its competitors to
retain its customers and how easily new competitors
can enter the market. It analyzes the dynamics of
supply and demand in the market in terms of the ability
of suppliers to set terms and that of buyers to
influence industry response to their needs in quality,
price, and product substitutes. The five forces model
can be used as part of the SWOT analysis of a
company looking to expand its presence in a market. It
analyzes its strengths and weaknesses by looking at
the competitive rivalry and the threat of substitute
products in the industry. The opportunities and threats
can also be analyzed by looking at suppliers' and
customers' bargaining power and the threat that new
entrants would present to the company.

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Porter's Five Forces Example

The following is an example identifying the Five Forces
in the television manufacturing industry:

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Lesson Summary
Porter's Five Forces is a model developed by
Michael Porter to analyze the factors that influence
the evolution of an industry. The forces are:

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Video Transcript

Porter's Five Forces in Business

There are many factors to consider when creating a
business. One of the most important is the
competitiveness of the industry. Michael E. Porter, a
Harvard professor known as a leader in competitive
and strategic management, created a well-known
model for determining the profitability of an industry.
The framework is known as Porter's Five Forces and
is based on the competitive forces that influence an
industry the most. These five forces include:

1. Competitive rivalry
2. Threat of new entrants
3. Bargaining power of suppliers
4. Bargaining power of customers
5. Threat of substitute products

Using Porter's Five Forces Model

Using these five forces will help a firm determine
whether to enter an industry and how shape its
competitive strategy. The model is extremely flexible
and can be used to determine strengths and
weaknesses in industries like healthcare, government,
finance, education, and manufacturing.

Let's delve into how a strategic company can use

Porter's model to determine whether to enter the
industry. Would a company be able to create a
competitive advantage over industry rivals? To
demonstrate Porter's Five Forces, let's say we are an
investment firm called Cross Investments, and we are
looking for entrepreneurship ventures.

Force #1: Competitive Rivalry

Of Porter's Five Forces, competitive rivalry has the

strongest influence on whether entering an industry
would be profitable. When rivalry is high, there are
many competitors, and those competitors have a high
cost associated with exiting the industry. Typically, the
industry grows slowly, has little customer loyalty, and
products and competitors are very similar.

Before the owners of Cross Industries created their

company, they looked at the investment industry. They
were trying to determine whether the industry had
enough room for another profitable company. What
they found was that the industry contained very few
competitors. As the industry developed, though, the
capital needed to enter the market increased. There
really weren't any services that were unique from what
Cross Industries could provide. It also didn't seem like
many companies would have the money readily
available to enter the market. The owners decided to
create Cross Industries because there was little
competitive rivalry in the industry. They had the capital
so they pushed forward.

Force #2: Threat of New Entrants

The threat of new entrants is the force that tells us

how easy or difficult it is for competitors to enter an
industry. The goal of those who are already in the
industry is to make it difficult to enter. Government
regulations, established brands, high capital
investment, unique products, and high customer
loyalty all decrease the threat of new entrants.

Cross Investments was researching whether to invest

in a company that makes footballs. This market is
difficult to enter. It has established brands like Nike,
Wilson, and Under Armour. After researching the
market, Cross Investments determined that with the
high level of existing brand loyalty and the patents and
trademarks needed to be successful, the investment
was too risky.

Force #3: Bargaining Power of Suppliers

When suppliers are limited or inputs are scarce, the

bargaining power of suppliers is high. They can then
raise their prices and limit their negotiations. This
affects buyers because they have to either absorb
these costs or raise their own prices. Furthermore,
they may not even be able to get the supplies when
they need them.

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Creating a Framework for Competitive Analysis

3 chapters | 12 lessons

Ch 1. Competitor Identification &...

Ch 2. Competitive Analysis Frameworks & Methods

SWOT Analysis | Definition, Process & Examples

5:35
Porter's Competitor Analysis Framework 7:17
Porter's Five Forces | Model, Analysis &
Examples 5:59

Next Lesson

Practical Application: Using Porter's Five Forces

Model in Your Business
Go to Competitive Analysis Frameworks &
Methods

Ch 3. Competitive Market & Environment

Porter's Five Forces | Model, Analysis & Examples

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