PORTER’S FIVE FORCES MODEL

Porter’s Five Forces is a classic model that organizations use to assess their competitive environment
and make informed decisions. The framework, developed by renowned Harvard Business School
professor Michael E. Porter, lets companies evaluate the environmental forces shaping the future of
their industry.

In this article, we’ll explain how you can use Porter’s Five Forces to analyze your competitive
landscape, identify opportunities and solidify your position in the market.

What Are Porter's Five Forces?

Michael E. Porter’s Five Forces framework is one of the most widely regarded business strategy tools.
Born out of his work in 1979, this framework offers organizations a systematic approach to assessing
their competitive environment and making strategic decisions that can influence their long-term
success.

The five forces include the factors that influence every industry. The five critical dimensions which
shape the competitive business landscape are:

1. Competitive Rivalry

2. Supplier Power

3. Buyer Power

4. Threat of Substitution

5. Threat of New Entrants

Competitive Rivalry

Competitive Rivalry evaluates the number of existing players and how established they are in the
industry. How many competitors do you have? Are their products better than your own?

In industries with cutthroat competition, companies often lower prices and invest in expensive
marketing campaigns to increase market share. That means suppliers and buyers can quickly move
towards your competitors. Conversely, businesses in less competitive sectors enjoy more comfortable
profit margins.

For example, the airline industry has intense competition. Major players such as American Airlines,
Delta Air Lines and United Airlines often differentiate themselves by reducing costs, improving
customer experience and launching new routes to attract passengers.

Supplier Power

Suppliers provide the essential ingredients for a business’s operations. How much influence does a
supplier wield over a company’s profits?

When only a few suppliers can provide a product, they can dictate terms and pressure businesses to
accept higher prices. Even if terms are unfavorable, some get pressured to take them because of the
costs of moving to another supplier.

In an ideal scenario, companies must be able to diversify their supplier base. By reducing their
dependency on a supplier, businesses can safeguard their supply chains, control costs and maintain a
competitive edge.
For example, the automotive industry has many suppliers for engines, electronics and tires. However,
a relatively small number of companies supply critical components such as semiconductor chips,
which grants them substantial power.

Buyer Power

Buyer Power refers to the influence customers wield over a business. If an industry has strong buyer
power, consumers can demand lower prices, higher quality or improved service, affecting a
company’s profitability.

Buyers wield more power in a market with fewer customers and more sellers. In this scenario,
businesses can differentiate themselves by formulating unique value propositions to justify their
higher prices. Some examples include loyalty programs, excellent customer service and novel
experiences.

The electronics industry provides a compelling example of buyer power within Porter’s Five Forces
framework. Consumers can access various electronic products, from smartphones and laptops to
smartwatches and home entertainment systems. Price comparisons are easily accessible online, so
finding the best deals and discounts is easy.

For example, companies such as Apple let consumers customize their devices with various features,
colors and accessories. They consistently upgrade their products with new features because it’s easy
to transition to alternative brands or products.

Threat of Substitution

The Threat of Substitution refers to the likelihood that customers might switch to a different product
or service. When substitution threats are high, businesses are vulnerable to sudden shifts in
consumer preferences.

One notable example of the threat of substitution occurs in the beverage industry. Consumers can
choose from many beverages including carbonated soft drinks, bottled water, juices, energy drinks,
coffee, tea and alcoholic beverages. That’s why beverage companies must explore niche markets,
introduce limited-edition flavors and change their packaging to differentiate themselves.

Threat of New Entrants

How easy is it for new competitors to enter the market and threaten existing players? Threat of New
Entrants involves evaluating the barriers to entry in an industry.

High barriers such as high starting capital costs and a small pool of suppliers can deter new rivals
from early success. For example, an established company with significant resources can lower prices
to maintain a competitive edge over new entrants. However, new competitors can easily weaken
your business’s position and quickly disrupt the status quo.

Example of Porter's Five Forces

Let’s put Porter’s Five Forces into action through a real-world example—the retail industry.
Understanding the five forces in this competitive sector can spell the difference between success and
stagnation.

Competitive Rivalry
In the retail world, competition is intense. Businesses of all sizes demand consumers’ attention, often
resulting in price wars and thin profit margins. Dominant companies in this sector—including
Walmart and Amazon—use various strategies to outshine their rivals. They often lower prices,
optimize their supply chain and expand their product offerings, which makes it difficult for small
businesses to compete with them.

Supplier Power

Finding reliable suppliers and securing favorable terms is vital to success. Large retailers such as
Costco have immense buying power, so they can negotiate advantageous deals with suppliers and
acquire quality products. Most companies choose suppliers based on strict criteria such as cost-
effectiveness, quality and reliability.

Buyer Power

Customers in the retail industry are discerning and price-sensitive, which leads to significant buyer
power. Brands that excel in customer service and providing exceptional experiences, such as
Nordstrom, can command premium prices and build brand loyalty.

Threat of Substitution

The retail industry faces an ongoing threat from e-commerce and online marketplaces. Companies
such as eBay and Etsy provide alternative options for quality and affordable products, so traditional
retailers must continually innovate to remain relevant.

Threat of New Entrants

It’s easy to set up an online store, which means there’s a lower barrier to entry in the retail sector.
Platforms such as Shopify allow new small businesses to attract customers and establish themselves
quickly. However, the cost of competing with established giants in terms of marketing and logistics
makes it difficult to dominate the market.

Advantages of Porter's Five Forces

Porter’s Five Forces is an indispensable resource for businesses seeking sustainable growth and
competitive advantage. Here are some of its key benefits:

 Holistic Analysis: Porter’s Five Forces provides a comprehensive overview of the competitive
landscape. As a result, organizations can allocate their resources and make decisions based
on multiple factors existing in the environment.

 Strategic Insight: The model lets businesses think critically about their position in their
industry and their existing competitors. That way, they can make informed decisions.

 Risk Mitigation: By identifying potential threats, companies can address challenges ahead of
time. For example, it offers a unique value proposition to remain relevant for consumers.

 Opportunity Identification: Recognizing industry gaps and unmet needs can help businesses
differentiate themselves or develop innovative solutions.

 Long-Term Sustainability: When strategies consider Porter’s Five Forces, they are more likely
to withstand market fluctuations.

Disadvantages of Porter's Five Forces

 Oversimplification: The model oversimplifies complex market dynamics and fails to evaluate
“why” some observations occur. As a result, it can be easy to miss subtle nuances.

 Inaccurate Strategic Analysis: The framework needs to account for the dynamic nature of
industries and markets. They may evaluate their competition on broad or narrow terms
while failing to consider shifting boundaries.

 Backward-Looking: Porter’s Five Forces provides an overview of an industry based on the

 Need To Understand the Purpose of Porter’s Five Forces Framework: Porter’s Five Forces
can help you analyze an industry to create a business strategy. It is not used to analyze an
individual company or determine whether an industry is attractive.

Bottom Line

Porter’s Five Forces provides a timeless framework for organizations that want to evaluate their
competitive environment, identify opportunities and fortify their positions against threats. By
understanding the different forces, businesses can make informed decisions and adapt to evolving
markets.