Porter's Five Forces Analysis
Porter's Five Forces maps the five sources of competitive pressure on an industry, buyers, suppliers, new entrants, substitutes and rivalry, so you can see whether the industry itself is worth being in before you fight for share within it.
Four forces press in on industry rivalry at the centre, new entrants, buyers, suppliers and substitutes each squeezing from a different side.
Reach for this when…
- You are deciding whether to enter a new market and margins there look thinner than expected.
- Everyone in your industry is cutting price and you want to know why the whole sector feels this squeezed.
- A board wants to know if the industry itself, not just your execution, explains flat profits.
How to run it
- Assess the threat of new entrants: how easy is it for someone new to start competing.
- Assess buyer power: how easily can customers push your price down or walk.
- Assess supplier power: how much can the people you buy from squeeze you.
- Assess the threat of substitutes: what else could a customer use instead.
- Assess rivalry: how hard the existing players fight each other for the same customers.
A worked example
Situation. Ananya Rao ran a small craft brewery in Bengaluru, India, watching margins shrink and assuming it was her own pricing that was wrong.
Applied. Running the five forces, she found the real pressure was supplier power, two malt importers controlled the region, plus low switching costs letting bars swap her beer for a rival's on a whim.
Result. She locked a second malt supplier into a longer contract and built exclusive taps with three bars, and margins stabilised within two quarters.
The catch
The five forces read the industry at a point in time and go stale fast when new technology or a new entrant changes the game, as streaming did to video rental. It also treats forces as separate when in practice they interact, and it says nothing about whether your own firm can execute even in an attractive industry.
A favourable five forces analysis does not make you money. It only tells you the industry will let you keep more of what you earn.
Origin: Michael Porter