Porter’s Five ForcesPosted: November 7, 2007
“The Five Forces” are Michael E. Porter’s framework for assessing the level of competitive intensity industry participants should expect to see. Highly competitive industries are likely to produce lower average profitability for participants in that market. Useful for rationalizing market entry or market exit decisions. E.g., competitors should seek out markets where the Five Forces are less severe, and exit markets with strong pressure from one or more of the Five Forces.
This is probably the first formal “strategy” framework that many of us were ever taught in business classes or corporate management training. It’s a classic!
The Five Forces include:
- Bargaining Power of Customers — large or concentrated customers have more bargaining power vs. a pool of many smaller, disparate customers
- Bargaining Power of Suppliers — large or concentrated supplier base will have more bargaining power vs. a pool of many smaller, interchangeable suppliers
- Threat of New Entrants — low barriers to entry create high threat of new entrants; high barriers (e.g., intellectual property protection, large financial startup costs, or scarcity of qualified human resources) can lessen this threat
- Threat of Substitute Products or Services — presence of many alternative products/services creates high threat of substitution
- Intensity of Competition within an Industry — all else equal, intensity of competition increases when any of the first four forces increases
This framework is often expanded into “Six Forces” with the addition of “Government & Legal Regulations” as a sixth force that can affect the intensity of competition.
More info on Porter’s Five Forces from Wikipedia