Porter's Five Forces: Definition, Model & Examples

Porter's Five Forces is a method for analysing a company's competitive environment. It identifies and analyses five competitive forces that shape the industry. Selectyourlanguage Suggestedlanguagesforyou: English(UK) Americas English(US) Europe Deutsch(DE) English(UK) StudySmarter-Theall-in-onestudyapp. 4.8•+11kRatings Morethan3MillionDownloads Free Linkcopied! Rate GetApp Share | 1.7K Linkcopied! Rate GetApp Share | 1.7K BusinessStudies StrategicAnalysis PortersFiveForces All-in-onelearningapp Flashcards NotesNotes ExplanationsExplanations StudyPlanner Textbooksolutions Startstudying All-in-onelearningapp Flashcards NotesNotes ExplanationsExplanations StudyPlanner Textbooksolutions PortersFiveForces Save Print Edit Signuptouseallfeaturesforfree. Signupnow PortersFiveForces BusinessCaseStudies AmazonGlobalBusinessStrategy AppleChangeManagement AppleEthicalIssues AppleGlobalStrategy AppleMarketingStrategy BenandJerrysCSR BillGatesLeadershipStyle BillandMelindaGatesFoundation Coca-ColaBusinessStrategy DisneyPixarMergerCaseStudy EnronScandal FranchiseModelMcDonalds GoogleOrganisationalCulture IkeaFoundation IkeaTransnationalStrategy JeffBezosLeadershipStyle KraftCadburyTakeover MaryBarraLeadershipStyle McDonaldsOrganisationalStructure NetflixInnovationStrategy NikeMarketingStrategy NikeSweatshopScandal NiveaMarketSegmentation NokiaChangeManagement OrganisationDesignCaseStudy OyoFranchiseModel PortersFiveForcesApple PortersFiveForcesStarbucks PortersFiveForcesWalmart PricingStrategyofNestleCompany RyanairStrategicPosition SWOTanalysisofCadbury StarbucksEthicalIssues StarbucksInternationalStrategy StarbucksMarketingStrategy SusanWojcickiLeadershipStyle SwotAnalysisofApple TescoOrganisationalStructure TescoSWOTAnalysis UnileverOutsourcing VirginMediaO2Merger WaltDisneyCSRPrograms WarrenBuffettLeadershipStyle ZaraFranchiseModel BusinessDevelopment AssessingInnovation Businessgrowth DigitalTechnology Internationalisation MarketEntry BusinessOperations CustomerExpectations CustomerServiceandICT FlowProduction GoodCustomerService JobProduction Just-In-CaseInventoryManagement Just-In-TimeInventoryManagement LeanProduction MethodsofGoodCustomerService PoorCustomerService Procurement ProductionProcess QualityAssurance SalesProcess StagesofSalesProcess ChangeManagement DivorcebetweenOwnershipandControl ManagingOrganisationalCulture OrganisationStructures StrategicImplementation FinancialPerformance AnalysingFinancialPerformance AverageRateofReturn BalanceSheet BreakEvenAnalysisChart Break-EvenAnalysis CashFlow CashFlowBudget CashFlowForecast CashFlowImprovement CashflowProblems ExternalSourcesofFinance FinancialObjectives FinancialPerformanceandStakeholders FinancialStatements FinancialTermsandCalculations IncomeStatements InternalSourcesofFinance Investments ProfitabilityRatio SourcesofFinance HumanResources ContractofEmployment EmployeeCosts EmployeeTrainingandDevelopment HackmanandOldhamModel HerzbergTwoFactorTheory HumanResourceFlow HumanResourceManagement HumanResourceObjectives ImprovingEmployer-EmployeeRelations IncentivesforEmployees InternalandExternalCommunication JobDesign LabourProductivity LabourTurnover MaslowTheory Motivating&EngagingEmployees OrganisationDesign RecruitmentAndSelection RetentionRate TaylorMotivationTheory InfluencesonBusiness BusinessEthics BusinessRisks BusinessUncertainty ConsumerLaw E-commerce EconomicClimate EffectsofInterestRatesonBusinesses EmploymentLaw EnvironmentandBusiness ExternalFactorsAffectingBusiness GovernmentPoliciesonBusiness HealthandSafety InflationandBusiness InformationandCommunicationTechnologyinBusiness MultinationalCompany SustainabilityinBusiness TaxonBusiness IntroductiontoBusiness BasicFinancialTerms BusinessEnterprise BusinessLocation BusinessOwnership BusinessPlanning ClassificationofBusinesses EvaluatingBusinessSuccessBasedonObjectives MeasuringSuccessinBusiness MotivationinEntrepreneurship ReasonsforBusinessFailure RisksandRewardsofRunningaBusiness Managers DecisionMaking Leadership Management Stakeholder NatureofBusiness BusinessAimsandObjectives Cost ExternalEnvironment FormsofBusiness Franchising KeyBusinessTerms LimitedLiability Non-Profit Revenue Shareholder SoleTrader OperationalManagement Capacity EvaluatingTotalQualityManagement ImportanceofQuality ImprovingtheSupplyChain Inventory MeasuringQuality OperationalData OperationalObjectives OperationalPerformanceAnalysis Outsourcing ProductivityandEfficiency QualityManagement TotalQualityManagement StrategicAnalysis AssessingBusinessPerformance BusinessConsiderationsfromGlobalisation CompetitiveEnvironment CoreCompetencies CorporateMissionandObjectives CorporateSocialResponsibility EconomicChange EconomicEnvironment FinancialRatios InterestRatesintheUK InvestmentAppraisal LifestyleandTechnologicalEnvironment Non-FinancialData PortersFiveForces SWOTAnalysis SocialandTechnologicalEnvironment StrategicDirection AreasofCompetition BowmansStrategicClock Diversification StrategicPositioning PortersFiveForces TABLEOFCONTENTS: TABLEOFCONTENTS ThePorter'sFiveForcesanalysiswascreatedbyMichaelPorter,aprofessoratHarvardBusinessSchoolin1979.Sinceitspublication,ithasbecomeoneofthemostpopularandhighlyregardedbusinessstrategytools.Let'stakealookatwhatitisexactlyandhowbusinessescanusethistooltoguidetheirstrategy.Porter'sFiveForcesFrameworkPorter'sFiveForcesisamethodforanalysingacompany'scompetitiveenvironment.Itidentifiesandanalysesfivecompetitiveforcesthatshapetheindustry.ThepurposeofPorter'sFiveForcesistodeterminetheprofitpotentialofamarket.Ithelpsbusinesspeopleunderstandtherelativeattractivenessofanindustryandtheindustry'scompetitivepressure.Eachbusinesssectorisinfluencedbythefivefactorsandthereforeunderstandingthemandhowtheyapplytoanindustrycanenableacompanytoimplementasuitablebusinessstrategy.Itcanhelptomakedecisionsrelatingtowhethertoenteraspecificindustry,increasecapacityinaspecificindustryanddevelopcompetitivestrategies.Porter'sFiveForcesModelThefivemainforcesthatmakeupthismodelare:CompetitiverivalryNewentrantsPowerofBuyersPowerofSuppliersThreatofSubstitutesCompetitiveRivalryThetypeofcompetitioncanvarydependingonthebalanceofthecompetitiverelationship.Thecompetitiverivalryishighwhentherearenumerouscompetitorsbecausethenconsumerscaneasilyswitchtocompetitorsofferingsimilarproductsorservices.Similarsizecompaniesarelikelytobemorefiercethanwhentherearelargeandsmallcompanies.Itisalsoworthkeepinganeyeonthemarketgrowthasagrowingmarketallowsbothcompaniestogrowinsalesandastagnantmarketmeansthatamarketstealisrequired.Therefore,itisimportanttoknowyourcompetitors:Numberofcompetitors,Qualitydifferences,Concentrationofindustry,Brandloyalty,Marketgrowth.NewEntrantsNewentrantstothemarketcanthreatenyourownsalesvolumeandmarketshare.Therefore,thinkabouthoweasilythiscouldbedone.Entrybarriers:Economiesofscale,Capitalcostofentry,Expectedretaliation,Brandloyalty,Governmentpolicies,Specialistknowledge.PowerofBuyersPowerofbuyersisanabilitythatcustomershavetodrivepriceslowerorhigher.Buyers'powerishighwhentherearefewlargeplayersandproportionallymanysuppliers.Ifmanysourcesareavailable,buyersmayshoparoundforothermaterialsorsupplieswhichmayincludeariskoflosingakeyclient.Factorsdeterminingthepowerofbuyers:Numberofcustomers,Ordersize,Differencesbetweencompetitors,Buyers'abilitytosubstitute,Pricesensitivity,Informationavailability.PowerofSuppliersPowerofsuppliersisanabilitythatsuppliershavetodriveupthecostofinputs.Oppositetothepowerofbuyers,powerofsuppliersishighwhentherearefewsuppliers.Whentherearefewsuppliers,aproductisneworspecific,itmightbedifficultandexpensiveforacompanytoswitchsuppliers.Factorsdeterminingthepowerofsuppliers:Numberofsuppliers,Sizeofsuppliers,Uniquenessoftheproductorservice,Suppliers'abilitytosubstitute,Switchingcosts.ThreatofSubstitutesMostproductscanbesubstitutedforotherofferings,notnecessarilyinthesamecategory.Thisisknownasthethreatofsubstitutes.Thereareseveraltypesofsubstitution:Product-for-product.Acameracanbereplacedwithasmartphone.Need-based.Thesameproduct,butbetter,improved.Acomputerwithbettersoftware.Genericsubstitution.Thereisnocompetitiveproduct.Itisjustadecisiononwhattobuy.Anewcar,newkitchenorholiday.Gowithout.Giveupsmoking,alcohol,ormeat.Porter'sFiveForcesinPracticewithExampleLet'stakealookatPorter'sFiveForcesinactionwithadetailedexampleoftheairlineindustry.CompetitiveRivalryCharacteristics:Numerousairlines,Twocategoriesregardingquality:lowfareairlinesandregularairlines,ConcentratedmostlyinNorthAmerica,EuropeandAsia,Nomatterhowbigtheyare,someofthemhavebuilttrustamongcustomers,Theindustryisverystagnantintermsofgrowth.Theairlineindustryisverycompetitive.Nomatterwhereacompanyisbased,howbigitisandwhattypesofservicesitoffers,thecompetitiverivalryamongexistingcompetitorsishigh.NewEntrantsEntrybarriers:Inabilitytoprocurecheapequipmentsincetherearemanyestablishedcompanieswithsignificantcustomerbase,Highcostofentry(costofplanesandairportspots),Highriskofretaliation,Difficultiesinbuildingbrandloyalty,ManyGovernmentpolicies,Needforspecialistknowledge.Newentrantswouldfacemanydifficultieswhenenteringthemarket.Therefore,youshouldnotworryaboutnewcompetitors.PowerofBuyersCharacteristics:Highnumberofcustomersallovertheworld,Differentordersizes(individualandcorporateflights),Largedifferencesbetweencompetitors(lowfare,regularandmoreexclusiveflightoffers),Smallabilitytosubstitute(manydestinationsarereachablebyplaneonly),Relativelybigpricedifferences(priceschangecontinually),Largeinformationavailability.Powerofbuyersseemstobeveryhigh.Therearemanycustomerswhoareabletochoosefrommanydifferentservicesatdifferentprices.PowerofSuppliersCharacteristics:Lownumberofsuppliers,Big-sizedsuppliers,Lowuniquenessofproductsorservices(therearethatmanytypesofplanes),Moderateabilitytosubstitute,Highswitchingcosts.Powerofsuppliersappearsasmoderate.Theyareabletoraisepricessincetherearefewsuppliersanditistoughtochangeasupplier.However,therearenotmanycompetitivesuppliersanditmightbedifficultforthemtoofferanew,uniqueproduct.ThreatofSubstitutesItishardtosubstituteaplanewithanyothertypeoftransportsincemanydestinationsarereachablethiswayonly.Inthefuturetheremightbesomeinventionswhichwillsubstituteplanes,butfornowyoushouldnotworryaboutthem.LimitationsofthePorter'sFiveForcesItisjustastartingpointforadeeperinvestigation.Theframeworkisverygeneralanddoesnotassesswhetherthefactorsareadvantageousornot.Thereisnoquantitativeanalysisinvolved.Ittendstobeverysubjective.Porter'sFiveForces-KeyTakeawaysPorter'sFiveForcesisatoolforunderstandingthecompetitivenessofyourbusinessenvironment.Thefiveforcesare:competitiverivalry,newentrants,powerofbuyers,powerofsuppliersandthreatofsubstitutes.Itspurposeistoidentifyacompany'spotentialprofitabilityandadjustitsstrategy.Theforcesshouldbecontinuouslymonitoredastheymaychangefrequently. FrequentlyAskedQuestionsaboutPortersFiveForces Whatareporter'sfiveforces? Porter'sfiveforcesare:Competitiverivalry,newentrants,powerofbuyersandsuppliers,andthethreatofsubstitutes. Whywouldabusinessuseporter'sfiveforces? Abusinesswoulduseporter'sfiveforcestoanalysethemarketcompetition.  Howtouseporter'sfiveforcesframework? Eachofthefiveforcesmustbeanalysedindividuallybeforeconductingacollectiveanalysis.Strategicdecisionscanbetakenbyusingfiveforcesframeworkwithotherimportantanalyses.   Howtoconductporter'sfiveforcesanalysis? Checkcompetition,findnewentrants,gaugethepowerofbuyersandsuppliers,andcheckthreatsofsubstitution.  WhatisPorter's5ForcesAnalysisexample?  Forexample,airlineindustryshowsthefiercecompetitiverivalrywithintheindustry.  FinalPortersFiveForcesQuiz Question WhatisPorter’sFiveForces? Showanswer Answer Porter’sFiveForcesisamethodforanalyzingacompany'scompetitiveenvironment. Showquestion Question WhatisthepurposeofthePorter’sFiveForces? Showanswer Answer ThepurposeofthePorter’sFiveForcesistodeterminetheprofitpotentialofamarket.Ithelpsbusinesspeopleunderstandtherelativeattractivenessofanindustryandtheindustry'scompetitivepressure. Showquestion Question Whatarethefiveforces? Showanswer Answer Competitiverivalry,newentrants,powerofbuyers,powerofsuppliers,threatofsubstitutes. Showquestion Question Whatismeantbynewentrants? Showanswer Answer Newentrantsareenterprisesenteringthemarketwhichcanposeapotentialthreattothealreadyexistingbusinesses. Showquestion Question WhatarethelimitationsofthePorter’sFiveForces? Showanswer Answer Itisverygeneralandtendstobesubjective. Showquestion Question Whatisthecompetitiverivalryhigh? Showanswer Answer Thecompetitiverivalryishighwhentherearenumerouscompetitorsbecausethenconsumerscaneasilyswitchtocompetitorsofferingsimilarproductsorservices. Showquestion Question Whatisthepowerofbuyers? Showanswer Answer Powerofbuyersisanabilitythatcustomershavetodrivepriceslowerorhigher. Showquestion Question Giveanexampleofafactordereminingthepowerofbuyers. Showanswer Answer Anyof:Numberofcustomers,Ordersize,Differencesbetweencompetitors,Buyers'abilitytosubstitute,Pricesensitivity,Informationavailability. Showquestion Question Whatisthepowerofsuppliers? Showanswer Answer Powerofsuppliersisanabilitythatsuppliershavetodriveupthecostofinputs. Showquestion Question Giveanexampleofafactordeterminingthepowerofsuppliers. Showanswer Answer Anyof:Numberofsuppliers,Sizeofsuppliers,Uniquenessoftheproductorservice,Suppliers'abilitytosubstitute,Switchingcosts. Showquestion Question Whatismeantbythethreatofsubstitutes? Showanswer Answer Mostproductscanbesubstitutedforotherofferings,notnecessarilyinthesamecategory.  Showquestion Question Giveanexampleofatypeofsubstitution. Showanswer Answer Anyof:Product-for-product,Need-based,Genericsubstitution,Gowithout. Showquestion Question Whatisaneed-basedsubstitution? Showanswer Answer Thesameproduct,butbetter,improved.  Showquestion Question Givetwoexamplesofentrybarriersfornewentrants. Showanswer Answer Anytwoof:Economiesofscale,Capitalcostofentry,Expectedretaliation,Brandloyalty,Governmentpolicies,Specialistknowledge. Showquestion Question Givetwoexamplesofthingstoknowaboutcompetitiors. Showanswer Answer Anytwoof:Numberofcompetitors,Qualitydifferences,Concentrationofindustry,Brandloyalty,Marketgrowth. Showquestion Question Porter'sFiveForcesisamethodforanalysingacompany's... Showanswer Answer competitiveenvironment.  Showquestion Question Economiesofscale,capitalcostofentry,expectedretaliation,brandloyalty,governmentpoliciesandspecialistknowledgeare___fornewentrants. Showanswer Answer entrybarriers Showquestion Question OneofPorter'sFiveForcesisthreatof___.  Showanswer Answer substitutes Showquestion Question Powerofbuyersisanabilitythatcustomershavetodrive___lowerorhigher. Showanswer Answer prices Showquestion Question Numberofsuppliers,sizeofsuppliers,uniquenessoftheproductorservice,suppliers'abilitytosubstituteandswitchingcostsarefactorsdetermining... Showanswer Answer thepowerofsuppliers. Showquestion Question Acameracanbereplacedwithasmartphone.Whattypeofsubstitutionisit? Showanswer Answer Product-for-product Showquestion Question Competitiverivalryishighwhenthereareonlyfewcompetitors. Showanswer Answer False Showquestion Question Anabilitythatsuppliershavetodriveupthecostofinputsiscalled... Showanswer Answer powerofsuppliers. Showquestion Question Similarsizecompaniesarelikelytobemorefiercethanwhentherearelargeandsmallcompanies.  Showanswer Answer True Showquestion Question Mostproductscanbesubstitutedforotherofferings,notnecessarilyinthesamecategory.  Showanswer Answer True Showquestion Question Imaginethatyouhavedecidedtobuyaholiday.Whattypeofsubstitutionisit? Showanswer Answer Genericsubstitution Showquestion Question Whentherearefewsuppliers,aproductisneworspecific,itshouldbeeasyandcheapforacompanytoswitchsuppliers. Showanswer Answer False Showquestion Question SomeofPorter'sFiveForcesarePowerofSuppliersandPowerof___. Showanswer Answer Buyers Showquestion Question Inthecaseoftheairlineindustry,whyisthethreatofsubstituteslow? Showanswer Answer Becauseitishardtosubstituteaplanewithanyothertypeoftransportsincemanydestinationsarereachablethiswayonly. Showquestion MoreaboutPortersFiveForces HumanResources Managers BusinessCaseStudies InfluencesonBusiness 60% oftheusersdon'tpassthePortersFiveForcesquiz!Willyoupassthequiz? StartQuiz MoreexplanationsaboutStrategicAnalysis CorporateMissionandObjectives Learn AssessingBusinessPerformance Learn CorporateSocialResponsibility Learn EconomicChange Learn EconomicEnvironment Learn SocialandTechnologicalEnvironment Learn FinancialRatios Learn InvestmentAppraisal Learn SWOTAnalysis Learn Non-FinancialData Learn BusinessConsiderationsfromGlobalisation Learn CoreCompetencies Learn CompetitiveEnvironment Learn LifestyleandTechnologicalEnvironment Learn InterestRatesintheUK Learn Discovertherightcontentforyoursubjects Biology Viewtopics Chemistry Viewtopics CombinedScience Viewtopics Economics Viewtopics English Viewtopics EnglishLiterature Viewtopics EnvironmentalScience Viewtopics Geography Viewtopics History Viewtopics HumanGeography Viewtopics Macroeconomics Viewtopics Marketing Viewtopics Math Viewtopics Microeconomics Viewtopics Physics Viewtopics Politics Viewtopics Psychology Viewtopics Sociology Viewtopics Noneedtocheatifyouhaveeverythingyouneedtosucceed!Packedintooneapp! StudyPlan Beperfectlypreparedontimewithanindividualplan. Quizzes Testyourknowledgewithgamifiedquizzes. Flashcards Createandfindflashcardsinrecordtime. Notes Createbeautifulnotesfasterthaneverbefore. StudySets Haveallyourstudymaterialsinoneplace. Documents Uploadunlimiteddocumentsandsavethemonline. StudyAnalytics Identifyyourstudystrengthandweaknesses. WeeklyGoals Setindividualstudygoalsandearnpointsreachingthem. SmartReminders Stopprocrastinatingwithourstudyreminders. Rewards Earnpoints,unlockbadgesandlevelupwhilestudying. MagicMarker Createflashcardsinnotescompletelyautomatically. SmartFormatting Createthemostbeautifulstudymaterialsusingourtemplates. Joinmillionsofpeopleinlearninganywhere,anytime-everyday Signupforfree Signuptohighlightandtakenotes.It’s100%free. GETSTARTEDFREE subtopic-ab Thisisstillfreetoread,it'snotapaywall. Youneedtoregistertokeepreading StudySmarteriscommitedtocreating,free,highqualityexplainations,openingeducationtoall.Byregisteringyougetfreeaccesstoourwebsiteandapp(availableondesktopANDmobile)whichwillhelpyoutosuper-chargeyourlearningprocess. RegisterforFree I'lldoitlater Thisisstillfreetoread,it'snotapaywall. Youneedtoregistertokeepreading StudySmarteriscommitedtocreating,free,highqualityexplainations,openingeducationtoall.Byregisteringyougetfreeaccesstoourwebsiteandapp(availableondesktopANDmobile)whichwillhelpyoutosuper-chargeyourlearningprocess. RegisterforFree I'lldoitlater Thiswebsiteusescookiestoimproveyourexperience.We'llassumeyou'reokwiththis,butyoucanopt-outifyouwish.AcceptPrivacy&CookiesPolicy Close PrivacyOverview Thiswebsiteusescookiestoimproveyourexperiencewhileyounavigatethroughthewebsite.Outofthese,thecookiesthatarecategorizedasnecessaryarestoredonyourbrowserastheyareessentialfortheworkingofbasicfunctionalitiesofthewebsite.Wealsousethird-partycookiesthathelpusanalyzeandunderstandhowyouusethiswebsite.Thesecookieswillbestoredinyourbrowseronlywithyourconsent.Youalsohavetheoptiontoopt-outofthesecookies.Butoptingoutofsomeofthesecookiesmayaffectyourbrowsingexperience. Necessary Necessary AlwaysEnabled Necessarycookiesareabsolutelyessentialforthewebsitetofunctionproperly.Thiscategoryonlyincludescookiesthatensuresbasicfunctionalitiesandsecurityfeaturesofthewebsite.Thesecookiesdonotstoreanypersonalinformation. Non-necessary Non-necessary Anycookiesthatmaynotbeparticularlynecessaryforthewebsitetofunctionandisusedspecificallytocollectuserpersonaldataviaanalytics,ads,otherembeddedcontentsaretermedasnon-necessarycookies.Itismandatorytoprocureuserconsentpriortorunningthesecookiesonyourwebsite. SAVE&ACCEPT