The forces that are with you

First described by Michael Porter in his classic 1979 Harvard Business Review article, employing a Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success. This framework and analysis is especially important when starting a new business or business line, launching a new product or when entering a new industry sector. 

Porter theorized that understanding both the competitive forces at play and the overall industry structure are crucial for effective, strategic decision-making and developing a compelling competitive strategy for the future.

In Porter's model, the five forces that shape industry competition are:

Competitive rivalry

This force examines how intense the competition is in the marketplace. It considers the number of existing competitors and what each one can do. Rivalry competition is high when there are just a few businesses selling a product or service, when the industry growth is slow, high fixed costs and when consumers can easily switch to a competitor's offering for little cost. When rivalry competition is high, companies compete away the value they create.

The bargaining power of suppliers

This force analyzes how much power a business's supplier has and how much control it has over the potential to raise its prices, which, in turn, lowers a business's profitability. It also assesses the number of suppliers of raw materials and other resources that are available. The fewer suppliers there are, the more power these suppliers have. Businesses are in a better position when there are multiple suppliers serving the industry

The bargaining power of customers

This force examines the power of the consumer and their effect on pricing and quality. Consumers have power when they represent a larger share relative to the number of sellers serving them, lack of differentiation among products or services and the barriers to switch products or services are low. Consumers have power to push competitors to rival over price. This allows consumers to capture more value for themselves.

The threat of new entrants

This force considers how easy or difficult it is for competitors to join the marketplace. The easier it is for a new competitor to gain entry, the greater the risk is of an established business' market share being destroyed. Barriers to entry include absolute cost advantages, access to inputs, economies of scale and strong brand identity. The threat of new entrants can force current players to keep prices down and spend more to retain customers. The threat of entry puts a cap on the profit potential of an industry.

The threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product or service to a competitor. When a new product or service meets the same consumer need in a different way, industry profitability suffers and switching costs are low. For example, email’s substitution for postal mail. The threat of substitutes is informed by switching costs, both immediate and long-term, as well as consumers' inclination to change. The threat of a substitute is also high if it offers an attractive price-performance trade-off relative to the industry’s product.

“Whatever their collective strength, the corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor. The collective strength of the forces may be painfully apparent to all the antagonists; but to cope with them, the strategist must delve below the surface and analyze the sources of each.”

—Michael E. Porter

Industries tend to change over time. Five Forces analysis is critical to anticipate and exploit this change and to best position your organization.