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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Porter's 5 Forces

What it is:

Porter's 5 Forces is an analytical framework for assessing business competitiveness strategies in a particular market.

How it works (Example):

Michael E. Porter, a professor at Harvard Business School, developed a framework for understanding the strategic competitiveness of a firm within a specific market. The framework includes an analysis of five concurrent forces that affect a business' ability to compete. The forces include:

1. Threats of substitute products from competitors, including product differentiation, price performance of substitutes and a buyer's ability to switch to a substitute.

2. Threat of the entry of new competitors, such as barriers to entry (i.e. patents, and other intellectual properties rights), brand control, government regulation, capital requirements.

3. Intensity of competitive rivalry, such as the number of competitors, firm growth rates, economies of scale, diversity and depth among competitors, and information complexity.

4. Bargaining power of customers, such as concentration of marketing channels, buyer volumes, prohibitive "switching" costs to buyers, and availability of competitive substitutes.

5. Bargaining power of suppliers, such as prohibitive "switching" costs, availability of alternative suppliers, degree of labor solidarity, and the sensitivity of selling price to supply costs. 

The first three of these forces focus on an analysis of a business' competitors within the sector. The last two forces focus on the business' vertical integration with the suppliers and customers.

Why it Matters:

Porter's framework focuses on a business' core competencies -- those assets that tip the competitive balance in a business' favor and provide advantages over the competition. While on its face, the framework merely determines whether a business or industry is "attractive" or "unattractive," depending on how they fair in an assessment of each of these forces, it also provides a useful tool for strategic business planners in helping a business to refocus and strengthen areas where a company may have exposure and potential weakness and exploit those areas where they have a competitive strength.

[Read more about Porter's Five Forces in Using Porter's Five Forces to Lock In Long-Term Profits.]

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