Loading the player...

What are 'Porter's 5 Forces'

Porter's Five Forces model, named after Michael E. Porter, identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. These forces are:

1. Competition in the industry;

2. Potential of new entrants into the industry;

3. Power of suppliers;

4. Power of customers;

5. Threat of substitute products.

Frequently used to identify an industry's structure to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness.

BREAKING DOWN 'Porter's 5 Forces'

Porter's Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. The model is widely used, worldwide, to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness and profitability of an industry or market.

Competition in the Industry

The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal.

Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened.

Power of Suppliers

This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are and how much it would cost a company to switch from one supplier to another. The fewer number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds.

Power of Customers

This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.

Threat of Substitutes

Competitor substitutions that can be used in place of a company's products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company's power can be weakened.

RELATED TERMS
  1. Porter Diamond

    A model that attempts to explain the competitive advantage some ...
  2. Six Forces Model

    A strategic business tool that helps businesses evaluate the ...
  3. National Diamond

    A theory of competitive advantage developed by Harvard Business ...
  4. Six-Force Model

    A design used to show how companies or industries are affected ...
  5. Market Power

    A company's ability to manipulate price by influencing an item's ...
  6. Bilateral Monopoly

    A market that has only one supplier and one buyer. The one supplier ...
Related Articles
  1. Investing

    Analyzing Porter's Five Forces on Apple (AAPL)

    Evaluate Apple's position in the marketplace by looking at it through the perspective of the Porter Five Forces Model for industry analysis.
  2. Small Business

    Porter's Five Forces

    Porter’s Five Forces is an analysis scheme created by Harvard Business School professor Michael E. Porter. Using this analysis tool, business managers can gauge the level of competition within ...
  3. Investing

    Using Porter's 5 Forces To Analyze Stocks

    These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet.
  4. Investing

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  5. Investing

    Analyzing Porter's Five Forces on Delta Airlines (DAL)

    Learn about Porter's Five Forces, a framework used to analyze external threats to companies, and discover which forces pose the biggest threats to Delta.
  6. Managing Wealth

    Why the Restaurant Biz Has Narrow Profit Margins

    ...and why people still do it.
  7. Investing

    Analyzing Porter's Five Forces on Verizon (VZ)

    Examine Verizon's position in the wireless service industry by considering Porter's Five Forces and determining the company's biggest potential threats.
RELATED FAQS
  1. Who uses Porter's 5 forces analysis?

    Find out how the Porter's five forces analysis helps financial decision makers in a company stay profitable and competitive. ... Read Answer >>
  2. Besides Porter's 5 forces, what other forces shape industry in the 21st century?

    Know the forces, in addition to Porter's 5 forces, that influence 21st century corporate structure to effectively plan your ... Read Answer >>
  3. What's the difference between Porter's 5 forces and PESTLE analysis?

    Compare how these tools for business analysis can be used to examine competitive situations and to help develop effective ... Read Answer >>
  4. What's the difference between Porter's 5 forces and SWOT analysis?

    Learn about when and how to use SWOT analysis versus Porter's five forces. Learn what sets the analysis tools apart and how ... Read Answer >>
  5. Which of these is not one of Porter's 5 competitive forces?

    Which of these is not one of Porter's 5 competitive forces? a) Threat if new entrantsb) Threat of subsitute goodsc) Rivalry ... Read Answer >>
  6. What's the difference between Porter's 5 forces and PEST analysis?

    Learn the key differences between Porter's five forces and PEST analysis. Understand the objectives of each analysis and ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center