What Is Porter's Five Forces Model?

Porter’s Five Forces model is a way to analyse the competitive pressures in an industry. It helps a business judge how attractive that industry is: strong pressures can make it harder to earn profits, while weaker pressures may leave more room to do so.

The Five Forces

1. Competitive rivalry: How intensely do existing businesses compete? Many similar competitors may put pressure on prices.
2. Threat of new entrants: How easy is it for a new business to enter the industry? High start-up costs or strong existing brands can make entry harder.
3. Threat of substitutes: Can customers meet the same need in a different way? A substitute is an alternative product or service, not just another brand of the same product.
4. Bargaining power of buyers: How much influence do customers have over price and quality? Buyers may have more power when they can switch suppliers easily.
5. Bargaining power of suppliers: How much influence do suppliers have over the business? A supplier may have more power if few others can provide an essential input.

Applying The Model

Suppose a business is considering opening a coffee shop. It could face strong rivalry from nearby cafés and a threat from substitutes such as making coffee at home. If customers have plenty of places to buy coffee, they can switch easily, increasing buyer power. The business would also consider how easily other shops could open and whether it has a choice of suppliers. Looking at all five forces gives a fuller picture than looking only at its direct competitors.

The common exam mistake is to list the forces without applying them. Explain which force matters in the industry you have been given and how it could affect the business. Also, do not confuse this model with a general analysis of political or economic changes: Five Forces focuses on competition within an industry.