Porter’s 5 Forces is a model used to analyze the competitive environment of a company. The model is focused on rivalry. Often this rivalry is specific to businesses selling potentially similar products e.g. Pepsi and Coke, Nike and Adidas, McDonald’s and Burger King, etc. However, Porter’s 5 Forces expands this to look at the threat of substitute products and how demand from consumers and availability of goods from suppliers affects the whole market.
Porter’s 5 forces are:
- The threat of new entrants into the market. New companies, especially those that are well funded and have experienced members of the senior management team can be a significant threat.
- The threat of substitute products being developed or used may displace your market share. Porter realized that substitutes are as much of a threat and new rival products that have similar attributes. For example, novel vegan fast-food chains may substitute traditional fast food outlets without competing in identical markets.
- Rivalry from your current competitors. For example, where they have had a competing product that has not been historically one of their core products that have suddenly had a new lease of life because of a recent project or a new member of the senior management team with a specific interest in that product.
- Threats posed by suppliers. These could be where the suppliers have conflicting interests e.g. have a stake in a company that rivals yours, or where the cost of raw goods has increased meaning that you are forced to pay more than you have done historically, or simply cannot afford to use the supplier. If a supplier is the only supplier of a particular product or raw material, they could increase the price simply due to the power that they have due to the unique position they are in terms of the demand for their product. This can happen where suppliers either own IP (intellectual property) for a product or where suppliers are given exclusivity to a territory for the distribution of a product.
- The fifth of Porter’s 5 Forces is the power of the consumer. This can be affected by changing fashions, ethical considerations, market saturation points, and just changes in buying habits. Without the ‘pull’ of consumer demand, a new strategy will often need to be developed to shape the company’s offerings to meet the new demand or develop a new line of products in line with current consumer habits and their demands. These can be expensive changes, but without changing, a company can soon become stagnant, and ultimately it can fail. Some of the most successful companies are able to implement an element of a change management strategy from the offset and anticipate changes in consumer behavior before they happen and adapt at a faster rate than competitors.
Porter’s Other Theories
Along with the 5 Forces framework, Michael Porter also published Porter’s Value Chain analysis. The Value Chain analyzed the supply chain from inbound logistics through to customer service, separating activities into primary activities and support activities. Read more about Porter’s Value Chain.
Porter’s Five Forces Diagram
Threat of New
Entrants to the
Supplier Power Consumer Demand
and Threats Rivalry and Changes in Habits
Thank you for reading this article about Porter’s 5 Forces. Please read the other theories produced by Michael Porter along with the information on this page. The 5 Forces model was first described in a Harvard Business Review in 1979. Porter’s Value Chain was first referenced in the publication ‘Competitive Advantage: Creating and Sustaining Superior Performance’, first printed in 1985.