Porter’s Five Forces is a strategic tool used to assess industry competitiveness and long-term profitability by analysing the key forces shaping market dynamics.
The Purpose of Porter’s Five Forces
Porter’s Five Forces, introduced by Harvard Business School professor Michael E. Porter in 1979, offers a structured framework for assessing the competitive intensity and profitability potential of an industry. Instead of focusing only on the actions of direct competitors, this model identifies five broad factors that collectively determine an industry’s attractiveness and the strategic decisions that businesses should take to succeed.
Understanding these forces helps firms make informed choices about:
Whether to enter or exit a market
How to respond to competitors
Where to allocate resources
How to adapt long-term strategy to maintain or improve profitability
The framework is especially useful for long-term planning and strategic positioning, rather than for everyday operational decisions.
Why It Matters to Businesses
Every business operates within a competitive environment, and being able to assess the external threats and pressures that influence performance is essential. Porter’s model gives a macro-level view of the factors that could erode profits or create opportunities for growth.
Key reasons for using the model:
It reveals how competitive forces interact, rather than analysing competitors in isolation.
It identifies which parts of the supply chain or customer base exert the most pressure.
It highlights potential areas where a business can gain a competitive advantage, such as through cost control, differentiation, or innovation.
It supports strategic decision-making, especially when entering new markets, launching new products, or facing disruptive change.
For AQA A-Level Business students, the model offers a structured way to analyse case studies, giving depth and clarity to exam answers involving strategic analysis.
Overview of the Five Forces
Porter’s framework centres around five distinct forces that influence the level of competition and profitability in any given industry. Each force addresses a different aspect of the competitive environment.
1. Threat of New Entrants
This force examines how easy or difficult it is for new competitors to enter the market and start competing with existing firms. If entry barriers are low, new entrants can quickly appear, increasing competition and reducing profit margins.
Key factors that influence this threat include:
Economies of scale: Established firms often benefit from lower costs per unit due to higher production volumes. New entrants may find it hard to match this efficiency.
Capital requirements: High initial investment (e.g. in equipment, R&D, marketing) can discourage new businesses.
Brand loyalty: Strong customer preference for existing brands can make it difficult for newcomers to gain traction.
Access to distribution channels: Established firms may have exclusive contracts with suppliers or retailers.
Regulatory barriers: Legal requirements, such as health and safety standards, licences, and patents, can restrict new entrants.
The greater the barriers, the lower the threat of new entrants. Conversely, industries with low entry barriers tend to experience high levels of disruption and fluctuating profitability.
2. Bargaining Power of Buyers
This force assesses the power that customers have to influence prices, demand higher quality, or seek better service. Buyers can be individual consumers, businesses, or institutions depending on the market.
The bargaining power of buyers increases when:
There are few buyers, each purchasing in large volumes.
Products are standardised or undifferentiated, making it easier to switch between suppliers.
Buyers are price sensitive, especially in commodity markets.
Switching costs are low, so customers can change suppliers without significant loss.
Buyers can integrate backwards, meaning they can potentially produce the product or service themselves (e.g. a supermarket developing its own-brand goods).
When buyer power is high, firms may be forced to lower prices, improve customer service, or increase promotional spending to retain business, which all reduce profit margins.
3. Bargaining Power of Suppliers
This force examines the ability of suppliers to control prices, supply quality, or availability. Suppliers gain power when they are essential to the business and not easily replaced.
Factors that increase supplier power:
Few suppliers exist, and each one dominates a large share of the supply market.
Lack of substitutes for the input (e.g. a rare material or proprietary technology).
High switching costs for businesses to change suppliers (e.g. retraining staff, changing systems).
Suppliers can integrate forward, meaning they might enter the customer’s market (e.g. a manufacturer opening a retail outlet).
Strong supplier power can increase input costs, reduce profit margins, and limit the flexibility of a firm to respond to market changes. In some cases, suppliers may dictate terms, leaving firms with reduced bargaining strength.
4. Threat of Substitutes
This force considers the availability of alternative products or services that meet the same customer needs but in a different way. Substitutes are not the same as competitors—they are different solutions to the same problem.
The threat of substitutes is high when:
Substitutes offer a better price–performance trade-off (e.g. public transport vs. private car in urban areas).
New technologies enable the creation of effective alternatives (e.g. streaming services replacing DVDs).
Switching costs are low, and customers are willing to change easily.
Substitutes limit the potential for firms to increase prices, as consumers may turn to alternatives. They can also drive the need for continuous innovation and product improvement.
5. Rivalry Among Existing Competitors
This central force looks at the degree of competition between existing firms in the industry. Intense rivalry drives price wars, increased marketing, frequent product launches, and high operating costs.
Rivalry tends to be strongest when:
There are many competitors of similar size and capability.
Industry growth is slow, forcing firms to steal market share from each other.
Fixed costs are high, encouraging full capacity utilisation and aggressive sales strategies.
Products are undifferentiated, and buyers see little difference between brands.
Exit barriers are high, meaning companies are forced to stay in the industry even if it’s unprofitable.
High levels of rivalry erode profit margins, create uncertainty, and force businesses to invest in strategies to differentiate themselves and maintain market share.
Interdependence of the Forces
Although each force is distinct, they are not isolated. The interactions between them often shape the overall level of competitive pressure in the industry.
For example:
If the threat of new entrants is high, it can increase rivalry, as more firms compete for the same customers.
If supplier power increases, businesses may need to raise prices, which could push customers toward substitutes.
If buyers gain power, they can demand lower prices, prompting businesses to seek cheaper suppliers or improve efficiency, which might also shift supplier relationships.
Understanding the network of forces helps firms to develop strategies that address multiple threats at once. Strategic decisions often target the most pressing forces while also considering the knock-on effects of those decisions.
Real-World Example of Interdependence
In the airline industry:
Rivalry is intense due to numerous carriers competing on routes.
Buyers (passengers) are highly price-sensitive and use comparison websites to find the best fares.
Suppliers (aircraft manufacturers and fuel providers) hold significant power because of the limited number of players.
Threat of substitutes like trains, coaches, or video conferencing for business travel can impact demand.
New entrants, such as budget airlines, increase competition, especially in deregulated markets.
In such a sector, all five forces combine to create a challenging, low-margin environment.
Using the Model Strategically
Porter’s Five Forces provides a comprehensive tool for businesses to plan strategically. By understanding where competitive pressure comes from, a business can adapt its structure, products, or strategy to protect profitability.
Strategic uses of the model include:
Evaluating new market opportunities: A firm might analyse an industry’s Five Forces before entering to assess risk and reward.
Identifying profit levers: Firms can pinpoint where to improve efficiency or reduce dependency (e.g. diversifying supplier base).
Guiding investment decisions: A business might choose to invest in markets with fewer threats or weaker buyer power.
Designing competitive strategies: The firm can use the model to decide whether to pursue cost leadership, differentiation, or focus strategies.
For example:
If buyer power is strong, a business might respond by developing a more differentiated product or improving customer loyalty through better service.
If supplier power is strong, the business might vertically integrate, forming its own supply chain.
If the threat of substitutes is rising, the firm might invest in innovation, research, and development to stay ahead.
Text-Based Representation of the Model
While this format cannot include graphics, the model is typically imagined with the central force—rivalry among existing competitors—surrounded by the other four forces. Here is a simplified version using text:
At the centre: Rivalry Among Existing Competitors
From the top: Threat of New Entrants
From the bottom: Threat of Substitutes
From the left: Bargaining Power of Suppliers
From the right: Bargaining Power of Buyers
All arrows point inward, indicating the pressure they apply on central rivalry. The more intense these external forces are, the more competitive the market, and the harder it is for firms to maintain profitability.
FAQ
Porter’s Five Forces goes beyond direct competitors by evaluating five separate influences on industry profitability: new entrants, buyer power, supplier power, substitutes, and rivalry. Traditional competitor analysis often focuses solely on existing firms, missing out on external pressures like powerful suppliers or disruptive technologies. Porter’s model ensures businesses consider a wider competitive environment, such as how easily customers can switch to alternatives or how new regulations might open the door to new firms, giving a more holistic view of strategic threats.
Yes, Porter’s Five Forces can be adapted for use in non-profit or public sector settings by focusing on competition for resources, funding, and public attention. Instead of customers, stakeholders such as donors, government bodies, and service users become the “buyers.” Substitutes may include alternative service providers or solutions. The model helps these organisations assess pressures on funding, resource access, and public trust, allowing them to develop strategies to remain sustainable, effective, and competitive in delivering their services.
In mature industries, rivalry among existing competitors typically intensifies due to slow growth and saturated markets. The threat of new entrants tends to decline as high entry barriers develop over time. Supplier and buyer power may increase, as established relationships and price sensitivity become more significant. The threat of substitutes often grows with technological advancement and shifting consumer preferences. Overall, as industries mature, competitive forces usually become more pronounced, requiring firms to focus more on efficiency, innovation, and differentiation.
Digital disruption significantly reshapes all five forces. It can lower barriers to entry by reducing start-up costs and increasing market accessibility, intensifying the threat of new entrants. It often enhances buyer power, as consumers gain instant access to price comparisons and product reviews. Suppliers may gain or lose power depending on whether digital tools strengthen their uniqueness or make them more replaceable. New digital substitutes emerge frequently, and online competition increases rivalry. Businesses must constantly adapt strategies to survive these rapid shifts.
A business can use Porter’s Five Forces to identify areas where it can reduce external pressures or turn them into strengths. For example, by differentiating its product, it can reduce buyer power and the threat of substitutes. Vertical integration or sourcing diversification may weaken supplier power. Strong branding and innovation can raise entry barriers and reduce rivalry. By proactively addressing each force, a firm can develop strategies that are harder for competitors to imitate, leading to a long-term sustainable competitive advantage.
Practice Questions
Explain how Porter’s Five Forces can help a business assess the attractiveness of entering a new market.
Porter’s Five Forces helps a business assess market attractiveness by identifying the competitive pressures that may affect profitability. By analysing the threat of new entrants, a business can evaluate how easily competitors could emerge. Assessing buyer and supplier power reveals how much influence these stakeholders have over prices. The threat of substitutes shows whether alternative products may limit pricing flexibility. Finally, examining industry rivalry highlights how intense competition is. Together, these forces provide a structured view of potential risks, helping a business decide whether the long-term profit potential of the new market justifies the investment.
Analyse how the interdependence of Porter’s Five Forces can influence a firm’s strategic decision-making.
The interdependence of the Five Forces means one change can affect others, influencing a firm’s strategic direction. For example, a rise in supplier power may force a firm to raise prices, increasing the threat of substitutes and buyer power. This could lead the firm to focus on differentiation or cost-cutting strategies. High rivalry may push a firm to innovate, which could reduce buyer power and make substitutes less appealing. Strategic decisions must therefore account for how responding to one force may trigger changes in others. Understanding these interdependencies enables firms to craft strategies that address multiple competitive pressures effectively.
