Porter's Five Forces Framework is a method of analysing the operating environment of a

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...

of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in ''Harvard Business Review'' in 1979. Porter refers to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a

company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...

that affects its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the

marketplace A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a '' souk'' (from the Arabic), ' ...

given the overall change in

industry information Industry classification or industry taxonomy is a type of economic taxonomy that classifies companies, organizations and traders into industrial groupings based on similar production processes, similar products, or similar behavior in financial ...

. The overall industry attractiveness does not imply that every

firm A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...

in the industry will return the same profitability. Firms are able to apply their

core competencies A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel.Prahalad, C.K. and Hamel, G. (1990)The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91. It can be define ...

business model A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...

or network to achieve a profit above the industry average. A clear example of this is the airline

industry Industry may refer to: Economics * Industry (economics), a generally categorized branch of economic activity * Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery * The wider industrial sector ...

. As an industry, profitability is low because the industry's underlying structure of high fixed costs and low variable costs afford enormous latitude in the price of airline travel. Airlines tend to compete on cost, and that drives down the profitability of individual carriers as well as the industry itself because it simplifies the decision by a customer to buy or not buy a ticket. A few carriers – Richard Branson's Virgin Atlantic is one – have tried, with limited success, to use sources of differentiation in order to increase profitability. Porter's five forces include three forces from 'horizontal competition' – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from 'vertical' competition – the

bargaining power Bargaining power is the relative ability of parties in an argumentative situation (such as bargaining, contract writing, or making an agreement) to exert influence over each other. If both parties are on an equal footing in a debate, then they w ...

of suppliers and the bargaining power of customers. Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found both lacking in rigor and ''

ad hoc Ad hoc is a Latin phrase meaning literally 'to this'. In English, it typically signifies a solution for a specific purpose, problem, or task rather than a generalized solution adaptable to collateral instances. (Compare with ''a priori''.) Com ...

''. Porter's five-forces framework is based on the

structure–conduct–performance paradigm The structure–conduct–performance (SCP) paradigm, first published by economists Edward Chamberlin and Joan Robinson in 1933, and developed by Joe S. Bain is a model in Industrial Organization Economics which offers a causal theoretical expl ...

in industrial organizational economics. Other Porter's strategy tools include the value chain and generic competitive strategies.

Five forces that shape competition

Threat of new entrants

New entrants put pressure on current organizations within an industry through their desire to gain market share. This in turn puts pressure on prices, costs, and the rate of investment needed to sustain a business within the industry. The threat of new entrants is particularly intense if they are diversifying from another market as they can leverage existing expertise, cash flow, and brand identity which puts a strain on existing companies profitability. Barriers to entry restrict the threat of new entrants. If the barriers are high, the threat of new entrants is reduced, and conversely, if the barriers are low, the risk of new companies venturing into a given market is high. Barriers to entry are advantages that existing, established companies have over new entrants. Michael E. Porter differentiates two factors that can have an effect on how much of a threat new entrants may pose: ;

Barriers to entry In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or hav ...

: The most attractive segment is one in which entry barriers are high and exit barriers are low. It is worth noting, however, that high barriers to entry almost always make exit more difficult. : Michael E. Porter lists 7 major sources of entry barriers: :* Supply-side economies of scale – spreading the fixed costs over a larger volume of units thus reducing the cost per unit. This can discourage a new entrant because they either have to start trading at a smaller volume of units and accept a price disadvantage over larger companies, or risk coming into the market on a large scale in an attempt to displace the existing market leader. :* Demand-side benefits of scale – this occurs when a buyer's willingness to purchase a particular product or service increases with other people's willingness to purchase it. Also known as the network effect, people tend to value being in a 'network' with a larger number of people who use the same company. :* Customer switching costs – These are well illustrated by structural market characteristics such as supply chain integration but also can be created by firms. Airline frequent flyer programs are an example. :*

Capital requirements A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...

– clearly the Internet has influenced this factor dramatically. Websites and apps can be launched cheaply and easily as opposed to the brick-and-mortar industries of the past. :* Incumbency advantages independent of size (e.g., customer loyalty and

brand equity Brand equity, in marketing, is the worth of a brand in and of itself – i.e., the social value of a well-known brand name. The owner of a well-known brand name can generate more revenue simply from brand recognition, as consumers perceive the prod ...

). :* Unequal access to distribution channels – if there are a limited number of distribution channels for a certain product/service, new entrants may struggle to find a retail or wholesale channel to sell through as existing competitors will have a claim on them. :* Government policy such as sanctioned monopolies, legal franchise requirements,

patents A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...

, and regulatory requirements. ; Expected retaliation : For example, a specific characteristic of oligopoly markets is that prices generally settle at an equilibrium because any price rises or cuts are easily matched by the competition.

Threat of substitutes

A substitute product uses a different technology to try to solve the same economic need. Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines, automobiles, trains, and ships; beer and wine; and so on. For example, tap water is a substitute for Coke, but Pepsi is a product that uses the same technology (albeit different ingredients) to compete head-to-head with Coke, so it is not a substitute. Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), while giving Pepsi a larger market share at Coke's expense. Potential factors: * Buyer propensity to substitute. This aspect incorporated both tangible and intangible factors. Brand loyalty can be very important as in the Coke and Pepsi example above; however, contractual and legal barriers are also effective. * Relative price performance of substitute * Buyer's

switching costs Switching costs or switching barriers are terms used in microeconomics, strategic management, and marketing. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of swit ...

. This factor is well illustrated by the mobility industry.

Uber Uber Technologies, Inc. (Uber), based in San Francisco, provides mobility as a service, ride-hailing (allowing users to book a car and driver to transport them in a way similar to a taxi), food delivery (Uber Eats and Postmates), pack ...

and its many competitors took advantage of the incumbent taxi industry's dependence on legal barriers to entry and when those fell away, it was trivial for customers to switch. There were no costs as every transaction was atomic, with no incentive for customers not to try another product. * Perceived level of product differentiation which is classic Michael Porter in the sense that there are only two basic mechanisms for competition – lowest price or differentiation. Developing multiple products for niche markets is one way to mitigate this factor. * Number of substitute products available in the market * Ease of substitution * Availability of close substitutes

Bargaining power of customers

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the

under pressure, which also affects the customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. Buyers' power is high if buyers have many alternatives. It is low if they have few choices. Potential factors: * Buyer concentration to

concentration ratio In economics, concentration ratios are used to quantify market concentration and are based on companies' market shares in a given industry. Market share can be defined as a firm's proportion of total sales in an industry, a firm's market capit ...

* Degree of dependency upon existing channels of distribution * Bargaining leverage, particularly in industries with high fixed costs * Buyer switching costs * Buyer information availability * Availability of existing substitute products * Buyer

price sensitivity A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...

* Differential advantage (uniqueness) of industry products * RFM (customer value) Analysis

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the

can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources. Potential factors are: * Supplier switching costs relative to

switching costs * Degree of differentiation of inputs * Impact of inputs on cost and differentiation * Presence of substitute inputs * Strength of the distribution channel * Supplier concentration to the

concentration ratio * Employee solidarity (e.g. labor unions) * Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Competitive rivalry

Competitive rivalry is a measure of the extent of competition among existing firms. Price cuts, increased advertising expenditures, or investing in service/product enhancements and innovation are all examples of competitive moves that might limit profitability and lead to competitive moves(Dhliwayo, Witness 2022). For most industries, the intensity of competitive rivalry is the biggest determinant of the competitiveness of the industry. Having an understanding of industry rivals is vital to successfully marketing a product. Positioning depends on how the public perceives a product and distinguishes it from that of competitors. An organization must be aware of its competitors' marketing strategies and pricing and also be reactive to any changes made. Rivalry among competitors tends to be cutthroat and industry profitability is low while having the potential factors below: Potential factors: * Sustainable

competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...

through innovation * Competition between online and offline organizations * Level of

advertising Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...

expense * Powerful competitive strategy which could potentially be realized by adhering to Porter's work on low cost versus differentiation. * Firm

Factors, not forces

Other factors below should also be considered as they can contribute in evaluating a firm's strategic position. These factors can commonly be mistaken for being the underlying structure of the firm; however, the underlying structure consists of the five factors above.

Industry growth rate

Sometimes bad strategy decisions can be made when a narrow focus is kept on the growth rate of an industry. While rapid growth in an industry can seem attractive, it can also attract new entrants especially if entry barriers are low and suppliers are powerful. Furthermore, profitability is not guaranteed if powerful substitutes become available to the customers. For example, Blockbuster dominated the rental market throughout 1990s. In 1998, Reed Hastings founded Netflix and entered the market. Netflix's CEO was famously laughed out of the room. While Blockbuster was thriving and expanding rapidly, its key pitfall was ignoring its competitors and focusing on its growth in the industry.

Technology and innovation

Technology in itself is a rapidly growing industry. Regardless of the advanced growth, it presents its limitations; such as customers not being able to physically touch/test products. Technology stand alone cannot always provide a desirable experience for a customer. "Boring" companies that are in high entry barrier industries with high switching costs and price-sensitive buyers can be more profitable than "tech savvy" companies. For example, quite commonly websites with menus and online booking options attract customers to a restaurant. But the restaurant experience cannot be delivered online with the use of technology. Food delivery companies like Uber Eats can deliver food to customers but cannot replace the restaurant's atmospheric experience.

Government

Government cannot be a standalone force as it is a factor that can affect the firms structure of five forces above. It is neither good or bad for the industry's profitability. For instance, * patents can raise barriers to entry * supplier power can be raised by union favoritism from government policies * failing companies reorganizing due to bankruptcy laws

Complementary products and services

Similar to the government above, complementary products/services cannot be a standalone factor because it's not necessarily bad or good for the industry's profitability. Complements occur when a customer benefits from multiple products combined. Individually those standalone products can be redundant. For example, a car would be unusable without petrol/gas and a driver. Or for example, a computer is best used with computer software. This factor is controversial (as discussed below in Criticisms) as many believe it to be 6th Force. However, complements influence the forces more than they form the underlying structure of the market. For instance, complements can * influence barriers of entry by either lowering or raising it e.g. Apple providing set of tools to develop apps, lowers barriers to entry; * make substitution easier e.g. Spotify replacing CDs A strategy consults job is to identify complements and apply them to the forces above.

Usage

Strategy consultants occasionally use Porter's five forces

framework A framework is a generic term commonly referring to an essential supporting structure which other things are built on top of. Framework may refer to: Computing * Application framework, used to implement the structure of an application for an op ...

when making a qualitative evaluation of a

's strategic position. However, for most consultants, the framework is only a starting point and value chain analysis or another type of analysis may be used in conjunction with this model. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naïve . According to Porter, the five forces framework should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers (see

). A

that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the primary issue in

corporate strategy In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessment ...

is the selection of industries (lines of business) in which the company will compete. The average ''Fortune Global 1,000'' company competes in 52 industries.

Criticisms

Porter's framework has been challenged by other academics and strategists. For instance, Kevin P. Coyne and Somu Subramaniam claim that three dubious assumptions underlie the five forces: * That buyers, competitors, and suppliers are unrelated and do not interact and

collude Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

. * That the source of value is a structural advantage (creating barriers to entry). * That uncertainty is low, allowing participants in a market to plan for and respond to changes in competitive behavior. An important extension to Porter's work came from Adam Brandenburger and

Barry Nalebuff Barry J. Nalebuff (born July 11, 1958) is an American businessman, business theorist, and writer. He is a Milton Steinbach Professor of Management at Yale School of Management and author who specializes in business strategy and game theory. His pu ...

of Yale School of Management in the mid-1990s. Using

game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has applic ...

, they added the concept of complementors (also called "the 6th force") to try to explain the reasoning behind strategic alliances. Complementors are known as the impact of related products and services already in the market. The idea that complementors are the sixth force has often been credited to

Andrew Grove Andrew Stephen Grove (born András István Gróf; 2 September 193621 March 2016) was a Hungarian-American businessman and engineer who served as the third CEO of Intel Corporation. He escaped from Communist-controlled Hungary at the age of 20 ...

, former CEO of Intel Corporation. Martyn Richard Jones, while consulting at Groupe Bull, developed an augmented five forces model in Scotland in 1993. It is based on Porter's Framework and includes Government (national and regional) as well as pressure groups as the notional 6th force. This model was the result of work carried out as part of Groupe Bull's Knowledge Asset Management Organisation initiative. Porter indirectly rebutted the assertions of other forces, by referring to innovation, government, and complementary products and services as "factors" that affect the five forces.Michael E. Porter. "The Five Competitive Forces that Shape Strategy", ''

Harvard Business Review ''Harvard Business Review'' (''HBR'') is a general management magazine published by Harvard Business Publishing, a wholly owned subsidiary of Harvard University. ''HBR'' is published six times a year and is headquartered in Brighton, Massach ...

'', January 2008 (Vol. 88, No. 1), pp. 78–93
PDF
/ref> It is also perhaps not feasible to evaluate the attractiveness of an industry independently of the resources that a

brings to that industry. It is thus argued (Wernerfelt 1984)Wernerfelt, B. (1984), A Resource-based View of the Firm, ''

Strategic Management Journal The Strategic Management Society (SMS) is a professional society for the advancement of strategic management. The society consists of nearly 3,000 members representing various backgrounds and perspectives from more than eighty different countries. ...

'', Vol. 5: pp. 171–18
PDF
/ref> that this theory be combined with the resource-based view (RBV) in order for the firm to develop a sounder framework. Other criticisms include: * It places too much weight on the macro-environment and doesn't assess more specific areas of the business that also impact competitiveness and profitability * It does not provide any actions to help deal with high or low force threats (e.g., what should management do if there is a high threat of substitution?)