Test Your Knowledge of Porter's Five Forces Framework in Business Strategy

Porter's Five Forces Framework for Analysing Industry Competition

• Porter's Five Forces Framework was developed to analyze the operating environment of a business, drawing from industrial organization economics to derive five forces that determine the competitive intensity and the attractiveness of an industry in terms of its profitability.
• The five forces are the threat of substitute products or services, the threat of established rivals, the threat of new entrants, the bargaining power of suppliers, and the bargaining power of customers.
• The overall industry attractiveness does not imply that every firm in the industry will return the same profitability, as firms can apply their core competencies, business model, or network to achieve a profit above the industry average.
• The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University, and was first published in the Harvard Business Review in 1979.
• The framework is based on the structure-conduct-performance paradigm in industrial organizational economics, and other Porter's strategy tools include the value chain and generic competitive strategies.
• Barriers to entry restrict the threat of new entrants, and if the barriers are high, the risk of new companies venturing into a given market is low, while if the barriers are low, the risk of new entrants is high.
• A substitute product uses a different technology to try to solve the same economic need, and increased marketing for a substitute might "shrink the pie" for both competitors, while increased advertising might "grow the pie" and give a larger market share at the expense of a competitor.
• The bargaining power of customers is their ability to put the firm under pressure, which also affects the customer's sensitivity to price changes, and it is high if buyers have many alternatives and low if they have few choices.
• The bargaining power of suppliers is their power over the firm when there are few substitutes, and suppliers may refuse to work with the firm or charge excessively high prices for unique resources.
• Competitive rivalry is the extent of competition among existing firms, and for most industries, the intensity of competitive rivalry is the biggest determinant of the competitiveness of the industry.
• Other factors that should be considered, but not forces, include industry growth rate, technology and innovation, government, and complementary products and services, which can contribute to evaluating a firm's strategic position.
• The framework has been challenged by other academics and strategists as it is not feasible to evaluate the attractiveness of an industry independently of the resources that a firm brings to that industry.