Porter's Five Forces Generator

Where the Five Forces came from

Michael Porter, then a young professor at Harvard Business School, set out the model in Harvard Business Review in 1979¹. His point was that managers see competition too narrowly. They watch their direct rivals and forget that customers, suppliers, possible newcomers and substitute products also compete with them for the same profit¹.

The five forces are rivalry among existing competitors, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, and the threat of substitutes¹. Porter updated the article in 2008 with new examples and a longer list of entry barriers, seven instead of six². The idea did not change: together, the forces decide how much profit an industry can earn over the medium and long run².

Five Forces describes an industry, not a company. It explains why airlines as a whole earn little and soft drink makers as a whole earn a lot². Your own company's position comes after, once you know the shape of the field you play on.

How to do a Five Forces analysis well

Name the industry precisely. "Food" is too broad and "our brand" is too narrow. Say what is sold, to whom, and where, such as "meal-kit subscriptions sold to US households." If two products face different buyers or rivals, they may be two industries.

Start from profit. Porter says every company should already know its industry's average profitability and how it has changed over time². The forces are there to explain that number.

Give causes, not just ratings. "High" means little on its own. For each force, write the reasons: how easily buyers can switch, how many suppliers there are, what a newcomer would need to spend. Porter's articles list these drivers force by force¹².

Find the strongest force. The strongest force or forces set the industry's profit, and it is not always the obvious one². Porter's example is photographic film: rivalry was fierce, but the force that sank profits was a substitute, digital photography².

A weak analysis and a stronger one

This uses the meal-kit example shown above. The business is generic and the reasons are illustrations, not market research.

The stronger version shows that substitutes and buyers set the ceiling on price, not the other meal-kit brands. That changes what to work on.

Common mistakes, including some Porter corrected himself

• Adding a sixth force. Many summaries add government or complements (products used together with yours, like apps for a phone). Porter rejects both as forces. Neither is good or bad for profit in itself; each works through the five, so trace it into them. A patent, for example, raises the barrier to entry².
• Mistaking visible traits for structure. Fast growth and advanced technology do not make an industry attractive by themselves. Porter notes that personal computers grew fast and were among the least profitable industries of their time².
• Analyzing your company instead of the industry. The model rates the field. Your strengths and weaknesses belong in a SWOT, read against what the forces show.
• Counting only today's rivals. Substitutes are easy to miss because they can look nothing like your product². Ask what else a customer could do to get the same job done.
• Treating it as a snapshot. Structure is fairly stable but shifts, for example when a patent expires or a new technology lowers costs². Note which forces are moving and in which direction.

How much the industry really explains

Researchers have argued for decades over how much of a company's profit comes from its industry. Richard Rumelt, writing in 1991, noted that Richard Schmalensee had found industry the strongest factor in 1985, then found stable industry effects to be small and effects specific to each business to be very large³.

In 1997, Anita McGahan and Porter himself studied US public companies. Industry accounted for about 19% of the variation in profit, and factors specific to each business for about 32%⁴. Industry mattered less in manufacturing and more in lodging and entertainment, services, retail and wholesale, and transportation⁴.

So the industry sets the range, and the choices a business makes decide where in that range it lands. Five Forces is strongest when it leads to a clear position, not when it ends as a table of ratings.

It also says little about creating a new market. A study of Dutch retail, covering 41 kinds of shops from 1982 to 2000, found that profits from new ideas did get competed away, but over about 15 years⁵. The authors suggest using both approaches together⁵. Blue Ocean Strategy covers the new-market side.

Turning the forces into a strategy

Porter describes three kinds of move once the forces are clear²:

• Position where the forces are weakest. His example is the truck maker Paccar, which chose drivers who own their own trucks. These buyers have less bargaining power than large fleets and are less sensitive to price².
• Get ahead of change. Spot a force that is shifting, such as a new substitute or a patent about to expire, and move before rivals do².
• Reshape the industry. Lead competitors toward ways of competing that improve the forces for everyone². Competing on features and service rather than price is one example, since it tends to protect profit².

Pick one, and write down what you will stop doing to make room for it. Porter's later argument is that strategy means choosing what not to do⁶. Playing to Win is a good way to make that choice with a team. For changes outside the industry, such as new laws or economic shifts, run a PESTLE analysis, then check which of the five forces each change would move. To compare Five Forces with other planning methods, see the framework comparison.