Porter's Five Forces and Competitive Strategy
Porter's Five Forces, developed by Michael Porter in his 1980 book Competitive Strategy, is a framework for analysing how attractive and how competitive an industry is, used to inform strategic decisions such as whether to enter a market or how to position within it. The five forces are: the threat of new entrants (how easily new competitors can enter the market, affected by barriers to entry such as start-up costs and regulation); the bargaining power of suppliers (how much suppliers can raise prices or reduce quality, greater when suppliers are few or their inputs are essential); the bargaining power of buyers/customers (how much customers can demand lower prices or higher quality, greater when buyers are few, purchase in bulk, or can switch easily); the threat of substitutes (products from a different industry that meet the same need); and competitive rivalry (the intensity of competition among existing firms, affected by the number of competitors and how similar their products are). A market where all five forces are strong is unattractive to enter, because profits are squeezed from every direction; a market where the forces are weak allows firms to sustain higher profits.
Before you start
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Method
- Identify the industry or market being asked about, since Porter's Five Forces analyses the whole industry, not a single firm's internal strengths and weaknesses.
- Work through each of the five forces in turn: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, competitive rivalry.
- For each force, judge it as strong (bad for firms already in the market, because it limits their ability to charge high prices or keep high profit margins) or weak (good for firms already in the market), using specific evidence from the case or context.
- Support each judgement with a reason drawn from the determinants of that force, e.g. buyer power is strong when buyers are large, few in number, or face low switching costs.
- Draw the forces together into an overall judgement about how attractive the industry is, rather than leaving five separate, unconnected points.
- For an evaluate question, weigh which forces matter most in this specific case, since one very strong force (e.g. a dominant supplier) can outweigh several weaker ones, and recommend a strategic response, such as building barriers to entry or differentiating the product to reduce substitute and rivalry pressure.
Worked example
A budget airline is considering whether to enter the UK short-haul domestic flight market. Apply Porter's Five Forces to assess how attractive this market is for a new entrant.
- Threat of new entrants: low. Airlines face very high capital costs (aircraft purchase or lease), strict safety regulation, and a limited number of take-off and landing slots at popular airports, all of which are significant barriers to entry.
- Bargaining power of suppliers: high. Aircraft manufacturing is dominated globally by two firms, Boeing and Airbus, and jet fuel prices are set on world markets, so airlines have little power to negotiate down these major input costs.
- Bargaining power of buyers: high. Price comparison websites make it easy for passengers to compare fares across airlines instantly, and switching between airlines carries no real cost to the customer, so buyers can force fares down.
- Threat of substitutes: moderate to high, since UK rail and coach services cover many of the same domestic routes and, for very short journeys, can be a genuine alternative to flying.
- Competitive rivalry: high, because several budget carriers already compete intensely on UK domestic routes, often triggering price wars that squeeze everyone's margins.
- Overall conclusion: despite low threat of new entrants, the market is unattractive to enter because the other four forces are all strong, meaning any new airline would likely face high supplier costs, price-sensitive customers, competition from rail, and aggressive rivals all at once.
Practice questions
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Q1Name the five forces in Porter's Five Forces framework.Show answer
Answer: Threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and competitive rivalry.
Q2State one factor that increases the threat of new entrants to a market.Show answer
Answer: Low start-up/capital costs (or weak regulation, or no strong brand loyalty among existing customers).
Q3Explain why the bargaining power of buyers is high when customers can switch supplier easily.Show answer
Answer: Because if customers face no cost or inconvenience in moving to a rival, a firm that tries to raise prices or cut quality risks losing them immediately, forcing firms to compete hard on price and service.
Q4Give one example of a substitute product for cinema visits.Show answer
Answer: A streaming subscription service (or any other form of home entertainment).
Q5What did Michael Porter identify as the purpose of the Five Forces framework?Show answer
Answer: To analyse how attractive and competitive an industry is, to help a business decide whether and how to compete in it.
Q6State one factor that would make competitive rivalry within a market low.Show answer
Answer: A small number of competitors (or products that are highly differentiated from one another, reducing direct price competition).
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Analyse how a business could use Porter's Five Forces to inform a decision about entering a new market.
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NovaFit is considering opening budget gyms in a UK city. There are currently three established gym chains in the city, none offering a strongly differentiated service, and new gym operators can lease suitable retail units relatively cheaply, with equipment suppliers numerous and willing to offer credit terms. Members can cancel their gym membership with one month's notice and comparison websites list local gym prices side by side. Home fitness apps and online workout videos have grown by 30% in local usage over the past two years. Using Porter's Five Forces, evaluate whether NovaFit should enter this market.
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