Porter's Five Competitive Forces

by Matthew Murphy

The insight of Michael Porter's Five Competitive Forces model is that it focuses on the determinants of competition and profitability within an industry and distills the nature of competition down into just five competitive forces.  The forces identified by Porter in his 1979 Harvard Business Review article "How Competitive Forces Shape Strategy," are; 1) threat of new entrants, 2) Bargaining power of suppliers, 3) bargaining power of buyers, 4) substitute products or services, and 5) rivalry among existing competitors.  These forces combine to determine the long-run profitability of an industry by focusing attention on the critical industry structure of profitability, power of buyers and suppliers, exposure to new products and services and attractiveness of new entrants. 

Porter points out that there are many other "fleeting factors" that are often considered when doing industry analysis, yet he cautions that these factors do not drive long-run industry profitability.  At best, they have a short-run impact, but at worst they may be misleading or distracting.  The factors that Porter identifies include; 1) industry growth rate, 2) technology and innovation, 3) government involvement, and 4) complementary products and services. 

Porter argues for example that fast growing industries are not always attractive.  It depends on the nature of the five forces that affect that industry.  If it is fast growing but has low barriers to entry, it may be unattractive due to the large number of new entrants that it attracts, thereby increasing competition and eroding profitability.  Likewise, high technology or high innovation industries may be unattractive if the power of buyers or suppliers is very high.  The presence or absence of government intervention is not in and of itself attractive or unattractive, but it is in how government intervention affects the other competitive forces that determines long-run profitability. For example, patent protection raises barriers to entry improving profitability while regulatory restrictions might raise the power of buyers or suppliers reducing profitability.  Lastly, when considering complementary products or services one must examine how the complements affect the five forces.  While they may increase overall industry demand, it is not necessarily a net benefit to the industry as a whole.  Complements could raise or lower barriers to entry and it could have the effect of raising or lowing the threat of substitutes.

Porter's five competitive forces model provides a clear and concise way of thinking about the actual structure of an industry in terms of the long-run forces that effect its profitability.  By avoiding becoming distracted by short-run or fleeting "factors," Porter provides a way to perform industry analysis that focuses attention where it belongs, on the critical long-run forces affecting industry structure and profitability.