Background
Michael Porter presented the model in a 1979 Harvard Business Review article and in Competitive Strategy (1980). It carried into business strategy the structure-conduct-performance (SCP) view of industrial organization economics, which holds that industry structure shapes firm conduct and performance, and in particular Bain's (1956) work on barriers to entry. Its core message is that competition is not only between direct rivals but takes place across a wider field including customers, suppliers, potential entrants and substitutes.
The five forces
- Rivalry among existing competitors: intensifies when competitors are numerous or similar in size, industry growth is slow, fixed costs and exit barriers are high, and differentiation is weak.
- Threat of new entrants: grows as barriers to entry such as economies of scale, product differentiation and brands, capital requirements, access to distribution and government policy fall.
- Threat of substitutes: grows when products that meet the same need in a different way offer a good price-performance trade-off and switching costs are low.
- Bargaining power of buyers: is strong when buyers are concentrated or purchase in volume, products are standardized, and backward integration is possible.
- Bargaining power of suppliers: is strong when suppliers are few, there are no substitute inputs, switching costs are high, and forward integration is possible.
Analysis and use
Porter (2008) recommends first defining the industry, then assessing the strength of each force and its causes to explain industry profitability, and finally looking at how the structure is likely to change. The findings lead to strategies that position a firm where the forces are weakest or reshape the balance of forces, and the model is used together with Porter's generic strategies. In practice it is also widely used as an external analysis tool to organize the opportunities and threats in a SWOT analysis.
Complements and criticism
Porter (2008) treated government and complements not as a sixth force but as factors that affect the five forces. Brandenburger and Nalebuff (1996), by contrast, proposed the value net, which includes complementors as a separate player. Critics also argue that the model views industries statically, is hard to apply to platforms and digital markets with blurred industry boundaries, and does not explain differences in firms' internal resources.
See also: Entrepreneurship, Scenario Planning, BCG Matrix
References
- Bain, J. S. (1956). Barriers to new competition. Cambridge, MA: Harvard University Press.
- Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, 57(2), 137-145.
- Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press.
- Brandenburger, A. M., & Nalebuff, B. J. (1996). Co-opetition. New York: Currency Doubleday.
- Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.