Porter's five forces analysis

Porter's Five Forces Framework is a method of analysing the <a href="/facts/Competition_(economics)/zscsQx5l">competitive environment</a> of a business. It draws from <a href="/facts/Industrial_organization/WWLtWmpC">industrial organization (IO) economics</a> to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to <a href="/facts/Profit_(economics)/kfPA9rfB">normal profit levels</a>. The five-forces perspective is associated with its originator, <a href="/facts/Michael_E._Porter/Efbku8s6">Michael E. Porter</a> of <a href="/facts/Harvard_University/Lhy9L1cx">Harvard University</a>. This framework was first published in Harvard Business Review in 1979.
Porter refers to these forces as the <a href="/facts/Market_environment/rxqhnGS5">microenvironment</a>, to contrast it with the more general term <a href="/facts/Environmental_scanning/rxqhnGS5">macroenvironment</a>. They consist of those forces close to a <a href="/facts/Company/psBVz9jr">company</a> that affects its ability to serve its customers and make a <a href="/facts/Profit_(economics)/kfPA9rfB">profit</a>. A change in any of the forces normally requires a business unit to re-assess the <a href="/facts/Marketplace/TaoHSSq2">marketplace</a> given the overall change in <a href="/facts/Industry_information/oKoqcVCJ">industry information</a>. The overall industry attractiveness does not imply that every <a href="/facts/Firm/psBVz9jr">firm</a> in the industry will return the same profitability. Firms are able to apply their <a href="/facts/Core_competencies/Q7I1v0v4">core competencies</a>, <a href="/facts/Business_model/TL9XXsQa">business model</a> or network to achieve a profit above the industry average. A clear example of this is the airline <a href="/facts/Industry_(economics)/nlB2hvkF">industry</a>. As an industry, profitability is low because the industry's underlying structure of high fixed costs and low variable costs afford enormous latitude in the price of airline travel. Airlines tend to compete on cost, and that drives down the profitability of individual carriers as well as the industry itself because it simplifies the decision by a customer to buy or not buy a ticket. This underscores the need for businesses to continuously evaluate their competitive landscape and adapt strategies in response to changes in industry dynamics, exemplified by the airline industry's struggle with profitability despite varying approaches to differentiation. A few carriers – <a href="/facts/Richard_Branson/khhRPD3m">Richard Branson</a>'s <a href="/facts/Virgin_Atlantic/nxvBS6gU">Virgin Atlantic</a> is one – have tried, with limited success, to use sources of differentiation in order to increase profitability.
Porter's five forces include three forces from 'horizontal competition' – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from 'vertical' competition – the <a href="/facts/Bargaining_power/VAy1veEQ">bargaining power</a> of suppliers and the bargaining power of customers.
Porter developed his five forces framework in reaction to the then-popular <a href="/facts/SWOT_analysis/VdJ8efX2">SWOT analysis</a>, which he found both lacking in rigor and <a href="/facts/Ad_hoc/IYxx5Ha8">ad hoc</a>. Porter's five-forces framework is based on the <a href="/facts/Structure%E2%80%93conduct%E2%80%93performance_paradigm/kmC416ly">structure–conduct–performance paradigm</a> in <a href="/facts/Industrial_organization/WWLtWmpC">industrial organizational economics</a>. Other Porter's strategy tools include the <a href="/facts/Value_chain/nIfCnfcA">value chain</a> and <a href="/facts/Porter_generic_strategies/LhGxpC2U">generic competitive strategies</a>.

Porter's five forces analysis open-in-new

Porter's five forces analysis