Developed by Michael Porter (Harvard, 1979) to analyse industry attractiveness
Helps a business understand WHERE profit is being eroded — and why
Five forces determine the competitive intensity of an industry
The weaker the combined forces → the more profitable the industry
Used to decide: should we enter this market? how do we defend our position?
Each force reduces profitability — the goal is to find an industry where you face few strong forces
All 4 outer forces funnel into the centre — competitive rivalry
Strong outer forces → more intense rivalry → lower industry profits
Example: UK supermarkets face high buyer power (price-sensitive consumers) + high rivalry (Tesco vs Sainsbury's vs Aldi)
High barriers: Pharma (patents + R&D costs), nuclear energy (capital + regulation), commercial banking (licences)
Low barriers: Hairdressing, street food, online retail — easy to enter, so margins are thin
Incumbents want HIGH barriers — new entrants want LOW barriers
Few suppliers in the market — few alternatives for the buyer
Supplier's product is unique or differentiated (hard to switch)
Switching costs are high (retraining, retooling, relationship rebuild)
Supplier could forward-integrate (become a competitor)
Supplier's product is critical input — business can't function without it
Many competing suppliers → buyer can play them off against each other
Standardised, commodity inputs (steel, wheat, generic components)
Buyer represents a large % of supplier's revenue — supplier can't afford to lose
High power: OPEC oil cartel, De Beers diamonds, TSMC (chips to Apple)
Low power: Wheat farmers selling to large supermarkets
Few buyers purchasing in large volumes — they set the terms
Product is standardised — buyer can easily switch supplier
Low switching costs — no lock-in
Buyer has good price information — hard to charge above market rate
Buyer could backward-integrate (make the product themselves)
Many small buyers with no individual bargaining power
Highly differentiated product — buyers willing to pay premium
High switching costs — buyers are locked in
High power: Supermarkets buying from food manufacturers; Amazon's influence over third-party sellers
Low power: Individual consumers buying luxury goods, patented medicines
A different product that fulfils the same customer need
NOT the same product from a rival — that's competitive rivalry
Examples: trains substitute for planes; Netflix substitutes for cinema; email substitutes for post
Substitute offers similar or better performance at lower cost
Low switching cost to the substitute
Customers show willingness to switch (price-sensitive)
High substitute threat → a firm cannot raise prices without losing customers
PED becomes more elastic when good substitutes exist
Firms reduce substitute threat through: branding, patents, creating switching costs
The intensity of competition between existing players in the industry
All other four forces ultimately feed into this one
Many competitors of similar size — no clear dominant player
Slow industry growth — firms must fight for each other's market share
Low product differentiation — competition is purely on price
High fixed costs — firms must sell high volumes → aggressive pricing
High exit barriers — firms stay even when unprofitable (idle capacity, redundancy costs)
| Force is Strong | Strategic Response |
|---|---|
| High new entrant threat | Build brand loyalty, lock in patents, achieve scale economies |
| High supplier power | Dual-source, backward integrate, build long-term contracts |
| High buyer power | Differentiate product, create switching costs, build brand |
| High substitute threat | Innovate to stay ahead, lower price, build switching costs |
| High rivalry | Differentiate, niche down, or compete on cost (Porter's generics) |
Cost leadership → compete in high-rivalry, commodity markets by winning on price
Differentiation → reduce buyer/substitute power by being unique
Focus → find a niche where forces are weaker
Takes a snapshot — doesn't capture how rapidly industries change
Digital disruption can transform all five forces overnight (e.g. Uber vs taxis)
Assumes a traditional market structure — doesn't handle platform markets well
Model is purely adversarial — doesn't account for strategic partnerships
Co-opetition (competing AND cooperating) is common in modern markets
Example: Apple and Samsung — rivals in phones, Samsung supplies OLED screens to Apple
Industry definition is subjective — what counts as a substitute?
Doesn't account for government as a sixth force (regulation, subsidies)
Best used alongside SWOT, PESTLE — not in isolation
AQA point: "Five Forces is most useful as a starting framework, not a final answer"
A new electric car manufacturer is considering entering the UK car market. Which of the following would MOST reduce the threat of new entrants into this market?
The UK budget airline industry has many competitors of similar size, low product differentiation and high fixed costs. According to Porter's Five Forces, this best describes:
A pharmaceutical company holds patents on its key drugs that last 20 years. Which TWO forces in Porter's model does this MOST directly weaken?