What is 5 Force Analysis



5 Force Analysis is a tool developed by Michael Porter to help companies analyze the competitive environment in which they operate. It is a framework used to analyze business competition at both the industry and company level.

The five forces are:

  • the threat of new entrants
  • the bargaining power of buyers
  • the bargaining power of suppliers
  • the threat of substitutes
  • the intensity of rivalry

In this article, we’ll discuss the importance and application of 5 Force Analysis.

Definition of 5 Force Analysis

5 Force Analysis is an analytical tool developed by Harvard Business School professor Michael Porter to analyze the competitive forces in any industry. It is a framework that assesses and identifies the relative power of five key external forces that drive competition and shape the business environment. These forces are buyer power, supplier power, competitive rivalry, risk of substitution, and barriers to entry.

By understanding the interactions between these five forces, analysts can gain insight into which areas pose the greatest long-term risks or opportunities for companies within an industry.

The 5 Force Analysis helps to measure and understand how profitability is affected by competitive actions such as new entrants or market fluctuations. Companies can use it to assess their competitive position, anticipate environmental changes and make strategic decisions about where and how to compete in different markets. It also helps senior executives evaluate competitive threats and identify where new products or services may be needed in order to expand market share or reduce the potential risk associated with existing products or services.

Furthermore, firms use this analysis when they consider launching a new product or service so they can evaluate their positions relative to competitors as well as identify opportunities for growth. The results of this analysis also provide valuable data which can be used by decision makers as they devise strategies for expanding business operations while mitigating potential risks associated with entering a new market.

Examples of 5 Force Analysis

Five Force Analysis is an essential tool for understanding the dynamics of any industry and for identifying the forces that shape competition within the industry. It is a strategic concept used to assess an organization’s potential competitors, suppliers, customers, substitute products or services, and the new entrants into a market. It can also aid in making decision-making processes easier and more efficient.

The five core concepts form the basis of a Five Force Analysis:

  • Competitive rivalry – This looks at how existing competitors affects each other.
  • Buying power – This looks at how powerful customers are when it comes to pricing and discounts they receive from suppliers.
  • Supplier power – This looks at how suppliers are able to negotiate prices with their customers.
  • Substitute products or services – This looks at what other products or services could compete with yours in the marketplace.
  • Threat of entry –This looks at how easy it is for new rivals to enter your particular market space.

By understanding each of these environmental forces, managers will be better prepared to make informed decisions about protecting their organizations from competitive activities, setting prices that reflect buyer power, negotiating fairer terms from suppliers, introducing revolutionary new products that reduce consumer demand for substitutes, and assessing whether entering a particular industry would be profitable for their organization. Understanding these environmental forces will ultimately help you stay competitive in your market space!

Five Forces

Five Force Analysis is a tool developed by Michael Porter, which is used to analyze the competitive environment of an industry or market. It is based on five forces that affect the competitive dynamics of an industry.

The five forces are:

  • Supplier Power
  • Buyer Power
  • Competitive Rivalry
  • Threat of Substitutes
  • Threat of New Entrants

All five forces are important when looking at the competitive environment of an industry, and can help you determine the best strategy to take.

Threat of New Entrants

One of the five forces outlined in Michael Porter’s Five Forces Model is the threat of new entrants into a particular market or industry. This force considers how easy or difficult it is for potential competitors to enter the market and compete with existing businesses. It identifies barriers that prevent new players from entering, such as strong brand loyalty, materials that are difficult to access, government regulations and high capital costs.

The threat of new entrants depends heavily on the nature of an industry and its product or service offerings. If an industry has a low barrier to entry (such as being able to generate free publicity on social media), more businesses might be attracted to enter that particular space. On the other hand, if there are multiple specialized components that must be integrated together in order to be successful (such as in the automotive industry), existing firms might have strong competitive advantages due to economies-of-scale or previous investments in infrastructure and research.

Knowing how much leverage potential competitors have on pricing, quality of products/services, technological innovation and other aspects can help establish competitive strategies for both existing firms or those considering entering certain industries.

Bargaining Power of Suppliers

The bargaining power of suppliers is another factor that needs to be considered when conducting a Five Forces analysis. This refers to the ease or difficulty for suppliers in raising the price of their goods and services due to the presence of a competitive market. It also includes their ability to threaten a business’s profits by reducing quality, quantity, and/or prices of their product or service offered to the buyer.

The supplier’s bargaining power can be determined by analyzing several factors such as:

  • Supplier concentration,
  • cost relative to total purchases in sales,
  • supplier switching costs,
  • threat of forward integration by suppliers, and
  • threats posed by substitute products.

Generally speaking, businesses should strive for well-balanced relationships with their suppliers–minimizing costs while maximizing quality.

Supplier concentration is especially important when analyzing a businesses purchasing power since it indicates how many different suppliers they have access to. The fewer options businesses have in terms of potential suppliers, the less powerful they become in the negotiation process which often results in higher supplier costs. Additionally, if a business has high dependance on one particular supplier material then this could lead them into unfavorable pricing terms as well as limited product availability and/or innovation opportunities from that single source as well.

If companies are able to diversify their supply chain with multiple suppliers then this diversification may will help them reduce costs and mitigate risk from overly relying on specific vendors or sources of supply materials. Furthermore, being aware of any potential substitutes could offer viable alternative options for businesses should certain supplies run out or become too expensive due to increasing raw material prices etc.. Businesses should also be aware of any threats posed by possible forward integration strategies that particular suppliers might use which would allow them entrer into other areas giving them increased control over pricing matters etc..

Bargaining Power of Buyers

In Michael Porter’s Five Forces model, bargaining power of buyers refers to the pressure that customers can put on businesses to get them to provide higher quality products, better customer service, and low prices. Buyers have the power to choose which company’s products or services they will purchase and the ability to switch suppliers if necessary.

The bargaining power of buyers is based on the following factors:

  • Size of purchases: Larger companies can gain discounts by making larger orders. It is also easier for smaller customers who represent a small fraction of total sales volume to switch suppliers if they don’t receive good service or prices.
  • Buyer concentration: If there are few customers in an industry, they tend to have more bargaining power than industries with many customers. This can be seen in sectors such as telecommunications where there are only a few major players in each country.
  • Substitutes availability: Availability of other product or service alternatives can reduce the buyer’s reliance on any single supplier and give them more bargaining power when it comes to price negotiation.
  • Brand identity or loyalty: Companies with strong brand identity or high levels of customer loyalty are able to charge higher prices because buyers are more likely to stick with their favored companies even when reasonable alternatives may be available elsewhere.
  • Price sensitivity: How sensitive buyers are to price changes affects their ability to influence pricing decisions from suppliers/providers. Those who demand lower prices (due to tight budgets) will have greater purchasng power than those who demand top quality regardless of cost.

Threat of Substitutes

The threat of substitutes refers to the availability of substitute goods that can either serve the same or similar needs of customers as your product or service, substituting in some shape or form. It is one of five identified forces in Michael Porter’s Five Forces Analysis; the other four include threat of new entry, bargaining power of buyers, bargaining power of suppliers and industry competition.

The degree to which customers may be willing to switch from an existing product or service to an available substitute varies from industry-to-industry and person-to-person. If a substitute has easily accessible substitution existence, more attractive pricing points and similar performance characteristics, then current offerings may face a tougher challenge.

A few examples participating in the threat of substitutes include products like:

  • Uber vs Taxi rides
  • Streaming services such as Netflix versus premium cable channels like HBO
  • iPhones against handphones
  • Traditional movers vs budget movements solutions

Ultimately, companies should acquire a thorough understanding of their industry by taking into consideration possibilities for substitute products or services that a customer might opt out for instead.

Rivalry Among Existing Competitors

In Porter’s Five Forces, rivalry among existing competitors is categorized as one of the forces that shape a company’s competitive environment. It is an essential factor to consider when assessing the attractiveness of an industry. The intensity of competition within an industry will drive down prices and reduce profits for companies operating in that space.

One way to measure competition in an industry is by reviewing the current level of consolidation. If there are few competitors, they are more likely to have greater pricing power, which may eventually lead to higher profits. However, the presence of numerous players indicates intense competition and this can have a direct impact on profitability for each firm operating in the same space.

The key factors that determine how much rivalry exists between competing firms include:

  • Market size and growth rate;
  • Availability of substitutes;
  • Switching costs;
  • Buyer/supplier/distributor power and exit barriers;
  • Economies of scale;
  • Product differentiation strategies;
  • Number and size of competitors;
  • Cost structure;
  • Strategy pursued by existing firms, including marketing tactics used, investment schemes and organizational structures adopted.

By understanding these factors, companies can develop strategies for entering or exiting competitive markets in order to maximize their competitive advantage or minimize risk exposure.

Advantages and Disadvantages

Five Force Analysis is a tool used to analyse the competitive market environment of a company. It helps companies to understand the forces that affect their business and develop strategies to remain competitive in the marketplace.

While there are many advantages of using Five Force Analysis, there can also be some disadvantages. Let’s explore both the advantages and disadvantages of this tool:

  • Advantages:
  • Disadvantages:

Advantages of 5 Force Analysis

Five Force Analysis is a framework created by Michael Porter that is used to analyze an industry or market. This tool helps in evaluating the competitive strength and attractiveness of a market, industry, or sector. It is especially useful when launching a new product or making decisions related to mergers and acquisitions. Five Forces Analysis considers five key areas that can affect competitive strategy: buyers, suppliers, new entrants into the market, substitutes, and rivals.

Advantages of 5 Force Analysis:

  • Offers organizations insight into their position in the marketplace relative to their competitors
  • Helps identify potential threats from substitutes or new entrants
  • Enables organizations to assess their bargaining power with suppliers/customers
  • Provides clarity as organizations decide which markets are worth pursuing
  • Adds predictive value as future trends can be tracked using the same set of metrics
  • Enhances decision making capability by helping organizations better understand how actions may shape the industry
  • Makes business more profitable by helping them identify opportunities for expanding market share

Disadvantages of 5 Force Analysis

The Five Forces Analysis is a tool developed by Harvard Business School professor Michael Porter and is used to assess competition in the marketplace. It is based on the idea that a company’s profit potential depends upon the strength of its competitors and its ability to differentiate itself from them.

While Five Forces Analysis can be an invaluable tool, it also has its drawbacks.

  • The Five Forces Analysis relies heavily on assumptions and interpretations of quantitative data and as such, is not always reliable or accurate. This can lead to poor decision-making and incorrect predictions about competitors or market trends.
  • Due to the wide range of factors involved in analyzing competitive forces, it can be difficult for companies to analyze all of these forces within a finite time period.
  • Industry changes such as new entrants or technology shifts may not be included in traditional Five Forces models because they are difficult to predict accurately.

Despite these drawbacks, there are many advantages to using Five Forces Analysis, including the ability for companies to take proactive steps toward staying competitive and gain “first mover” advantage in an industry by understanding it better than their competitors do. Additionally, this helps organizations proactively understand how changes in one aspect of the industry may affect others down the line and how they need to strategize accordingly.

Therefore, although it does have its flaws, when used correctly Five Force Analysis can provide organizations with valuable insight into their competitive environment and enable them to make intelligent market decisions which enable them maintain their edge over their competitors.


The five forces analysis model is an effective tool to identify and analyze the sources of competition in any industry. Organizations can use this method to identify the strengths and weaknesses of their existing market position, and to decide how they can best position themselves within the industry to compete effectively in the future.

By understanding the external environment through this analysis, organizations can better anticipate change and emerging opportunities, as well as create more sustainable competitive strategies. In conclusion, 5 force analysis offers a roadmap for companies to analyze their external environment, strategize more effectively based on their findings and better prepare for long-term success.