Five Forces AnalysisWhat is it?Five

Five Forces Analysis
What is it?
Five Forces Analysis is a tool that enables managers to study the key factors in an industry environment that shape that nature of competition: (1) rivalry among current competitors, (2) threat
of new entrants, (3) substitutes and complements, (4) power of suppliers, and (5) power of buyers.
When do we use it?
In a strategic analysis, Five Forces Analysis is an excellent method to help you analyze how competitive forces shape an industry in order to adapt or inflence the nature of competition. Collectively,
the Five Forces determine the attractiveness of an industry, its profi potential, and the ease and
attractiveness of mobility from one strategic position to another. Because of this, the analysis is
useful when fims are making decisions about entry or exit from an industry as well as to identify
major threats and opportunities in an industry.
Why do we use it?
Ths analysis was originally developed by Michael Porter, a Harvard professor and a noted authority on strategy. While all fims operate in a broad socioeconomic environment that includes legal,
social, environmental, and economic factors, fims also operate in a more immediate competitive
environment. Th structure of this competitive environment determines both the overall attractiveness of an industry and helps identify opportunities to favorably position a fim within an industry.
Porter identifid fie primary forces that determine the competitive environment: (1) rivalry among
current competitors, (2) threat of new entrants, (3) substitutes and complements, (4) power of suppliers, and (5) power of buyers.
1. Rivalry. Among the direct and obvious forces in the industry, existing competitors must
fist deal with one another. When organizations compete for the same customers and try
to win market share at the others’ expense, all must react to and anticipate their competitors’ actions.
2. Treat of Entrants. New entrants into an industry compete with established companies
placing downward pressure on prices and ultimately profis. In the last century, Japanese
automobile manufacturers Toyota, Honda, and Nissan represented formidable new entrants
T H E S T R A T E G I S T ’ S T O O L K I T
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to the U.S. market, threatening the market position of established U.S. players GM, Ford,
and Chrysler. Th existence of substantial barriers to entry helps protect the profi potential
of existing fims and makes an industry more attractive.
3. Substitutes and Complements. Besides fims that directly compete, other fims can affct
industry dynamics by providing substitute products or services that are functionally similar
(i.e., accomplishing the same goal) but technically diffrent. Th existence of substitutes
threatens demand in the industry and puts downward pressure on prices and margins.
While substitutes are a potential threat, a complement is a potential opportunity because
customers buy more of a given product if they also demand more of the complementary
product. For example, iTunes was established as an important complement to Apple’s iPod,
and now the fim has leveraged connections among its suite of products including iPhone,
iPad, and the like.
4. Power of Suppliers. Suppliers provide resources in the form of people, raw materials, components, information, and fiancing. Suppliers are important because they can dictate the
nature of exchange and the potential value created farther up the chain toward buyers.
Suppliers with greater power can negotiate better prices squeezing the margins of downstream buyers.
5. Power of Buyers. Buyers in an industry may include end consumers, but frequently the term
refers to distributors, retailers, and other intermediaries. Like suppliers, buyers may have
important bargaining powers that dictate the means of exchange in a transaction.
POTENTIAL
ENTRANTS
SUPPLIERS BUYERS
SUBSTITUTES
INDUSTRY
COMPETITORS
Rivalry Among
Existing Firms
Threat of
New Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Threat of Substitute
Products or Services
F I V E F O R C E S A N A L Y S I S
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According to Porter, successful managers do more than simply react to this environment; they act
in ways that actually shape or “enact” the organization’s competitive environment. For example,
a fim’s introduction of substitute products or services can have a substantial inflence over the
competitive environment, and in turn this may have a direct impact on the attractiveness of an
industry, its potential profiability, and competitive dynamics.
How do we use it?
Step 1. Analyze rivalry among existing competitors.
First identify the competitors within an industry. Competitors may include (1) small domestic
fims, especially their entry into tiny, premium markets; (2) strong regional competitors; (3) big
new domestic companies exploring new markets; (4) overseas fims, especially those that either
try to solidify their position in small niches (a traditional Japanese tactic) or are able to draw on
an inexpensive