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What Is "Porter's 5 Forces Analysis"?

Porter identified five competitive forces that shape every single industry and market. These forces help us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry. The following image shows the relationship between the different competitive forces.

Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:

Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper programs)
High fixed costs
Scarcity of resources
High costs of switching companies
Government restrictions or legislation


Power of Suppliers - This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power:

There are very few suppliers of a particular product
There are no substitutes
Switching to another (competitive) product is very costly
The product is extremely important to the buyer, they can not do without it
The supplying industry has a higher profitability than the buying industry


Power of Buyers - This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power:

Small number of buyers
Purchases of large volumes
Switching to another (competitive) product is simple
The product is not extremely important to the buyer, they can do without it for a period of time.
Customers are price sensitive


Availability of Substitutes - What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low,...