Porter's Five Forces

What it does:
Helps an organization understand the amount of profit that is possible within its industry.

Its other names:
Five Competitive Forces, the Five Forces Model.

Where it comes from:
The 1985 book Competitive Strategy: Techniques for Analyzing Competitors and Industries by Michael E. Porter (now available in a 1998 edition from Free Press).

Summary:
Porter believed that an organization's profitability is determined by "five forces" within its industry:

1. Threat of substitutes -- Are there many products from competing firms that customers can choose to buy?
2. Entry of competitors -- How easy is it for new competitors to get started in the industry?
3. Bargaining power of buyers -- Can consumers influence pricing by ordering in volume and bargaining in other ways? (Looking not just at end-user customers but at wholesalers and other intermediaries.)
4. Bargaining power of suppliers -- Can suppliers rigidly control the prices of what they provide, or does the presence of competing suppliers help keep prices low?
5. Rivalry among existing companies -- Is competitive advantage spread evenly among many organizations, or does one dominate the marketplace?

C onsider these five forces when assessing the profitability of a company (or of a discrete product group or division) within its industry and discover new activities that can spur growth. Example: Would acquiring one of your competitors boost your company's position in the marketplace?

What else you need to know:
Some analysts add a sixth force -- government regulation. A Five Forces analysis is an excellent tool to prevent companies from exaggerating their own competitive strength. Example: "We have the greatest product on the marketplace! No one else will be able to compete with us!"