Porter's five forces: definition, example and limits

The five forces are a model put forward by Michael Porter, a Harvard professor, in a Harvard Business Review article published in 1979. His thesis is that an industry's profitability depends not only on the fight between direct competitors, but on five pressures competing for the value created.

• Rivalry among existing competitors. The more numerous they are, of similar size and selling similar products, the more they fight on price.
• The threat of new entrants. If entry is easy, any high profit attracts new players who bring it down. Barriers to entry (capital, licences, brand, access to distribution) protect incumbents.
• The threat of substitutes. A different product that meets the same need caps prices: the train for the plane, video calls for business travel.
• The bargaining power of buyers. Customers who are few, large, or who switch supplier easily dictate their prices.
• The bargaining power of suppliers. A supplier that is essential and hard to replace captures part of the margin.

When the five forces are weak, the industry is comfortable and margins are high. When they are strong, even a well-run company struggles to make money.

The five forces are usually drawn as a cross, with rivalry in the centre and the other four around it. The tree below says the same thing and adds, under each force, the two questions that let you assess it quickly.

The goal is not to score each force. It is to spot the one or two that explain the industry's profitability, then ask whether they will strengthen or weaken. In most industries, one or two forces do almost all the work.

Here is the prompt. An investment fund is looking at the budget gym industry and wants to know whether it is structurally profitable. The interviewer supplies the facts as you ask.

You announce that you will go through the five forces quickly to find the ones that matter, then dig into those.

Rivalry. Five national chains share 60% of the market, with almost identical offers. The average monthly fee has gone from €30 to €22 in five years. Competition is on price: high force.

New entrants. Opening a gym costs about €1M and requires no special permit. Any funded player can enter: high force.

Buyers. They are individuals, so none has power alone. But memberships have no commitment and 40% of members leave each year. Switching gym costs nothing: high force, through ease of leaving rather than size.

Suppliers. Equipment makers are numerous. The real supplier is the landlord: rent is 30% of a gym's costs, and good locations are scarce. Medium force, strong locally.

Substitutes. Running, home workout apps, sports clubs. They are free or cheap: medium force.

Reading. Three high forces out of five. The industry should therefore be weakly profitable on average, and the interviewer confirms it: the average operating margin is 5%. You then ask the question the fund really cares about: is everyone at 5%? Answer: the leader is at 15%.

Recommendation. The industry is structurally hard, and nothing suggests the pressure will ease. The fund should not invest for the sake of the industry, but may take an interest in a player that escapes the average. The next step is to understand where the leader's 15% comes from. Two leads to check: long leases on the best locations, which neutralise both the landlord and new entrants, and a scale that spreads head office and advertising costs.

The framework breaks first because it talks about the industry and your client is a company. The example shows it: the industry average is 5% and the leader is at 15%. In many industries, the gap between the best and the worst player exceeds the gap between industries. The five forces say nothing about that gap.

It also breaks because it describes without concluding. Reviewing five forces produces five observations. Knowing that buyer power is "high" does not tell you what to do. In an interview, a candidate who spends three minutes on each force has used half their time without moving towards a recommendation.

Third limit: it is a snapshot. The model describes an industry's balance at a point in time, whereas the interesting questions are often about what disrupts it: a technology, a regulation, a player from elsewhere.

Fourth limit: industry boundaries. The framework assumes you know where the industry starts and stops. Is a home workout app a substitute for gyms or a competitor? Depending on the answer, two forces change level.

Finally, it only sees adversaries. Some players increase the value of your product instead of capturing it, like app developers for a phone maker. The original model has no place for them.

Use the five forces as a silent checklist for the question "is this market attractive?", which is one branch of a market entry or M&A case. You run through them in your head and only present the two that matter to the interviewer.

Phrase them in the words of the case. "I would like to understand whether a new player can open a gym easily, and what keeps a member from leaving" says the same as "barriers to entry and buyer power", while showing that you are thinking about the industry at hand.

Always move from the industry to the company. Once the pressure is identified, ask what allows some players to escape it: scale, a location, a brand, a contract. That is where the recommendation lies.

Finally, look at movement. Ask which force is changing, because that is often why the client is asking the question today.

The FrameLab course files the five forces under business mental models, alongside the value chain and economies of scale: lenses you bring in when the case is about market dynamics, and which fit inside a tailored structure rather than replacing it. You will see how they are really used in the interview cases, where market attractiveness is most often settled in a few well-chosen questions.

For each of the following three industries, name the force that weighs most on profitability and justify it in one sentence.

1. Makers of national biscuit brands, sold through supermarkets.
2. Low-cost airlines.
3. Publishers of accounting software for small businesses.