Porter’s five forces in practice: assessing an industry step by step

Porter’s five forces is one of the best-known tools in strategy, and one of the most often misused. Many teams fill in five boxes with a few words each, rate most of them “medium” and move on. Used properly, the framework answers a sharper question: why is this industry as profitable as it is, and what would change that?

This guide walks through a five forces analysis in four steps, with a worked illustration, the mistakes that weaken most analyses, and a note on when the tool is the wrong choice.

What the five forces are

Michael Porter of Harvard Business School first published the framework in Harvard Business Review in 1979 and revisited it in a 2008 HBR article, The Five Competitive Forces That Shape Strategy. His central point is that competition for profit goes beyond the firms you think of as rivals. The value an industry creates can be taken by any of five forces:

• Rivalry among existing competitors, through price cuts, advertising, new products and service improvements.
• Bargaining power of buyers, who push prices down or demand more for the same price.
• Bargaining power of suppliers, who push input prices up or offer worse terms.
• Threat of new entrants, who add capacity and compete for share.
• Threat of substitutes, products that meet the same underlying need in a different way.

Strong forces squeeze an industry’s profits. Weak forces leave room for them. The analysis is about the industry, not about any one company, which is why it works best as a starting point for strategy rather than the whole of it.

Step 1: define the industry

Most weak analyses go wrong here. If you define the industry too broadly, such as “food”, the forces become too vague to say anything useful. Define it too narrowly, such as “oat milk sold in one supermarket chain”, and you miss substitutes and entrants that matter.

Set two boundaries before you start:

• Product scope. Which products or services are in, and which are substitutes outside the industry?
• Geographic scope. Is competition local, national or global? A plumber competes locally. A software firm may compete worldwide.

A practical test: if two segments would look very different on several forces (different buyers, different suppliers, different barriers), treat them as separate industries and analyse each one.

Step 2: gather evidence on each force

For each force, list the drivers and find evidence for each one. The Institute for Strategy and Competitiveness at Harvard Business School and the wider literature summarised on Wikipedia point to the drivers in the table below.

Write each finding as a sentence with a source, not a rating. “The top three supermarkets account for most of our sales and can delist us at short notice” tells a reader far more than “buyer power: high”.

Step 3: weigh the forces and the factors behind them

The forces are rarely equal. In most industries one or two of them explain most of the profit picture. Ask which force, if it changed, would move profits the most. That is where the strategy needs to focus.

Check your conclusion against what incumbents actually earn. If your analysis says the forces are weak but most established firms make thin margins over several years, something is missing.

Then look at the factors that shift the forces. Porter treats government policy, technology, complements and industry growth as factors that shape the five forces rather than as forces in their own right. A new regulation can raise entry barriers. A new technology can create a substitute. His 2008 article also warns that a fast-growing industry is not always a profitable one, because growth attracts entrants. Industry structure changes over time, so note which forces are moving and in which direction.

Step 4: turn the analysis into choices

The 2008 article describes several ways to use the analysis. Each one gives you a question to answer:

1. Position the company where the forces are weakest, for example in a segment with less price-sensitive buyers or fewer substitutes.
2. Defend against the strongest force, for example by reducing dependence on one powerful supplier.
3. Exploit changes in the forces before rivals do.
4. Reshape the structure in your favour, for example by raising switching costs or working with rivals to grow the market without starting a price war.

If your analysis does not change at least one decision, it was a description, not a strategy tool.

A worked illustration

An example (illustration only). A small UK coffee roaster sells beans wholesale to independent cafés in two cities and wants to know whether to expand into a third.

• Industry definition: wholesale speciality coffee for independent cafés in the UK. Supermarket retail coffee is a separate industry with different buyers.
• New entrants: moderate threat. A small roaster can be set up without large capital, but building trust with cafés takes years.
• Suppliers: green coffee importers are numerous, so supplier power is fairly weak, although world coffee prices affect everyone.
• Buyers: cafés are small, but they can switch roaster easily and compare prices. Buyer power is the strongest force.
• Substitutes: tea, chains with their own roasting, and capsule systems in offices. A slow but present threat.
• Rivalry: many small roasters with similar products. Price competition is common.

Conclusion: profits in this industry are limited mainly by buyer power and rivalry. Expanding into a third city adds more of the same exposure. A better move might be to lower buyer power first, for example through equipment servicing and barista training that make switching roaster harder, and then expand.

Common mistakes

• Ratings without evidence. A slide of “high, medium, low” with no facts behind it cannot be challenged or used.
• Analysing a company instead of an industry. Firm strengths belong in a separate analysis of resources and capabilities.
• Treating every factor as a sixth force. Government, technology and complements matter, but through their effect on the five forces. Some writers, such as Brandenburger and Nalebuff, do argue for complements as a separate force, so state which view you are using.
• A one-off snapshot. The forces move. Revisit the analysis when regulation, technology or a major player changes.
• Stopping at the analysis. The value is in what you do differently afterwards.

When to use it, and when not to

Use the five forces when you are deciding whether to enter an industry, explaining why margins are what they are, judging an acquisition target’s market, or planning how to defend profits. It is most useful in industries with clear boundaries.

Be careful in other cases. Critics note that the model assumes buyers, suppliers and rivals act independently, and that it says little about what managers should do once a force is found to be strong. It also says nothing about a company’s own resources. Consultants often pair it with value chain analysis, a PESTLE scan of the wider environment and a closer look at named competitors. In very fast-moving, technology-driven markets, the industry boundary itself may be changing, so treat any conclusion as provisional and check it often.