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Unit 4: External Assessment

4.2 Porter’s Five Force Analysis Notes

In 1979, the Harvard Business Review published the article “How Competitive Forces Shape
Strategy” by the Harvard Professor Michael Porter. It started a revolution in the strategy field.
In subsequent decades, “Porter’s five forces” have shaped a generation of academic research and
business practice. This unit explores how competitive analysis can be done using Porter’s five
forces model.

4.2.1 The Five Forces

In essence, the job of the strategist is to understand and cope with competition. However,
managers define competition too narrowly, as if it occurs only among today’s direct competitors.
Yet competition for profits goes beyond established industry rivals. It includes four other
competitive forces as well: customers, suppliers, potential entrants and substitutes.
Figure 4.1: Porter’s Five Forces Model

Potential
entrants

Threat of
new entrants

Bargaining power
of suppliers Industry Bargaining power
competitors
of buyers
Suppliers
Buyers
Rivalry among
existing firms

Threat of
substitute products
or services

Substitutes

The Five Forces model developed by Michnal E. Porter has been the most commonly used
analytical tool for examining competitive environment. According to this model, the intensity
of competition in an industry depends on five basic forces. These five forces are:
1. Threat of new entrants
2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers

5. Threat of substitute products and services.
Each of these forces affects a firm’s ability to compete in a given market. Together, they determine
the profit potential for a particular industry. To understand industry competition and profitability,
one must analyze the industry’s underlying structure in terms of the five forces, as shown in the
Figure 4.1.

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