What it is for
Porter’s five forces assess how competitive a market is and where the pressure on prices and margins comes from. They help you understand why it is hard to make money in a sector and where it pays to position yourself.
The five forces
- Rivalry among competitors: how many there are, how similar they are, how aggressive they are.
- Threat of new entrants: how easy it is to set up a similar business.
- Substitute products: different alternatives that meet the same need.
- Customer power: how much customers can negotiate or switch supplier.
- Supplier power: how much the business depends on a few key suppliers.
How to read it
For each force you estimate whether the pressure is low, medium or high, and why. Where the pressure is high, you look for defences: differentiating, building customer loyalty, diversifying suppliers, creating barriers such as expertise or reputation.
An example: the electrical supplies shop
High rivalry with other distributors and with online purchases; new entrants held back by the stock they would need; low threat from substitutes; installer customers with medium power because they compare prices; suppliers concentrated in a few brands. The defence chosen: technical advice and on-site delivery, which the lowest online price does not offer.
Mistakes to avoid
- Counting only identical businesses as competitors and forgetting substitutes.
- Rating the forces without explaining why.
- Stopping at the diagnosis without deciding how to defend yourself.
