Porter's Five Forces

What it is

A model for judging how much profit a market allows the companies in it to keep. Michael Porter of Harvard Business School introduced it in a 1979 Harvard Business Review article, "How Competitive Forces Shape Strategy", expanded it in his 1980 book Competitive Strategy, and restated it in HBR in 2008. Porter's insight was that competition for profit goes well beyond the rivals you name in a battlecard. Five forces shape it: rivalry among existing competitors, the threat of new entrants, the threat of substitutes (different ways of solving the same problem), the bargaining power of buyers, and the bargaining power of suppliers. When the forces are strong, as in airlines, most of the value a market creates flows to customers, suppliers or newcomers. When they are weak, as Porter's 2008 article noted for industries such as software and soft drinks, the companies in the market keep more of it. The model describes the structure of an industry, not the merits of one company's product.

When to use it

• Before entering a new market or segment, to test whether it can support the margins the business case assumes, not just whether customers have the problem.
• Margins or win rates are falling and the team blames one competitor, when the real pressure might be buyers consolidating, a substitute maturing or new entrants cutting price.
• Leadership or the board asks why the market is attractive in a strategy paper or investment case, and needs a structured answer rather than a list of competitors.
• A pricing review where PMM needs to explain how much pricing power the market allows before recommending a change.
• Annual competitive planning, to widen the competitive view from named rivals to substitutes and potential entrants that battlecards miss.

PMM's role

An industry analysis like this usually belongs to corporate strategy, the CEO or a founder writing an investment case; the decision it informs (enter, stay, exit, or change the business model) is theirs. PMM contributes most of the evidence: competitive intelligence on rivals and likely entrants, win/loss data on substitutes customers actually chose, and customer research on how much leverage buyers hold. PMM also applies the result, using it to set positioning against substitutes, to judge pricing headroom and to brief sales on where buyer power will show up in deals. At a start-up, the founding PMM often drafts the analysis for the founders' fundraising or expansion case; at a scaled company, PMM feeds a strategy team's work.

How to read it

• Rivalry among existing competitors is strongest when there are many similar-sized rivals, slow growth, high fixed costs, or products buyers see as interchangeable. Price wars and heavy discounting are its symptoms.
• Threat of new entrants depends on barriers to entry: scale advantages, switching costs, network effects, regulation, access to distribution. Low barriers cap prices, because high margins attract newcomers.
• Threat of substitutes comes from different products that do the same job, often outside your category. For project management software, spreadsheets and email are substitutes. Substitutes set a ceiling on price.
• Buyer power is high when buyers are few and large, purchase in volume, face low switching costs, or can credibly build the solution themselves. Procurement-led enterprise deals are its classic sign.
• Supplier power is high when a few suppliers control a critical input. For software companies, cloud platforms, data providers and app marketplaces can all hold it.
• Read the forces together. The weakest overall structure, not the single strongest force, sets the market's profit potential. Rate each force low, medium or high, with evidence, and then judge the whole.

How to apply it

1. Define the industry precisely. Choose one product market and geography. Porter warned that defining the industry too broadly or too narrowly is the commonest error, because it hides or invents forces.
2. Gather evidence for each force. Use competitive intelligence, analyst reports, win/loss interviews, pricing data and customer research. Note the source for each claim.
3. Rate each force and state why. Score low, medium or high, with two or three pieces of evidence each. A rating without evidence is an opinion.
4. Identify the forces that are changing. Mark which forces are strengthening or weakening over the next two to three years, such as a new technology lowering entry barriers or buyers consolidating.
5. Judge overall attractiveness. Summarise in one paragraph what share of the value the market creates its companies can expect to keep.
6. Find the positioning response. For each strong force, ask how the business could reduce it: switching costs against buyer power, differentiation against rivalry, integrations against substitutes.
7. Hand the analysis to the decision owner with the evidence attached, and record which PMM programmes (pricing, positioning, enablement) change as a result.