The Porter’s Five Forces framework is used to determine the competitive intensity and attractiveness of an industry, and is relevant in the context of entering a new market, M&A, or starting a new business.
The intensity of competition will depend on the strength of the five competitive forces, however the significance of the forces will vary by industry.
1. Existing competition
How strong is the rivalry among existing firms?
Factors contributing to competitive rivalry include:
- Increased number of firms;
- Slower market growth;
- Low product differentiation;
- Low switching costs;
- Industry wide excess capacity;
- High fixed costs; and
- High exit barriers.
2. Substitutes
What is the price performance of substitutes? Do customers have high switching costs?
3. Barriers to entry
What is the threat posed by new entrants?
Barriers to entry might include capital requirements, economies of scale, network effects, government policy, switching costs, access to suppliers, access to distribution channels, product differentiation, and proprietary product technology.
4. Supplier bargaining power
How much bargaining power do suppliers have?
5. Customer bargaining power
How much bargaining power do customers have?
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