Porter's Five Forces
Why is it so hard to profit from a restaurant, yet easier in software? Similar investment, similar risk — opposite result. Michael Porter showed it isn't random: five forces together set how competitive an industry is, and how much profit you can pull from it. In this lesson we'll meet the five forc
An industry's profitability is set by five pressures: existing rivals, new entrants, substitutes, buyers and suppliers. The stronger the pressures, the harder it is to profit.
- Porter's Five Forces
- A framework for analyzing an industry by five forces: internal rivalry, new entrants, substitutes, buyer power and supplier power.
- barriers to entry
- Factors that make it hard for new rivals to enter, like high upfront investment or limited access to distribution.
- substitute products
- Products from another industry that meet the same customer need (e.g. a plane vs. a train).
- bargaining power
- How far buyers or suppliers can dictate terms (price, quality, credit) to the firms in an industry.
- internal rivalry
- The intensity of the fight among existing rivals; it sharpens with many players, slow growth and high exit barriers.
- threat of new entrants
- The risk that new players enter and split the profit; it shrinks as entry barriers rise.
- exit barriers
- Factors that make it costly to leave a losing industry (expensive assets, commitments) — so they intensify rivalry.
