Porter’s Five Forces

A Framework for Competitive Strategy Analysis

At Harding Loevner, the first thing we do when researching a company is analyze the industry in which it operates. We believe that whether a business thrives or not depends largely on the competitive structure of its industry.

The framework for this analysis is Harvard University professor Michael Porter’s Five Forces, which were first introduced in a 1979 issue of Harvard Business Review and later detailed in his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors.

In each episode of this six-part video series, we will examine a Porter Force and discuss how we use it to analyze industries.

Featuring leaders from our research team:

Yoko Sakai, CFA
Director of Research

David Glickman, CFA
Co-Deputy Director of Research

Tim Kubarych, CFA
Co-Deputy Director of Research

Bargaining Power of Buyers

The bargaining power of buyers (or customers) is for when buyers pit the industry participants against each other to try to negotiate lower prices and/or higher quality goods or services.

When the buyers are more concentrated than the companies they are buying these goods or services from, they hold more bargaining power than the industry being analyzed, which can lead to lower profits in the industry.

Additional Context

Think: is the bargaining power of buyers too strong to raise prices?

Subcomponents to consider:

  • Buyer concentration vs. firm concentration
  • Buyer volumes
  • Buyer information
  • Ability to backward integrate
  • Substitute products
  • Pull through

Bargaining Power of Suppliers

The bargaining power of suppliers focuses on industry participants’ ability to capture economic value for themselves, as well as how much of that value needs to go to suppliers to create the products or services in an industry.

The more suppliers there are, the lower the input costs for a company and, therefore, the greater profits participants can create.

Additional Context

Think: is it easy for the industry to negotiate prices with suppliers?

Subcomponents to consider:

  • Differences of inputs
  • Switching costs
  • Presence of substitute inputs
  • Supplier concentration
  • Threat of forward integration
  • Cost relative to total purchase
  • Impact of inputs on cost or differentiation

Threat of Substitutes

The threat of substitutes, or substitution risk, is when a customer either does something themselves, goes with a used rather than a new version of a product, or uses a product from another industry.

A substitute provides the same or a similar service as an industry product through a different means.

Substitute products or services limit an industry’s overall profit potential unless the industry participants are able to differentiate and fend off substitution risk through product performance, marketing, or other means.

Additional Context

Think: what are the other products or services that can substitute for what is offered by the industry?

Subcomponents to consider:

  • Switching costs
  • Relative price performance of substitutes
  • Buyer propensity to substitute
  • Threat of forward integration
  • Cost relative to total purchase
  • Impact of inputs on cost or differentiation

Threat of New Entrants

The threat of new entrants is when potential new entrants may come into an industry and compete with the incumbents. If an industry has a high barrier to entry, the stronger an incumbent’s competitive advantage.

Additional Context

Think: what is the likelihood of a new entrant coming into the industry?

Subcomponents to consider:

  • Economies of scale
  • Access to distribution
  • Proprietary product differences
  • Brand identity
  • Switching costs
  • Capital requirements

Rivalry Among Existing Companies

Rivalry among existing companies looks at competition between existing businesses in an industry.

The intensity of this force can be influenced by many factors, such as the maturity of the industry, price competitiveness, product or service differentiation, and more. The more rivalry within an industry, the harder it will be for a company to achieve profitable growth.

Additional Context

Think: what is the competitive landscape among companies within the industry?

Subcomponents to consider:

  • Industry growth
  • Fixed costs/value added
  • Intermittent overcapacity
  • Product differences
  • Brand identity
  • Switching costs
  • Concentration and balance
  • Informational complexity
  • Diversity of competitors
  • Corporate stakes
  • Exit barriers

In Conclusion

For over 40 years, Michael Porter’s Five Forces framework has been used to help those analyzing industries and the companies within them. While other strategic analysis methods, such as SWOT Analysis and the Delta model, provide unique and valuable insights into a business, Porter Forces look beyond a company and into its industry, offering a wider view of external factors that may impact a company’s ability to thrive.

It is important to note that the Porter Forces aren’t solely based around the question, “Is this company attractive because of this specific force?” These forces work in conjunction with each other. No single force determines the health of an industry. Only by analyzing all five forces can an industry’s strengths and weaknesses be determined. It’s imperative to objectively analyze each of the forces to understand the long-term trends within an industry.