Strategy.

Porter's Five Forces

6 min read·Apply by lunch

The question

In your market, which of the five forces is most threatening to your margins — and does your strategy address it?

The idea

Michael Porter published 'How Competitive Forces Shape Strategy' in the Harvard Business Review in 1979 — and redefined how businesses think about industry analysis. The Five Forces identifies the five structural sources of competitive pressure in any market: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes, and rivalry among existing competitors. Together, they determine the profit potential of an industry — why airlines structurally earn poor returns (under pressure on every force) while pharmaceuticals sustain exceptional margins (IP protection, high barriers, low substitution risk). The framework answers the question every strategy must start with: 'Is this an industry worth competing in — and where does the power actually sit?'

The framework

01
Bargaining power of suppliers.
How much power do your suppliers have to raise prices, reduce quality, or withdraw supply? Power is high when there are few suppliers, inputs are unique or scarce, switching costs are high, or suppliers could forward-integrate into your market. AWS selling cloud services to startups that are deeply integrated with AWS is textbook high supplier power. Ask: if your most critical supplier doubled their prices tomorrow, what would you do?
02
Bargaining power of buyers.
How much power do your customers have to negotiate down price, demand better terms, or switch to a competitor? Power is high when customers are few and large, products are undifferentiated, switching costs are low, or buyers could backward-integrate. B2B SaaS selling to enterprise: the buyer is large, informed, runs multi-vendor RFPs. That's high buyer power. Mitigations: product differentiation, switching costs (data, integrations, workflow lock-in), and multi-stakeholder relationships that make price the last variable.
03
Threat of new entrants.
How easy is it for a new competitor to enter your market? High threat when capital requirements are low, regulation is minimal, distribution is accessible, and brands aren't established. Low threat when you have patents, exclusive data, regulatory moats, or deep customer relationships built over years. Most startups overestimate barriers to entry. Most established businesses underestimate how much those barriers have declined.
04
Threat of substitutes and rivalry.
Substitutes are different products that meet the same underlying need — Zoom substitutes for business travel, video games substitute for TV, a good process substitutes for a software tool. Rivalry is determined by competitor count, market growth rate, product differentiation, and exit barriers. High rivalry plus commodity product equals structural margin destruction. The mitigation for both: become the only credible solution to a specific, well-defined job.

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