Porter's Five Forces

Definition - What does Porter's Five Forces mean?

Porter five forces is a type of analysis used for industry analysis and the development of strategy. The analysis is designed to understand industry competitiveness and it attractiveness of entry.

Porter’s five forces can be broken into two categories: horizontal and vertical. The horizontal threats, those outside of the company, include threats posed by established competitors, the threat of substitute products being developed, and the threat posed by companies that decide to enter into the industry. The vertical threats are the threats posed by having supplies and customers with a high degree of bargaining power.

Zideate explains Porter's Five Forces

If a company finds that there are too many competitors, it is too easy to develop substitutes or it is too easy for companies to enter the industry, it will likely reconsider its venture into that market. It will also likely reconsider entry into the market if suppliers, competitors or governments are too powerful.

Porter’s five forces have faced criticism because the critics say there are three assumptions that underlie Porter’s model that were not proven:

  • It assumes the three actors in the model - consumers, competitors and suppliers - are unrelated.
  • It assumes the most effective way to create value is to create barriers to entry.
  • It also assumes that participants’ behaviour can be predicted.
While some have criticized Porter’s five forces for the unproven assumptions underlying his model, some, such as Intel CEO Andrew Grove, don’t believe he went far enough - he suggested that "complementors" are the sixth force and explain why strategic alliances within industries arise. Others argue the sixth force is government, the public sector, and lobby and activist organizations.

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