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Porter's Five Forces framework diagnoses the profit potential of an industry by identifying the structural pressures that erode returns. The weaker the combined forces, the more attractive the industry.
The five forces are: 1. Rivalry among existing competitors 2. Threat of new entrants 3. Threat of substitutes 4. Bargaining power of buyers 5. Bargaining power of suppliers
Each force independently reduces industry profitability: intense rivalry → price wars; easy entry → competitors flood in; substitutes → caps prices; powerful buyers → force prices down; powerful suppliers → raise input costs.
Key point: the framework analyses the *industry*, not a single firm. A firm in a structurally attractive industry (weak forces) can earn good returns with mediocre strategy. A firm in a structurally terrible industry (strong forces on all sides) must have exceptional competitive advantage just to survive. Choosing which industry to compete in is itself a strategic decision.
Worked example
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