Porters 5

PURDUE EXTENSION

EC-722

Industry Analysis: The Five Forces

Cole Ehmke, Joan Fulton, and Jay Akridge

Department of Agricultural Economics

Kathleen Erickson, Erickson Communications

Sally Linton

Department of Food Science

Overview

Assessing Your Marketplace

The economic structure of an industry is not an accident.

Its complexities are the result of long-term social trends and

economic forces. But its effects on you as a business manager

are immediate because it determines the competitive rules

and strategies you are likely to use. Learning about that

structure will provide essential insight for your business

strategy.

Michael Porter has identified five forces that are widely used to

assess the structure of any industry. Porter’s five forces are the:

• Bargaining power of suppliers,

• Bargaining power of buyers,

• Threat of new entrants,

• Threat of substitutes, and

• Rivalry among competitors.

Together, the strength of the five forces determines the profit

potential in an industry by influencing the prices, costs, and

required investments of businesses—the elements of return

on investment. Stronger forces are associated with a more

challenging business environment. To identify the important

structural features of your industry via the five forces, you

conduct an industry analysis that answers the question,

“What are the key factors for competitive success?”

Using This Publication

This publication describes five forces that influence an

industry. The publication includes a set of application

questions that will help you evaluate the structure of the

industry you are in or are considering entering. The more you

understand about the strength of each force, the better able

you will be to respond.

The forces affecting profitability are often beyond your

control, so you must choose tactics to respond to the forces

rather than try to change the business environment. This

publication offers insight on specific tactics you need for

success when facing competitive situations. While you may

assess any one force individually, you will gain the most value

by assessing all five of the forces

With each force, a “Perspective” feature illustrates the force

for an Indiana wine entrepreneur by evaluating that marketplace.

To avoid repetition, we use the word “product” to mean

either a product or a service. Read more about the five forces

in Porter’s book, Competitive Strategy.

Audience: Business managers seeking to assess

the nature of their marketplace

Content: Presents five forces that influence the

profitability of an industry

Outcome: Reader should understand the forces

and be able to counter them with appropriate

tactics

2 Purdue Extension • Knowledge to Go

Bargaining Power