Porter's Five Forces is a framework for judging how competitive an industry is, using five forces: rivalry among existing competitors, the threat of new entrants, the threat of substitutes, supplier bargaining power and customer bargaining power. The stronger the forces, the tougher it gets to make a profit in that market.
Harvard Business School professor Michael Porter first laid out the model in a 1979 article in the Harvard Business Review. His point, as Shopify summarises it, was that competition is wider than the rival companies in your field. Porter was mainly thinking about competition on a large scale, but Shopify argues the framework holds for businesses of any size, from a market stall to a multinational.
The five forces, one by one
1. Rivalry among existing competitors
These are the businesses making similar products for a similar group of customers. Shopify's small-business example is a candle maker selling at a local farmers market. The competition isn't only the other small candle makers on the next stall. It's also big brands such as Yankee Candle and Bath & Body Works, in shops and online.
2. Threat of new entrants
This is about the competitors who don't exist yet. The question is how high the barrier to entry is, and Shopify says that depends on the capital required, regulation and economies of scale. A low barrier isn't purely bad news. It's what lets people start an ecommerce business with modest investment. But it also means others can follow you in just as easily.
3. Threat of substitutes
Substitutes aren't direct rivals. They're similar but different ways of meeting the same need. Shopify's examples: streaming platforms such as Netflix eroded cable TV's dominance, and Spotify did something similar to a music industry that had already been disrupted by earlier shifts from vinyl to cassette to CD. Technological disruption often arrives through this force.
4. Supplier bargaining power
Suppliers affect how profitable your whole market can be. When many suppliers compete for your business, their power is low. When you rely on a handful of them in a concentrated market, their power is high and they can charge you more.
5. Customer bargaining power
Buyer power varies a lot by industry. Shopify's example is a grocery store in a neighbourhood with plenty of alternatives. Products aren't very different from one shop to the next, comparing prices is easy, so customers keep prices low and demand good service, or they go elsewhere.
The catch: the model only works if you rate each force accurately
Shopify is blunt about this. Porter's Five Forces has no numerical scale. It's a qualitative judgement, and if you make decisions believing customer bargaining power is low and you're wrong, that could mean serious losses. These are Shopify's signals for rating each force:
| Force | Strong when | Weak when |
|---|---|---|
| Rivalry among competitors | Crowded market, many rivals, low growth, high fixed costs | Few rivals, low fixed costs, low exit barriers |
| Threat of new entrants | Low barrier to entry, low customer loyalty, little regulation | High barrier, high loyalty, government regulation |
| Threat of substitutes | Low switching costs, low loyalty, undifferentiated products | High switching costs, high loyalty, highly differentiated products |
| Supplier bargaining power | Few suppliers, high switching costs, differentiated products | Many suppliers, low switching costs, undifferentiated products |
| Customer bargaining power | Many alternatives, high price sensitivity, low switching costs | Few alternatives, low price sensitivity, high switching costs |
Notice how often switching costs and loyalty appear. They show up in three of the five rows, which is why brand and customer experience matter so much more in this model than people expect.
How to use Porter's Five Forces in four steps
- Identify the key players in your industry. Start with a competitive analysis so you know how rivals behave. This guide to competitive analysis and the tools for it walks you through it.
- Rate each force as strong, medium or weak, using the signals in the table above.
- Decide your response to each force. If you're just starting out, use the result to decide whether to enter a market segment or target another one. If you're already in the industry, use it to find a competitive advantage.
- Reassess regularly. Shopify warns that none of the forces is static. A new entrant, technology or regulation can shift them quickly, so don't run today's strategy on years-old analysis.
Shopify's founder example shows step one in practice. When several distributors closed and consolidation pushed prices up, the founder of Plant Material checked online pricing before deciding whether to carry a product, then travelled to Japan to build direct relationships with manufacturers and used platforms like Faire to spread supply beyond traditional distributors. That's supplier power being managed, not just noted.
A worked example: Shopify's loose-leaf tea seller
Shopify walks through a retailer selling loose-leaf tea. That business would probably see highs in customer bargaining power, the threat of new entrants, rivalry among existing competitors and the threat of substitutes, so it needs to market aggressively and intelligently to succeed.
Want AI doing the heavy lifting in your marketing?
I build the systems that handle the boring 80 percent, so you get your week back. Done properly, with the human kept in.
There's one low force on the list, and that's where the opportunity sits. If supplier bargaining power is weak, the tea seller can keep input costs low, and Shopify says that could justify a higher customer acquisition cost while still coming out ahead. That's the real value of the exercise: it tells you where you can afford to spend.
Shopify gives a second, shorter example for the automotive industry: high rivalry, a low threat of new entrants, a low to medium threat of substitutes, high supplier power and low to medium customer power.
Porter's Five Forces and SWOT
CFI describes Porter's Five Forces and PESTEL as the frameworks used alongside a SWOT analysis to understand the external environment, which is the opportunities and threats half of the grid. The five forces tell you how hard the market is. Your brand positioning is how you answer that.
Where I come in
I help SaaS marketing teams and small businesses turn this kind of analysis into positioning and messaging. If buyer power is high and switching costs are low, the answer is usually a sharper reason to choose you and a better reason to stay, and that's marketing work. You can see how I work on my work with me page.
My verdict on Porter's Five Forces
Before you price a product or launch into a market, score each force on paper. In my experience, the two that small businesses underestimate are substitutes and buyer power, because they're busy watching the rivals they already know. Write one sentence on what each rating means for your prices and margins, and you've got something you can act on.
Frequently asked questions
What are Porter's five forces?
Rivalry among existing competitors, the threat of new entrants, the threat of substitute products or services, supplier bargaining power and customer bargaining power.
Who created Porter's Five Forces?
Harvard Business School professor Michael Porter, who first laid out the model in a 1979 article in the Harvard Business Review.
Can a small business use Porter's Five Forces?
Yes. Shopify says the framework holds for businesses of any size, and gives small-business examples such as a farmers market candle maker and a loose-leaf tea seller.
How do you rate each force?
It's a qualitative judgement rated high, medium or low. Shopify's signals include the number of rivals, barriers to entry, switching costs, customer loyalty and price sensitivity.
