Review of the Five Competitive Forces

“The Five Competitive Forces That Sharp Strategy” by Michael E. Porter mainly discussed a framework provided by the author in the early 1980s that models an industry as being influenced by five forces: threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and competitive rivalry. These five competitive forces have had a global and far-reaching impact on corporate strategy formulation and become a yardstick for assessing industry profitability. The author undertakes a thorough reaffirmation and extension of his classic work of strategy formulation, which includes substantial new sections showing how to put the five forces analysis into practice. The five forces framework puts a lot of different factors together in a simple model in order to analyze the general competitive situation of an industry. The more powerful these forces in an industry, the lower profit potential it will have. The different combinations of the five forces changes ultimately affect the industry profit potential change. The following review will identify Porter’s five forces in detail, evaluate strengths and limitations of five forces model, and briefly talk about thoughts related to this analysis.

The central theme of this article is all about the five forces analysis. It assumes that there are five important forces that determine competitive power in a business situation. The first force is threat of new entrants. The basic idea behind this force is that new entrants are trying to win a place in the market, which may cause a competition about raw materials and market share with existing enterprises, and eventually may reduce the existing level of corporate profits in the industry. If it costs little in time or money to enter a market and compete effectively, if there are few economies of scale in place, or if the existing enterprise has little protection for key technologies, then new competitors can quickly enter the market and win a place. To preserve a favorable position, a corporation has to establish strong and durable barriers to entry. The second force is threat of substitutes. Substitutes not only limit profits in normal times, but also decrease the profits an industry can reap in good times. Due to the intrusion of