Porter's five forces

The five forces

1. Rivalry among existing competitors: high when there are many similar-sized rivals, slow market growth, little differentiation, high fixed costs or high exit barriers.

2. Threat of new entrants: high when barriers to entry are low (little capital needed, no economies of scale, easy access to distribution, no strong brands or patents).

3. Bargaining power of buyers: high when there are few large buyers, products are standardised, switching costs are low and buyers have good information.

4. Bargaining power of suppliers: high when there are few suppliers, inputs are unique and switching supplier is costly.

5. Threat of substitutes: high when other products meet the same need at a similar price and switching is easy (video calls as a substitute for business flights).

Using the model

• Strong forces mean low industry profitability: firms cannot raise prices (powerful buyers, substitutes, rivalry), costs are pushed up (powerful suppliers), and any high profits attract entrants.
• Firms use the analysis to decide whether to enter an industry and how to weaken the forces: build brands and patents (raise entry barriers), sign long-term contracts or integrate vertically (reduce supplier power), add loyalty schemes and switching costs (reduce buyer power), differentiate (reduce rivalry and substitutes).

The October 2024 WBS13 paper, Question 3, asked about competitive changes in an airline market: the kind of question where the five forces provide structure.

Limitations

• It is a snapshot; industries change quickly, especially with technology.
• It focuses on competition and ignores cooperation, such as partnerships and joint ventures.
• Industry boundaries can be hard to define.
• It looks at the industry, not at the strengths of the individual firm, so use it with SWOT.

Worked example

Assess the bargaining power of suppliers for a small independent café that buys coffee from one specialist roaster under a two-year contract.

1. Only one supplier, and the café's product depends on that coffee: supplier power is high.
2. Switching may be costly during the contract and may change the taste customers expect.
3. But coffee roasters are numerous in most cities, so once the contract ends the café could switch, reducing power.
4. Judgement: high in the short term, moderate in the long term.

Answer: High in the short term because of dependence and the contract; lower in the long term because alternatives exist.

Check yourself

1. Which of these makes the threat of new entrants low?
   • Little capital needed to start
   • Easy access to distribution channels
   • Very large economies of scale enjoyed by existing firms
   • No brand loyalty among customers
   Show answer

   Very large economies of scale enjoyed by existing firms. Scale economies are a barrier to entry: new firms start with higher unit costs.

2. Buyer power is likely to be highest when
   • a few large retailers buy most of the industry's output
   • there are millions of small customers
   • switching suppliers is very costly for buyers
   • the product is unique and patented
   Show answer

   a few large retailers buy most of the industry's output. Concentrated buyers can demand lower prices.

3. Which situation gives suppliers strong bargaining power?
   • There are hundreds of suppliers of a standard product
   • The firm can easily make the component itself
   • There is only one supplier of an essential component
   • Suppliers depend on the firm for most of their sales
   Show answer

   There is only one supplier of an essential component. A single supplier of an essential input can set terms.

4. For a train company on a busy route, which is the best example of a substitute?
   • Another train operator on a different continent
   • Coach travel on the same route
   • A supplier of train seats
   • The government regulator
   Show answer

   Coach travel on the same route. Coaches meet the same need: travel between the two places.

5. Which factor tends to increase rivalry among existing firms?
   • Strong product differentiation
   • A small number of firms with very different products
   • Rapid market growth
   • Slow market growth, so firms can only grow by taking share from each other
   Show answer

   Slow market growth, so firms can only grow by taking share from each other. In a slow-growing market, gains come at rivals' expense.

6. An industry has low entry barriers, many close substitutes and powerful buyers. Porter's model predicts that profitability will be
   • high
   • low
   • unaffected
   • high for new entrants only
   Show answer

   low. Strong forces squeeze profit.

7. Explain one way a business could reduce the bargaining power of its buyers.
   Show answer

   It could differentiate its product or build brand loyalty, for example through a loyalty scheme, so that buyers have fewer alternatives and higher switching costs and cannot easily demand lower prices.. Name the action and explain why buyers then have less power (fewer alternatives, costly to switch).

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (XBS11/YBS11, 2018), Unit 3 Business decisions and strategy and Appendices 6, 7 and 9
• Pearson Edexcel IAL Business WBS13/01 mark scheme, October 2024

Last updated 8 November 2026. Spotted a mistake? Tell us.