# Porter's Five Forces

**Creator/Source**: Michael Porter, 1979
**Core Value**: Analyze industry competitive structure and profit potential, identifying the five sources of competitive pressure
**One-liner**: Industry profitability is not determined by the product itself, but by the interplay of five competitive forces

---

> **Case Boundary**: Company/industry cases in this file are illustrative examples for framework structure and reasoning, not current factual claims by Alpha Insights. Before reusing any numbers, shares, dates, or conclusions in a live study, re-check sources and record them in the Evidence Claim Ledger.

## Overview

Porter's Five Forces model was proposed by Harvard Business School professor Michael Porter in 1979 and is the most classic industry competitive structure analysis tool in strategic management. The framework holds that an industry's profitability is not determined by the product itself, but by the interplay of five competitive forces.

**Core Design Principles**:
- **Structure Determines Behavior**: Industry competitive structure determines firms' strategic behavior and profit margins
- **Five-Force Interplay**: Industry attractiveness is determined by the combined intensity of five forces
- **Dynamic Perspective**: Force intensities change over time and require continuous monitoring

**Best Use Cases**:
- Core stage of industry research (typically after PESTEL)
- Assessing industry attractiveness and entry feasibility
- Competitive intensity analysis and competitive strategy formulation
- Industry screening before market entry

**Output Value**:
- Systematic assessment of five force intensities (Strong/Medium/Weak)
- Comprehensive judgment of industry attractiveness
- Competitive strategy recommendations for each force
- Direct input into SWOT analysis Threats (T) quadrant

**Relationship with SCP Framework**:
- **SCP**: More macro and academic, suitable for structural analysis in heavily regulated industries
- **Five Forces**: More micro and practical, suitable for strategy analysis in competitive industries
- In this Skill, Five Forces typically serves as a detailed analysis tool within the "Structure (S)" dimension of the SCP framework

---

## I. Framework Overview

### 1.1 Five Forces Model Structure

```
┌─────────────────────────────────────────────────────────────┐
│                  Porter's Five Forces                        │
├─────────────────────────────────────────────────────────────┤
│                                                             │
│                Threat of New Entrants                        │
│                         ↑                                   │
│                         │                                   │
│  Supplier         ──────┼────────  Buyer                    │
│  Bargaining Power       │         Bargaining Power          │
│         →               │               ←                   │
│                         │                                   │
│               Industry Rivalry                              │
│        (Rivalry Among Existing Competitors)                  │
│                         │                                   │
│                         ↓                                   │
│              Threat of Substitutes                          │
│                                                             │
└─────────────────────────────────────────────────────────────┘
```

### 1.2 Five Forces vs. SCP Framework

| Dimension | SCP Framework | Porter's Five Forces |
|-----------|-------------|---------------------|
| Positioning | More macro, academic | More micro, practical |
| Focus | Structure → Conduct → Performance causal chain | Direct analysis of competitive forces |
| Application | Industrial economics research | Business strategy analysis |
| Relationship | Five Forces can be seen as a refinement of "Structure" in SCP | SCP can serve as theoretical supplement to Five Forces |

**Positioning in This Skill**:
- **SCP**: Used as the primary framework for industry research (causal analysis)
- **Five Forces**: Used for competitive intensity analysis (micro competitive structure)

### 1.3 Five Forces and Industry Profitability

```
Five Forces Intensity ──→ Industry Profit Potential

Strong forces → Profits squeezed → Low industry attractiveness
Weak forces → Large profit margins → High industry attractiveness

Ideal state: All five forces weak (e.g., premium baijiu)
Worst state: All five forces strong (e.g., airlines)
```

---

## II. Five Forces Detailed Analysis

### 2.1 Force 1: Threat of New Entrants

**Definition**: The likelihood of new competitors entering the industry and their impact on existing players.

**Determining Factors**:
```
┌─────────────────────────────────────────────┐
│          Barriers to Entry                   │
├─────────────────────────────────────────────┤
│                                             │
│  1. Economies of Scale                      │
│     • Incumbent scale advantages            │
│     • Can new entrants quickly reach         │
│       critical mass                          │
│                                             │
│  2. Capital Requirements                    │
│     • Fixed investment needed for entry      │
│     • R&D, marketing sunk costs             │
│                                             │
│  3. Switching Costs                         │
│     • Cost for users to change suppliers     │
│     • Learning, contract, integration costs  │
│                                             │
│  4. Distribution Channels                   │
│     • Are existing channels monopolized      │
│     • Difficulty for new entrants to build   │
│       channels                               │
│                                             │
│  5. Policy Barriers                         │
│     • Licenses, qualifications, regulatory   │
│       requirements                           │
│     • Industry standards, certifications     │
│                                             │
│  6. Brand/Differentiation                   │
│     • Existing brand loyalty                 │
│     • Degree of product differentiation      │
│                                             │
│  7. Cost Advantages (Independent of Scale)  │
│     • Proprietary technology                 │
│     • Learning curve effects                 │
│     • Resource advantages                    │
│                                             │
└─────────────────────────────────────────────┘
```

**Threat Level Assessment**:
| Barrier Strength | Entry Threat | Industry Impact |
|-----------------|-------------|-----------------|
| High barriers | Low threat | Existing players protected |
| Medium barriers | Medium threat | Potential entrants observing |
| Low barriers | High threat | Profits rapidly diluted |

**Typical Cases**:
| Industry | Entry Barriers | Main Barrier Sources | Case |
|----------|---------------|---------------------|------|
| Premium baijiu | High | Brand, craftsmanship, time | Moutai moat |
| Chip manufacturing | High | Capital, technology, talent | SMIC |
| Restaurants | Low | Almost no barriers | Extremely fragmented competition |
| Ride-hailing | Medium → High | Scale, capital, policy | Didi's victory |

### 2.2 Force 2: Bargaining Power of Suppliers

**Definition**: Suppliers' ability to raise prices or lower quality.

**Signals of Strong Supplier Bargaining Power**:
```
┌─────────────────────────────────────────────┐
│  Signals of Strong Supplier Bargaining Power │
├─────────────────────────────────────────────┤
│                                             │
│  ✓ High supplier concentration (few dominate)│
│  ✓ Highly differentiated/high switching costs│
│  ✓ Suppliers can forward integrate           │
│  ✓ Downstream industry not an important      │
│    customer for suppliers                    │
│  ✓ Supplies significantly affect downstream  │
│    quality                                   │
│  ✓ Supplies are scarce/irreplaceable         │
│                                             │
└─────────────────────────────────────────────┘
```

**Typical Cases**:
| Industry | Supplier | Bargaining Power | Reason |
|----------|---------|-----------------|--------|
| Smartphones | TSMC | Strong | Advanced process monopoly |
| Computers | Intel/AMD | Strong | CPU duopoly |
| Restaurants | Food suppliers | Weak | Suppliers are fragmented |
| Airlines | Boeing/Airbus | Strong | Duopoly, high switching costs |

### 2.3 Force 3: Bargaining Power of Buyers

**Definition**: Customers' ability to push prices down, demand higher quality, or more services.

**Signals of Strong Buyer Bargaining Power**:
```
┌─────────────────────────────────────────────┐
│  Signals of Strong Buyer Bargaining Power    │
├─────────────────────────────────────────────┤
│                                             │
│  ✓ High buyer concentration (few large       │
│    customers)                                │
│  ✓ Large purchase volumes (high % of         │
│    supplier revenue)                         │
│  ✓ Standardized products / low               │
│    differentiation                           │
│  ✓ Low switching costs                       │
│  ✓ Buyers can backward integrate             │
│  ✓ Products have low impact on buyer quality │
│  ✓ Buyer information transparency (know      │
│    cost structures)                          │
│                                             │
└─────────────────────────────────────────────┘
```

**Typical Cases**:
| Industry | Buyer | Bargaining Power | Reason |
|----------|------|-----------------|--------|
| Auto parts | OEMs | Strong | Large volumes, can integrate |
| Cloud services | Enterprises | Medium | Some negotiation room |
| Cloud services | SMEs | Weak | Standardized, switching costs |
| Luxury goods | Individual consumers | Weak | Brand premium, no substitutes |

### 2.4 Force 4: Threat of Substitutes

**Definition**: The threat from other products or services that satisfy the same need.

**Key Point**:
- Substitutes are not same-category competition but cross-category replacement
- The core of substitution is "satisfying the same need"

**Substitution Types**:
| Substitution Type | Description | Case |
|------------------|-------------|------|
| Functional substitution | Different products achieving the same function | Bike-sharing vs. buses |
| Scenario substitution | Different scenarios satisfying the same need | Food delivery vs. instant noodles |
| Technological substitution | New technology replacing old technology | Digital vs. film |
| Time substitution | Competition for different time allocation | Douyin vs. long-form video |

**Substitute Threat Assessment**:
```
Substitute Threat = Substitute Value-for-Money × Switching Willingness

Substitute Value-for-Money = Substitute Performance / Substitute Price
Switching Willingness = Inverse function of Switching Cost
```

**Typical Cases**:
| Original Product | Substitute | Threat Level | Description |
|-----------------|-----------|-------------|-------------|
| Film | Digital | High (already replaced) | Technology disruption |
| Taxis | Ride-hailing | High (already replaced) | Model innovation |
| Instant noodles | Food delivery | High | Scenario substitution |
| Newspapers | News apps | High (already replaced) | Media transformation |

### 2.5 Force 5: Rivalry Among Existing Competitors

**Definition**: The intensity of competition among existing firms in the industry.

**Signals of Intense Rivalry**:
```
┌─────────────────────────────────────────────┐
│          Signals of Intense Rivalry          │
├─────────────────────────────────────────────┤
│                                             │
│  ✓ Many competitors of similar size          │
│  ✓ Slow industry growth (zero-sum game)      │
│  ✓ High fixed costs (incentive to cut prices)│
│  ✓ Low product differentiation (price wars)  │
│  ✓ Excess capacity                           │
│  ✓ High exit barriers (hard to leave)        │
│  ✓ Diverse competitor backgrounds (divergent │
│    strategies)                               │
│                                             │
└─────────────────────────────────────────────┘
```

**Competitive Tactics**:
| Tactic | Description | Typical Case |
|--------|-------------|-------------|
| Price war | Price cuts to grab share | Pinduoduo vs. Taobao |
| Advertising war | Marketing spend competition | Coca-Cola vs. Pepsi |
| Product war | New product iteration | Smartphone industry |
| Channel war | Channel competition | Home appliance industry |
| Talent war | Key talent competition | Internet industry |

---

## III. Five Forces Analysis Execution Steps

### Step 1: Define Industry Boundaries

**Goal**: Clarify the scope of the industry being analyzed.

**Definition Dimensions**:
```
1. Product Boundaries
   • Core product/service
   • Product category scope

2. Geographic Boundaries
   • National vs. regional market
   • Domestic vs. global market

3. Customer Boundaries
   • B2B vs. B2C
   • Premium vs. mid-range vs. budget
```

### Step 2: Analyze Each Force

**Goal**: Assess the intensity of each of the five forces.

**Assessment Template**:
```
Force Name: [e.g., Supplier Bargaining Power]

1. Force Intensity: [Strong/Medium/Weak]
2. Key Driving Factors:
   • Factor 1: [description]
   • Factor 2: [description]
3. Evidence Support:
   • Data/cases
4. Trend Assessment:
   • Direction of change over the next 1-3 years
```

### Step 3: Draw the Five Forces Diagram

**Goal**: Visualize force intensities.

```
Example: Premium Baijiu Industry

                    New Entrants
                    Threat: Low
                       ↑
                       │
    Suppliers ─────────┼────────── Buyers
    Power: Medium      │      Power: Weak
          →            │            ←
                       │
                 Industry Rivalry
                 Intensity: Medium
                       │
                       ↓
                  Substitutes
                  Threat: Medium
```

### Step 4: Assess Industry Attractiveness

**Goal**: Holistic judgment of industry profit potential.

**Assessment Matrix**:
```
Five Forces Intensity Distribution ──→ Industry Attractiveness

All 5 forces weak → Very high attractiveness (e.g., Moutai)
4 weak + 1 medium → High attractiveness
3 weak + 2 medium → Medium attractiveness
2 weak + 3 medium → Low attractiveness
1 weak + 4 strong → Very low attractiveness (e.g., airlines)
```

### Step 5: Formulate Competitive Strategy

**Goal**: Develop response strategies based on Five Forces analysis.

**Strategic Choices**:
| Force | Strategic Goal | Specific Strategies |
|-------|---------------|---------------------|
| New entrants | Raise barriers | Scale, brand, patents, policy |
| Suppliers | Reduce dependence | Diversify, backward integrate, joint procurement |
| Buyers | Increase stickiness | Differentiate, raise switching costs, value-added services |
| Substitutes | Strengthen uniqueness | Technology leadership, brand loyalty, ecosystem lock-in |
| Existing rivalry | Differentiate | Positioning, capability, model differentiation |

---

## IV. Output Format

### 4.1 Five Forces Analysis Report

```markdown
## Porter's Five Forces - [Industry Name]

### Industry Definition
- **Product boundaries**: [...]
- **Geographic boundaries**: [...]
- **Customer boundaries**: [...]

### Five Forces Analysis
| Force | Intensity | Key Drivers | Trend |
|-------|----------|------------|-------|
| Threat of new entrants | Strong/Med/Weak | ... | Strengthening/Weakening |
| Supplier bargaining power | Strong/Med/Weak | ... | Strengthening/Weakening |
| Buyer bargaining power | Strong/Med/Weak | ... | Strengthening/Weakening |
| Threat of substitutes | Strong/Med/Weak | ... | Strengthening/Weakening |
| Existing rivalry | Strong/Med/Weak | ... | Strengthening/Weakening |

### Industry Attractiveness
- **Overall assessment**: [Very High/High/Medium/Low/Very Low]
- **Key basis**: [...]
- **Profitability outlook**: [...]

### Strategic Recommendations
| Force | Recommended Strategy | Priority |
|-------|---------------------|----------|
| New entrants | ... | P0/P1/P2 |
| Suppliers | ... | P0/P1/P2 |
| Buyers | ... | P0/P1/P2 |
| Substitutes | ... | P0/P1/P2 |
| Existing rivalry | ... | P0/P1/P2 |
```

---

## Research Supplements: Five Forces Analysis Best Practices

Based on research from authoritative sources, the keys to successful Five Forces analysis include:

### 1. Limitations of Five Forces

| Limitation | Description | Mitigation |
|-----------|-------------|-----------|
| Static perspective | Traditional Five Forces is a static snapshot | Add time dimension, analyze force change trends |
| Ignores complements | Does not consider the impact of complements | Add "sixth force" analysis (complement power) |
| Ignores ecosystems | Does not consider platform ecosystems | Combine with Platform Canvas for ecosystem analysis |
| Ambiguous definitions | Industry boundary definition affects results | Define from demand perspective, avoid overly narrow scope |
| Innovation blind spot | Difficult to explain disruptive innovation | Supplement with Disruption Theory analysis |

### 2. Data Source Recommendations

| Force | Recommended Data Sources |
|-------|------------------------|
| Threat of new entrants | Business registration databases (new company registrations), VC/PE investment data, policy access documents |
| Supplier bargaining power | Public company financials (supplier concentration), industry association reports, supply chain surveys |
| Buyer bargaining power | Customer concentration data, channel surveys, price sensitivity testing |
| Threat of substitutes | Cross-category sales data, user substitution behavior surveys, technology substitution trend reports |
| Existing rivalry | Market share data (brokerage research), competitive behavior tracking (price/marketing/product) |

### 3. Entry Barrier Quantification Methods

Traditional Five Forces analysis tends toward qualitative description. Quantitative indicators are recommended:

| Barrier Type | Quantitative Indicator |
|-------------|----------------------|
| Economies of scale | CR5/CR10 concentration, leading firms' revenue scale |
| Capital requirements | Leading firms' fixed assets / R&D spend / marketing costs |
| Switching costs | User retention rate, contract terms, integration depth |
| Distribution channels | Channel coverage rate, exclusive agreement ratio |
| Policy barriers | Number of licenses, qualification acquisition cycle, compliance costs |
| Brand barriers | Brand awareness surveys, NPS (Net Promoter Score) |

### 4. China Internet Industry Five Forces Characteristics

Five Forces analysis for China's internet industry requires special attention to:

| Characteristic | Description | Analysis Focus |
|---------------|-------------|---------------|
| Capital-driven | VC/PE accelerates industry consolidation | Focus on funding rounds, investor backgrounds |
| Winner-take-all | Significant network effects | Analyze user scale, data moats |
| Ecosystem competition | Dominated by major ecosystems (Tencent/Alibaba/ByteDance) | Consider ecosystem positioning and alignment logic |
| Policy sensitivity | Regulatory policies change rapidly | Monitor antitrust, data security policies |
| Speed-first | Rapid iteration, burning cash for growth | Focus on growth velocity rather than short-term profitability |

### 5. Five Forces Intensity Scoring Matrix

A 1-5 point scale is recommended for quantifying force intensity:

```
Scoring Standards:
1 point = Extremely weak force (very large industry profit margins)
2 points = Relatively weak force (large industry profit margins)
3 points = Moderate force (average industry profit margins)
4 points = Relatively strong force (small industry profit margins)
5 points = Extremely strong force (minimal industry profit margins)

Composite Assessment:
- Total 5-10 points: Very high attractiveness industry
- Total 11-15 points: High attractiveness industry
- Total 16-20 points: Medium attractiveness industry
- Total 21-25 points: Low attractiveness industry
```

---

## Case Study: China Coffee Industry Five Forces Analysis (2024)

**Industry Definition**: China's freshly brewed coffee market (excluding RTD/instant), national geographic scope, 2024 market size ~180B RMB.

### Force-by-Force Analysis

| Force | Intensity | Score | Key Basis |
|-------|----------|-------|-----------|
| Existing rivalry | **Extremely strong** | 5/5 | Luckin ~18,000 stores vs. Starbucks ~7,000 stores; 9.9 RMB price wars normalized; CR2 ~55% but competition white-hot |
| Threat of new entrants | **Medium** | 3/5 | Low capital threshold (single store 300-500K RMB), but brand barriers + scale effects create obstacles; Cotti 7,000+ stores rapidly expanding but struggling with per-store profitability |
| Threat of substitutes | **Medium** | 3/5 | New tea drinks (Heytea, Nayuki) diverting young users; convenience store coffee (FamilyMart, 7-Eleven) capturing low-price segment; RTD coffee (Saturnbird, Sumida River) occupying home scenarios |
| Supplier bargaining power | **Low** | 1/5 | Coffee beans are a global commodity, supply adequate with transparent pricing; milk suppliers fragmented; equipment suppliers in fierce competition |
| Buyer bargaining power | **High** | 4/5 | Extremely high user price sensitivity (clear 9.9 vs. 30+ RMB split); switching costs near zero (multiple apps on phone for price comparison); multi-platform coupons further suppress actual prices |

### Five Forces Diagram

```
                    New Entrants
                    Threat: Medium (3/5)
                       ↑
                       │
    Suppliers ─────────┼────────── Buyers
    Power: Low (1/5)   │     Power: High (4/5)
          →            │            ←
                       │
                 Industry Rivalry
               Intensity: Very Strong (5/5)
                       │
                       ↓
                  Substitutes
                  Threat: Medium (3/5)

Composite Score: 16/25 → Medium-low industry attractiveness
```

### S→C→P Causal Chain

1. **Very strong rivalry + low supplier power** → Low cost-side pressure but intense revenue-side price wars → Luckin maintains ~60% gross margin at the 9.9 RMB price point through extreme supply chain efficiency (per-cup ingredient cost ~4 RMB)
2. **High buyer power + low switching costs** → Brands forced to continuously subsidize to retain users → Luckin 2024 marketing expense ratio ~8%; Starbucks China same-store sales YoY -8% (users defecting to low-price competitors)
3. **Medium entry barriers** → New players like Cotti rapidly opening stores but struggling to profit → Industry exhibits "easy to scale, hard to profit" pattern; a wave of store closures expected in 2025

### So What

Composite Five Forces judgment: Industry profit pool severely compressed. **Only two strategies can sustain profitability**:
- **Cost leadership** (Luckin path): Extreme supply chain + 10,000-store scale effects, maintaining profit margins even at 9.9 RMB
- **Brand premium** (Starbucks path): Third-place experience + brand loyalty supporting 30+ RMB average ticket price, but growth in China has peaked

Brands caught in the middle (Manner, Cotti, Tims, etc.) face a structural dilemma of "can't go up, can't come down" — this is a classic "profit pool squeezed by both extremes" pattern in the Five Forces model.

---

## V. Common Mistakes

| Mistake Type | Manifestation | Correction |
|-------------|--------------|-----------|
| Industry defined too narrowly | Overlooking potential competition | Define industry from demand perspective |
| Ignoring substitutes | Only looking at same-category products | Think from "what need does it satisfy" |
| Static analysis | Only looking at current state | Analyze force change trends |
| Equal weighting | Treating all forces equally | Identify the key forces |
| Ignoring complements | Only looking at competition, not complements | Consider ecosystem synergies |
| Confusing buyer with user | In B2B scenarios | Distinguish decision-maker from end-user |

---

## VI. Integration with Other Frameworks

| Upstream Framework | Input Content | This Framework's Output | Downstream Framework |
|-------------------|--------------|------------------------|---------------------|
| PESTEL | Macro environment | Industry competitive structure | SCP |
| Industry research | Industry data | Competitive intensity assessment | Three-Layer Analysis |
| Competitive analysis | Competitors | Competitive strategy recommendations | SWOT |
| SCP | Industry structure | Competitive behavior analysis | Three-Layer Analysis |

**Typical Combinations**:
- **Industry research**: PESTEL → Five Forces → SCP → Three-Layer Analysis
- **Competitive analysis**: Five Forces → Competitive Strategy → Action Planning
- **Market entry**: Five Forces (industry attractiveness) → SCP → Playing to Win

---

## VII. China Market Specifics

| Dimension | China Characteristics | Case |
|-----------|----------------------|------|
| Major policy impact | Industrial policy changes rapidly; focus on policy barriers | "Double Reduction" policy reshaped the education industry's Five Forces overnight |
| Capital-driven | Capital accelerates competition; fundraising capability becomes a key competitive variable | Community group buying cash-burning wars (Meituan/Pinduoduo/Didi) |
| Speed-first | Winner-take-all logic; scale effects more critical than differentiation | Douyin went from 0 to #1 in short video within 3 years |
| Ecosystem competition | Dominated by major ecosystems; consider ecosystem positioning rather than individual firms | WeChat ecosystem vs. Alipay ecosystem payment Five Forces comparison |
| Policy barriers | Licenses, qualifications, and industry access constitute unique entry barriers | Third-party payment licenses, ICP permits, medical device registrations |
| Local government | Local protectionism and industrial policies affect regional competitive landscapes | Varying NEV local subsidies across regions |
| Capital power | VC/PE accelerates industry consolidation, changing competitive tempo | Didi-Kuaidi merger; Meituan-Dianping merger |
| Internet platforms | Platform ecosystems reshape competitive landscapes; cross-industry substitution more common | Douyin e-commerce's substitution threat to traditional e-commerce |
