What is Five Forces Analysis? 5 Threats and How to Apply It
Five Forces analysis is a core strategic framework that breaks down the competitive structure of an industry into five distinct threats, helping you assess the attractiveness of your business environment and identify your path to winning. Proposed by Michael Porter, this approach remains an indispensable tool for executive decision-making worldwide—used for new market entry decisions, repositioning existing businesses, and designing pricing and differentiation strategies.
This article systematically explains what Five Forces analysis is, the substance of each of the five threats and how to evaluate them, the differences and combinations with other frameworks like 3C, SWOT, and PEST, a five-step process you can run repeatedly in practice, industry-specific examples, and common pitfalls and how to avoid them. Use this as a practical guide for marketers and business leaders building inputs for strategy, business planning, and market entry decisions.
Five Forces analysis is a framework that organizes the "five forces (threats)" influencing competition within an industry, allowing you to assess the industry's profitability and attractiveness, and the strategic options available to your company. Its defining strength is that it captures industry structure three-dimensionally by going beyond direct competition with rivals to include four "outer forces"—new entrants, substitutes, buyers, and suppliers.
There are two main purposes. The first is to determine the overall profitability (attractiveness) of an industry, which informs management decisions about whether to enter, continue, or exit a market and where to concentrate resources. The second is to design countermeasures for each of the five threats and build your competitive advantage.
Five Forces analysis was systematized by Michael E. Porter, a professor at Harvard Business School, in his 1979 Harvard Business Review article and his 1980 book Competitive Strategy. Until then, strategy theory tended to focus on internal resources, but Porter advanced the idea that "a company's profitability is largely determined by the structure of the industry to which it belongs," applying industrial organization theory to corporate strategy.
While the framework of five threats is simple, it was groundbreaking in that it didn't reduce industry competition to "rivalry among incumbents" alone—it expanded the lens to include suppliers, buyers, substitutes, and new entrants. Decades after its introduction, it remains a long-standing standard in MBA education and management consulting.
In an era when industry boundaries are dissolving due to digitalization and globalization, with cross-industry entry and disruption from substitute technologies happening frequently, the value of Five Forces analysis—which provides a bird's-eye view of industry competitive structure—has only grown. Its strength lies in surfacing threats that are easy to miss when you only watch direct competitors.
The core of Five Forces analysis is the "five threats (forces)" that influence competition within an industry. Below, we organize the meaning of each threat, its impact on industry profitability, and the issues to check when evaluating it.
The first threat is the intensity of competition among existing companies vying for the same customers within the same industry. It manifests as price wars, advertising spend battles, new product development races, and sales promotion clashes—the most visible threat that directly suppresses overall industry profit margins.
The issues to evaluate the intensity of competition are as follows.
Don't judge rivalry by "number" alone—evaluate it three-dimensionally with views like "how much room is there for differentiation" and "can market growth absorb the pressure."
The second threat is the players who might newly enter the industry. In industries where new entry is easy, even when you generate profits, new entrants quickly arrive, diluting share and profit and lowering the overall profitability of the industry.
The issues to evaluate the threat of new entrants (the height of entry barriers) are as follows.
In recent years, DX and platform-driven business models have made cross-industry entry a real threat even in traditional sectors. Beyond "Is it hard for industry peers to enter?", also consider "Is it easy for cross-industry players or startups to encroach?"
The third threat is substitutes that solve the same customer problem your offering addresses—but through a different means. The key point is that substitutes need not be in the same category; they can come from completely different categories (e.g., a restaurant's competitors aren't just chain restaurants, but also delivery, prepared meals, meal kits, and home cooking).
The issues to evaluate the threat of substitutes are as follows.
The threat of substitutes is often overlooked because it cuts across industry boundaries. Asking "if our customers couldn't use our service, what would they use instead?" makes it easier to enumerate substitutes comprehensively.
The fourth threat is the bargaining power of the "buyers (customers)" who purchase your products and services. The stronger the buyers' power, the greater the pressure to lower prices and improve quality and service, squeezing your profit margins. Typical manifestations are price negotiations with B2B procurement departments, and price pressure from comparison sites in B2C.
The issues to evaluate buyer bargaining power are as follows.
In B2B, "dependence on a few large customers" is often the biggest issue for buyer bargaining power. In B2C, the existence of comparison and review platforms structurally elevates buyer power, so you must intentionally design differentiation factors beyond price.
The fifth threat is the bargaining power of "suppliers" who provide raw materials, components, services, and talent to your company. Strong supplier power leads to rising input prices and constraints on delivery and quality, deteriorating cost structure and lowering overall industry profitability.
The issues to evaluate supplier bargaining power are as follows.
Supplier bargaining power must be evaluated not only for raw materials, but for platform players in the modern business stack—"cloud vendors," "major ad platforms (Google, Meta, etc.)," and "major payment providers." A single-source structure should be considered not just a cost issue but a business continuity risk.
The theoretical core of Five Forces analysis is the proposition that "the average profitability of an industry is determined by the combined strength of the five threats." Industries where threats are strong overall are structurally hard to make money in, while industries where threats are weak are structurally easier to profit from—a simple but powerful idea.
Reading the relationship between threat strength and industry profitability reveals patterns like these.
What matters is not just accepting "industry attractiveness" as given, but considering "how much room your company's actions have to control the five threats." Raising switching costs through differentiation, raising entry barriers through scale economies, weakening supplier power through vertical integration—these specific strategic moves naturally emerge from the Five Forces framework.
Rather than using Five Forces analysis alone, the rule of thumb is to combine it with other frameworks. Below, we organize the differences from frameworks that are commonly confused with it, and how to use them together in practice.
Five Forces analysis examines "industry competitive structure," while 3C analysis examines three actors—"Customer," "Competitor," and "Company." The two differ in their angle of view.
In practice, the effective approach is to use them in sequence: "capture the industry structure with Five Forces, then specify your moves with 3C."
SWOT analysis organizes Strengths, Weaknesses, Opportunities, and Threats—and you can directly use the results of Five Forces analysis as input for the external environment's "opportunities" and "threats."
If you extract "industry-wide threats" and "opportunities created by structural change" from your evaluation of the five threats and reflect them in SWOT's O and T, your external environment analysis gains depth. Cross-SWOT (strengths × opportunities, weaknesses × threats, etc.) becomes better grounded when used to derive action plans.
PEST analysis captures the macro environment along four axes: Politics, Economy, Society, and Technology. It addresses "environmental changes that affect the entire industry," sitting at a level above Five Forces analysis.
By using PEST to grasp macro trends and then considering how those trends affect each of the five threats (deregulation increases new-entrant threat, digitalization increases substitute threat, etc.), you can paint a three-dimensional picture of how the industry will change.
Value chain analysis is another framework proposed by Porter. It decomposes a company's activities into primary activities (procurement, manufacturing, outbound logistics, sales, service) and support activities (HR, R&D, etc.), analyzing where value is created and where cost advantages or differentiation can be achieved.
While Five Forces analysis captures "the structure outside the industry," value chain analysis decomposes "activities inside your company." The two are complementary—the standard pattern is to use Five Forces to identify "where in the industry there are profit opportunities," then use value chain analysis to design "which of your activities will capture those profits."
Filling in items in Five Forces analysis is easy for anyone, but making it function as a strategic tool requires care in sequence and analytical design. Below, we explain a five-step process you can run repeatedly.
The first thing to do is clearly define "which industry and which market are the target of analysis." Proceeding with this ambiguous causes the scope of competitors, customers, and substitutes to drift, and your conclusions become scattered.
The specific items to decide are as follows.
Defining "industry" too broadly produces coarse analysis; defining it too narrowly causes you to miss substitutes and new entrants. The practical knack is to set granularity using the criterion of "the market trying to solve the same problem the customer faces."
Next, enumerate the evaluation issues for each of the five threats. Using the issue lists from the previous chapter as checklists helps prevent omissions.
At this stage, prioritize covering the issues comprehensively. Don't try to fill in everything—focus on the most important issues for your industry's characteristics first.
Once issues are decided, gather objective data and evaluate each one. "Don't fill in based on intuition or assumption; always attach evidence"—this is what determines the quality of Five Forces analysis.
Adopting the practice of recording "source, retrieval date, and sample size" for each issue makes later discussion and verification easier. Don't forget to separate fact from interpretation in your descriptions.
Based on the evidence gathered, rate each of the five threats on a three-point scale ("strong / moderate / weak") or a 1–5 score. Sharing the rating axis internally helps suppress variation when multiple people perform the analysis.
What matters here is rating at two time points: "now" and "3–5 years out." Because the speed of structural change has increased in many industries, distinguishing the present from the future is essential for designing the time horizon of your strategy.
Finally, translate the evaluation of the five threats into specific strategy and actions. Only when you reach this point does Five Forces analysis become a "strategic blueprint" rather than an "industry report."
Representative directions for actions per threat are as follows.
Format your output as a set: "five threat ratings + 3–5 strategic hypotheses + actions / owners / KPIs to start in the next 3–6 months." This makes the link between analysis and decision-making harder to break. Integrating with the results of 3C, SWOT, and value chain analysis produces an even more robust strategic document.
Because Five Forces analysis is high-level, concrete examples accelerate understanding. Below are sample entries for three typical industries. Adjust based on the situation closest to your own.
Rivalry (Strong)
Threat of New Entrants (Moderate to Strong)
Threat of Substitutes (Moderate)
Buyer Bargaining Power (Moderate)
Supplier Bargaining Power (Strong)
Implication: Rather than wearing yourself out in feature competition, the KSF is to embed yourself deeply in the operational context of a specific industry and company size, and differentiate through data and operational support. Designing pricing strategy that accounts for cloud costs and personnel expenses, and redefining value delivery for the AI-agent era, are the medium-term issues.
Rivalry (Strong)
Threat of New Entrants (Strong)
Threat of Substitutes (Strong)
Buyer Bargaining Power (Strong)
Supplier Bargaining Power (Moderate)
Implication: Profit margins decline in ad-dependent acquisition competition, so the path to victory lies in designing a brand worldview that increases repeat purchase rates and LTV, plus subscription/community operations for customer lock-in. Building brand assets (media/community/branded search) that don't depend solely on ad platforms is the medium- to long-term KSF.
Rivalry (Strong)
Threat of New Entrants (Moderate to Strong)
Threat of Substitutes (Strong)
Buyer Bargaining Power (Moderate)
Supplier Bargaining Power (Strong)
Implication: Rather than competing on price or location, the KSF is differentiation through "local ingredients, specialization, and experience design," plus capturing branded recall on Google Maps and SNS. The realistic answer to substitutes (takeout/delivery) is to coexist with them by structuring revenue by use case.
Five Forces analysis is a powerful framework, but it's also an area where the pitfall of "making it for show without connecting it to strategy" easily occurs. Below, we organize four typical pitfalls and their countermeasures.
Cases where you proceed with coarse-grained definitions like "the IT industry" or "the restaurant industry"—the scope of competitors, substitutes, and buyers stays undefined, and the rating of the five threats becomes abstract.
The countermeasure is to define "target industry, target geography, and target customer segment" together in Step 1, and to proceed with analysis only after internal alignment. Set granularity using the criterion of "the set of means to solve the same customer problem," and as needed, create separate Five Forces analyses per segment.
Five Forces analyses filled in by 1–2 hours of brainstorming in an internal meeting are just a transcription of attendees' impressions—objectivity isn't guaranteed. If your perception of the market or competitors is off, all the strategy built on top of it will be off.
The countermeasure is to attach "source of evidence" to every issue. Establishing a rule of filling in items with industry reports, statistics, customer interviews, and IR materials—each with citations—lets you separate fact from hypothesis and significantly raises the quality of discussion. When external data is hard to gather, even just hearings with existing customers or former employees produce far better accuracy than a subjective report.
Cases where you analyze the five threats and conclude "the industry is harsh" or "competition is intense," but never connect it to what you'll actually do. The true value of Five Forces analysis lies in the link to strategy and action in Step 5.
The countermeasure is to write 1–3 actions you can take for each of the five threats, and translate them into initial actions with priorities and KPIs. Choices among Porter's generic strategies (differentiation / cost leadership / focus) and concrete moves to raise entry barriers and switching costs should emerge naturally from your analysis.
Markets, competitors, and technology change significantly over six months to a year. But in many organizations, Five Forces analysis is created once at the launch of a new business or during medium-term planning, then sits asleep in a file thereafter.
The countermeasure is to put recurring updates of Five Forces analysis on the calendar (semi-annual reviews, annual strategy meetings, etc.) and adopt a lightweight cadence of updating only the elements where differences emerge. Tying it to daily data (web analytics, ad reports, CRM data, customer surveys) speeds up your awareness of changes in the five threats and keeps your strategy fresh.
Five Forces analysis is often discussed in the language of executive strategy, but it can also be applied at the front line of ad operations and marketing tactics. In fact, the disconnect between the tactical layer and the results of Five Forces analysis is precisely why frontline teams often face problems like "results don't improve" or "improvement ideas are shallow."
What's particularly important is connecting strategic hypotheses extracted from Five Forces analysis to the framework of measurement. Combining attribution analysis and Marketing Mix Modeling (MMM) lets you continuously verify whether "budget is being allocated according to the strategy derived from industry structure, and contributing to revenue as expected." Connecting strategy frameworks and measurement infrastructure in the same language is the shortcut to reproducible marketing.
Five Forces analysis is the foundational framework for reading the competitive structure and profitability of an industry through five threats and deriving the direction of your strategy. Let's review the key points one final time.
First, take your company's main business and try running through Five Forces analysis once using the issue lists in this article. Rather than aiming for a perfect analysis, the important thing is to put it into form and discuss it internally. Share the five-threat ratings you wrote, fill in missing information, and refine through competitor and customer perspectives. This very cycle raises the resolution of your strategy and the competitive strength of your organization.
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