3.8
Porter's Five Forces
An analysis of the structural pressure on profit in an industry from five directions: rivalry, new entrants, substitutes, supplier power and buyer power.
Michael Porter, Harvard Business Review (1979) and Competitive Strategy (1980)
What it does
Changes the question from whether your competitors are good to whether this industry is structurally capable of returning a profit. It is the reason a plan has to account for suppliers and substitutes that never appear in a competitor set, and it explains persistent profitability gaps between industries that firm-level analysis cannot.
When it breaks
It is the smaller half of the story, and Porter's own data says so: industry effects account for 19% of the variance in US public-company profitability, business-specific effects for 32%. The frame is also static and boundary-dependent — the industry has to be defined before the analysis starts, and the definition decides the answer. Applied to a young category, where the boundary is the thing being contested, it produces a confident reading of a structure that does not exist yet.
Case
McGahan and Porter decomposed the profitability of US public corporations inside 4-digit SIC categories into year, industry, corporate-parent and business-specific effects. The shares came out at 2%, 19%, 4% and 32%. Industry structure moves real money and it is outweighed by what the individual business does, with industry effects far larger in lodging, services, retail and transport than in manufacturing.
McGahan & Porter — How Much Does Industry Matter, Really?, Strategic Management Journal (1997) ↗Diagram not yet drawn
The five arrows pressing on the centre box, each drawn to the scale of the variance it accounts for — the industry arrow at 19% and, sitting outside the diagram entirely, the 32% the business itself contributes.
In the wild
Unchecked · not part of the tier
What people have written about this tool in the last twelve months. A machine found these and nobody has read them. Everything above this line was checked by hand.
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