Porter's Five Forces

Overview

Some industries earn 30%+ margins decade after decade; others fail to earn their cost of capital despite intelligent, well-funded firms. The cause is industry structure. Porter's 1979 five forces — new entrants, supplier power, buyer power, substitutes, rivalry — determine long-run profitability. A firm's earnings are the residual after those forces have taken their cut. Strategic goal: position where the forces are weakest; where possible, change the forces in your favor through scale, switching costs, differentiation, or vertical integration.

Composes with network-effects, switching-costs, signaling-games, pmf-crossing-the-chasm.

When to Use

• Entering or exiting an industry; strategic planning; explaining why a business is profitable or unprofitable despite good execution; evaluating an investment in a specific sector
• Someone says: "barriers to entry," "buyer/supplier power," "industry attractiveness," "structural competitiveness"
• Sizing a sector reshaped by AI: "who captures the profit in AI?", "does AI capex / compute supplier power make this industry attractive?", "can we win against AI-native competition or open-weight substitutes?"

When NOT to use: dynamic technology disruption; platform/ecosystem markets; very new markets (no stable structure); firm-level analysis (use VRIO instead).

Coaching Novices (Adaptive Front Door)