Are Porter's Five Forces still relevant?

Imagine you’re trying to understand the value of a company—like, really understand it, not just check its stock ticker, P/E ratio, or watch some heads talking on YouTube. You want to dig deep, figure out why this company is (or isn’t) worth your hard-earned cash. In times of information overload, you might ask yourself, “Is there a time-tested, straightforward framework that can help me judge a company’s competitive strength?”Good news: Yes. Porter’s Five Forces have been around since the disco era, yet they’re still boogying away in modern-day boardrooms.

Originally introduced by Michael E. Porter in his 1979 Harvard Business Review article called “How Competitive Forces Shape Strategy”, the framework remains a staple in strategic business analysis. Despite myriad new theories and models, Porter’s Five Forces still provide a clear and systematic way to break down how competitive (and therefore profitable) a particular company might be.If you’re the type who needs a research-based push, you’re in good company. According to a 2018 paper, Porter’s model continues to be widely cited in both academic and professional circles. Strategic analysts praise it for its ability to pinpoint competitive pressures that can make or break a business. So here they come – the five forces, that is:

Threat of New Entrants

How easy or tough is it for new players to enter the industry and compete? The barriers to entry—think regulatory hurdles, capital requirements, brand loyalty—dictate how threatened current businesses are by fresh competition.

If starting a competing business is as easy as whipping up sourdough bread (which everyone started doing in 2020), existing companies might struggle to retain pricing power or market share. In industries with high barriers—like pharmaceuticals, where you need billions in R&D and the patience to navigate the FDA—existing companies can usually breathe easier. Fewer hungry upstarts mean greater profit margins for the incumbents.

Bargaining Power of Suppliers

Suppliers can be everything from raw material providers (like mining companies delivering precious metals) to specialized service vendors (like cloud computing giants). If they can set high prices or choke off supply, your target company may find itself in a precarious position.

When a few large suppliers dominate an industry (or worse, your sole supplier is a monopolist) they set the terms, forcing companies to absorb higher costs or accept worse terms. This can quickly erode margins. But if suppliers are fragmented and easily substitutable (imagine commodity flour suppliers in the baking industry), then your analyzed company can likely command more favorable pricing.

Bargaining Power of Buyers

Here we look at customers—the ones paying for the company’s products or services. If buyers can easily switch to a competitor or if they buy in massive quantities (like Walmart sourcing products from multiple suppliers), they can push for discounts and special treatment.

If a small group of giant online retailers or a handful of large enterprise clients dominate the buyer side, they can leverage that power to wring every penny of discount from your company. Low margins? Ouch. Conversely, if the company sells to diverse buyers, each with limited purchasing volume, that’s a signal the company has more room to set favorable prices. Over time, that difference in margin spells the difference between triumphant success and corporate tears.

Threat of Substitute Products or Services

This force concerns how easily consumers can switch to an alternative solution that meets the same need. Sometimes the substitute is a direct copy, and sometimes it’s a creative workaround that solves the problem differently—like video conference tools substituting for airline business travel.

High threat of substitutes means a company must consistently innovate or competitively price to retain customers. If you’re in the board game business, but your audience has discovered the joys of playing card games on tablets or VR adventures, you might see your players drift away — unless your board game nights are just that good.

Rivalry Among Existing Competitors

This is the extent to which companies in the same industry compete on price, service, marketing, and product differentiation. High rivalry can resemble a gladiatorial fight, with winners emerging battered but victorious. Low rivalry can look more like a peaceful stroll in the park — where companies partition the market and coexist with mild jostling. But beware – there is something called the “Bertrand Oligopoly” in duopolistic markets: In the Bertrand model, firms compete by setting prices for identical products, and consumers always choose the cheapest option. This creates a strong incentive for each firm to slightly undercut the other, leading to a price war that continues until prices fall to the level of marginal cost—where firms make no profit. The result is intense competition that mirrors perfect competition, even with only two firms in the market.

In highly competitive industries—like airlines—price wars are common, and margins are razor-thin. In more oligopolistic settings—like operating systems or commercial aircraft—rivals keep a close eye on each other but avoid brutal price competition (most of the time). Strong differentiation and brand loyalty can reduce rivalry, which bodes well for profit stability.

Conclusion

Five Forces, Endless Insight – The reason we still rely on Porter’s Five Forces is simple: it works.

While the world has changed drastically since 1979, the fundamental dynamics of competition remain consistent. Companies still battle for profits against a backdrop of new entrants, supplier dynamics, customer power, substitutes, and internal rivalry. As you evaluate a stock (or business) for your portfolio, it’s vital to look at more than just the financial statements. How resilient is the company to competition? Could a new technology disrupt it tomorrow? Does a single massive supplier dictate its margins? Porter’s Five Forces guide you through these questions—like your favorite, slightly overcaffeinated personal trainer, keeping you focused on what truly matters. Bottom line: Every profound analysis of a company should run the gauntlet of these five forces. After all, if you don’t assess the competitive environment, your fancy discounted cash flow models (and all the witty research reports) won’t hold up. Because here’s the kicker: even if a company flunks just one of the Five Forces (my latest stock wreck: the supplier was a monopolist), it can be enough to punch a big hole in its moat and sink the whole ship—so keep your eyes wide open.