How Porter’s Five Forces Can Help Small Businesses Analyze the Competition

Understanding Porter’s Five Forces model

Porter’s Five Forces model is a competitive analysis method that’s considered a macro tool in business analytics. It looks at the industry’s economy as a whole; in contrast, a SWOT analysis is a microanalytical tool that focuses on a specific company’s data and analysis.

“Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time,” Porter wrote in a 2008 Harvard Business Review article. “A healthy industry structure should be as much a competitive concern to strategists as their company’s own position.”

Porter theorized that understanding the competitive forces at play and the overall industry structure is crucial for effective, strategic decision-making and the development of a compelling competitive strategy for the future.

Here are the five forces in Porter’s model:

1. Competitive rivalry

This force examines marketplace competition intensity. It considers the number of existing competitors and what each one can do. Rivalry competition is high when these conditions are met:

• Multiple businesses offer similar products or services.
• The industry is growing.
• Consumers can easily switch to a competitor’s offering for little cost.

When rivalry competition is high, advertising and price wars ensue, which can hurt a business’s bottom line. Digital transformation has intensified competitive rivalry across industries, with 93 percent of companies adopting a digital-first strategy, according to a 2023 study by Foundry. That means competition is fierce, and those who fail to embrace technological innovation risk operating from a competitive disadvantage.

2. The bargaining power of suppliers

This force analyzes a supplier’s power and control over price increases. When a B2B vendor has extensive control over pricing, their client business’s profit margins can suffer.

This force also assesses the available number of suppliers of raw materials and other resources. The fewer suppliers in the supply chain there are, the more power they have. Businesses are in a better position when there are many suppliers. Recent supply chain disruptions have highlighted this dynamic, even as they’ve declined. The 2024 Federal Reserve Small Business Credit Survey found that 29 percent of small businesses still experienced supply chain disruptions, with those dependent on single suppliers facing the most severe impacts. 

3. The bargaining power of customers

This force examines consumer power and its effect on pricing and quality. Consumers have power when multiple sellers offer comparable products because they can easily switch to another seller. Conversely, buying power is low when consumers depend heavily on a single seller. When a business has more customers, the buying power of each individual customer is low. The rise of price comparison tools and review platforms has significantly increased customer bargaining power, with 98 percent of consumers reading online reviews before making purchasing decisions according to research conducted by BrightLocal. 

4. The threat of new entrants

This force considers how easy or difficult it is for competitors to join the marketplace. The easier it is for a new competitor to gain entry, the greater the risk that an established business’s market share will be depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale, and strong brand identity. Digital marketplaces have lowered entry barriers in many industries — e-commerce platforms now enable businesses to launch with minimal upfront investment, with the global e-commerce market reaching $6.3 trillion in 2023, according to a report by eMarketer.

5. The threat of substitute products or services

This force studies how easy it is for consumers to switch from a business’s product or service to an alternative solution. It examines the number of competitors, how their prices and quality compare with the business being examined, and how much of a profit those competitors are earning — which, in turn, would determine if they can lower their costs even more. The threat of substitutes is informed by switching costs, both immediately and in the long term, as well as consumers’ inclination to change.

Example of Porter’s Five Forces

There are many examples of how Porter’s Five Forces can be applied to various industries.

The ultimate goal is to identify the opportunities and threats that could affect a business.

Let’s examine how Porter’s Five Forces applies to retail giant Walmart, analyzing its current market position:

• Competitive rivalry: Walmart faces intense competition from Amazon, which captured 6 percent of U.S. e-commerce sales in 2023, while Walmart held 6.4 percent. Traditional rivals like Target and Costco continue to challenge Walmart’s dominance. Despite this competition, Walmart’s scale — operating over 10,750 stores globally — provides significant competitive advantages.
• Bargaining power of suppliers: Walmart works with over 100,000 suppliers worldwide, significantly diluting individual supplier power. The company’s purchasing volume — with annual revenue of $681 billion in fiscal 2025 — gives it tremendous leverage in negotiations, often allowing it to dictate terms and prices to suppliers.
• Bargaining power of customers: With approximately 270 million customers visiting Walmart stores weekly, individual customer bargaining power remains minimal. However, the ease of switching to competitors, especially for online purchases, grants customers moderate collective influence. Walmart’s “everyday low price” strategy helps retain price-sensitive customers.
• Threat of new entrants: The retail industry’s high capital requirements, established distribution networks, and economies of scale create substantial barriers to entry. New entrants would need billions in investment to match Walmart’s infrastructure and supplier relationships, making this threat relatively low.
• Threat of substitute products: While direct substitutes for retail are limited, changing shopping behaviors present challenges. Buy Now, Pay Later services grew to $9.5 billion in value in 2024, and the segment is projected to reach $80.15 billion by 2033, a growth rate of 27 percent.

Strategies for success

Once your analysis is complete, it’s time to implement a strategy to expand your competitive advantage. To that end, Porter identified three generic strategies that can be implemented in any industry and by companies of any size.

Cost leadership

Your goal is to increase profits by reducing costs while charging industry-standard prices, or to increase market share by reducing the sales price while retaining profits. Modern cost leadership increasingly relies on automation and AI, which reduces overall labor costs without sacrificing productivity.

Differentiation

To implement this strategy, your company’s products must be significantly better than the competition’s, thereby improving their competitiveness and value to the public. It requires thorough research and development, plus effective sales and marketing. Companies with strong differentiation strategies achieve higher price premiums relative to competitors, with sustainability and personalization emerging as key differentiators in 2025.

Focus

Successful implementation entails the company selecting niche markets in which to sell its goods. It requires an intense understanding of the marketplace, as well as deep knowledge of the business’s sellers, buyers and competitors. (For more detailed strategies, consult Porter’s 1985 book Competitive Advantage.)

Alternatives to Porter’s Five Forces

While Porter’s Five Forces is an effective and time-tested model, it has been criticized for failing to explain strategic alliances. In the 1990s, professors Adam Brandenburger, then at Harvard Business School and now at New York University’s Stern School of Business, and Barry Nalebuff, of the Yale School of Management, created the idea of a sixth force, “complementors,” using game theory insights. (Consult their book, Co-Opetition, for more information.)

In this model, complementors sell products and services that are best used in conjunction with a competitor’s product or service. Modern examples include smartphone manufacturers and app developers, or electric vehicle makers and charging station networks — partnerships that have become increasingly critical as ecosystem strategies drive business success.

These additional modeling tools can inform your understanding of your business and its potential:

• Value chain analysis: A value chain analysis helps companies understand where their best productive advantage lies. 
• BCG matrix: The BCG matrix helps companies identify which products will likely benefit most from increased investment. This tool remains particularly relevant for portfolio management, helping businesses allocate resources across product lines in rapidly changing markets.
• PEST analysis: Businesses should also consider conducting either a PEST analysis or a PESTLE analysis. These analyses take into account how external political, economic, sociocultural and technological forces — as well as legal and environmental forces, in a PESTLE analysis — can affect the business environment. This analysis should be conducted alongside Porter’s Five Forces to provide a thorough overview of factors and challenges that influence a business and its industry.

Navigating the economic environment

All business decisions contain elements of risk and uncertainty. Conducting routine analyses of the business, industry and overall economic environment is vital to the success of any company, regardless of its size. Porter’s Five Forces model provides a clear framework that business leaders can employ to understand how their business fits into the larger industry. 

Using Porter’s Five Forces alongside additional analytical tools and models — like a SWOT analysis, a BCG matrix and a PEST(LE) analysis — can help business leaders navigate the broader economic environment with greater confidence and, ultimately, reap increased odds of success. 

Jeremy Bender and Katherine Arline contributed to this article.