MBA Five Forces Concept Card Template

Five Forces Concept Card: [Industry and course]

A concept card for industry analysis with the five competitive forces: threat of entry, bargaining power of suppliers, bargaining power of buyers, threat of substitutes and rivalry among existing competitors. It explains why some industries earn higher returns than others, how to define the industry before you analyse it, how complements and government fit in, how to score the forces without turning the framework into a checklist, and how concentration measures such as the Herfindahl-Hirschman Index (HHI) connect the analysis to industry economics. It is for MBA students in the core strategy course, case-competition teams and managers who must judge whether an industry is worth entering or defending. Source basis: Porter (1979, 1980, 2008), McGahan and Porter (1997), Rumelt (1991), Brandenburger and Nalebuff (1996) and the US Merger Guidelines (2023), all written up in original words, notation and examples. Replace every [bracketed] value and every row marked Example.

Document control

Contents

• 1. When to use it
• 2. The idea in plain language
• 3. The five forces and their drivers
• 4. Defining the industry
• 5. Formulas and notation
• 6. Complements, government and other factors
• 7. Assumptions, limits and critiques
• 8. How managers use it
• 9. The analysis process
• 10. Worked example A (fully solved): mid-market warehouse robotics
• 11. Worked example B (half solved): specialty outdoor retail
• 12. Exercise C (unsolved): a regional hospital market
• 13. Connections to other cards
• 14. Common mistakes and misconceptions
• 15. Self-test questions
• 16. My notes and next steps

1. When to use it

Use a five-forces analysis when the question is about the structure of an industry and the average profitability it allows:

• deciding whether to enter an industry, or which of several industries to enter;
• explaining why average returns in an industry are high or low, and whether that will last;
• finding a position inside an industry where the forces are weaker (a segment, a customer group, a channel);
• anticipating how a change (a new technology, a regulation, a merger, a platform) will shift profit between incumbents, suppliers, buyers and new entrants;
• preparing a case discussion where the instructor opens with "Is this an attractive industry?".

Do not use it alone when the question is why one firm beats its rivals in the same industry (use mba/mba-value-chain-card, mba/mba-resource-based-view-card and mba/mba-competitive-advantage-card), when the market is a multi-sided platform whose value depends on network effects (add the platform lens in mba/mba-strategy-guide), or when the decision is a single strategic move against named rivals (use mba/mba-game-theory-card).

2. The idea in plain language

An industry creates value when buyers are willing to pay more for its products than it costs to make them. How much of that value the firms in the industry keep, as opposed to passing it to customers, suppliers or new entrants, depends on five forces. Porter set this out in Harvard Business Review in 1979 and in the book Competitive Strategy in 1980, and restated it with new guidance on application in 2008.

The key insight is that competition is wider than rivalry. A firm competes for profit not only with the companies that look like it, but also with its customers (who bargain prices down), its suppliers (who bargain input prices up), potential entrants (whose threat caps prices) and substitutes (other ways of meeting the same need, which cap what customers will pay). When all five forces are strong, as in many airline and commodity markets, almost no firm earns attractive returns over time. When all five are weak, average returns can stay high for decades.

Three consequences follow, and each is easy to forget under time pressure:

1. Industry structure, not growth, drives profitability. A fast-growing industry with powerful suppliers and easy entry can be a poor place to invest; a slow one with high barriers can be excellent.
2. The strongest force or forces decide the outcome. The analysis is not a vote of five equal parts. One very strong force (for example, a near-monopoly supplier) can take most of the value by itself.
3. Structure can change and can be shaped. Firms can raise switching costs, build scale, change channels or integrate, and those moves alter the forces. Strategy is partly a choice of where to stand, partly a choice of how to reshape the ground.

3. The five forces and their drivers

Two points about the table matter in practice. First, the drivers apply to the industry as it competes today and as it is likely to compete over the period of the decision, not as it was five years ago. Second, rivalry on dimensions other than price (features, service, brand) can expand the value created and leave average profit intact, while price rivalry mostly redistributes it.

4. Defining the industry

The most common error is analysing the wrong industry. Define two boundaries:

• Product scope. Do the products share the same five-force structure? If buyers, suppliers, entry barriers or substitutes differ a lot between two product lines, they are two industries. Motor oil for car owners and motor oil for fleet operators can face different buyers and channels, for example.
• Geographic scope. Is competition local, regional, national or global? If the forces differ by country, the industry is local even when the same firms compete in many countries.

A useful test is to write down the main competitors, buyers, suppliers, substitutes and potential entrants. If the lists change a lot when you move from one product or region to another, split the analysis. Draw the boundary too narrowly and you will miss substitutes and entrants; draw it too widely and the forces will average out into something that describes no real market. When in doubt, analyse the segment where your firm earns its profit and note how the wider industry differs.

5. Formulas and notation

Value created and how it is split. For one unit sold, with buyer willingness to pay $WTP$, price $P$, the industry's cost $C$ and the supplier's opportunity cost $SOC$ (the lowest price at which suppliers would still supply):

$\text{Value created} = WTP - SOC = \underbrace{(WTP - P)}_{\text{buyer surplus}} + \underbrace{(P - C)}_{\text{firm margin}} + \underbrace{(C - SOC)}_{\text{supplier surplus}}$

Buyer power and substitutes push $P$ down; supplier power pushes $C$ up towards the value the supplier contributes; entry and rivalry push $P$ towards $C$. This value-based view comes from Brandenburger and Stuart (1996).

Weighted force score (a recording device, not a theory). For force $f$ with drivers $j = 1, \dots, J$:

$S_f = \sum_{j=1}^{J} w_{fj}\, s_{fj}, \qquad \sum_{j=1}^{J} w_{fj} = 1$

and an optional summary across forces, $\bar{S} = \sum_f v_f S_f$ with $\sum_f v_f = 1$.

Concentration. With market shares $s_i$ in percent for the $N$ firms in the market:

$HHI = \sum_{i=1}^{N} s_i^2, \qquad CR_4 = s_{(1)} + s_{(2)} + s_{(3)} + s_{(4)}, \qquad \Delta HHI_{\text{merger of } i, k} = 2\, s_i\, s_k$

The HHI is usually traced to Hirschman (1945) and Herfindahl (1950). As of October 2026, the US Merger Guidelines issued by the Department of Justice and the Federal Trade Commission on 18 December 2023 (the FTC Chairman and the acting head of the DOJ Antitrust Division told staff on 18 February 2025 that they remain in effect) treat a market with an HHI above 1,800 as highly concentrated. A merger that produces an HHI above 1,800 with an increase of more than 100 is presumed to substantially lessen competition, and so is a merger that creates a firm with a share above 30 percent with an HHI increase of more than 100. The presumption is rebuttable, and market definition comes first. The 2010 guidelines used 2,500 as the highly concentrated level. Check the current guidelines on ftc.gov or justice.gov before you rely on these numbers; other jurisdictions use different thresholds. A full treatment of concentration, market power and pricing is in mba/mba-market-structure-card.

6. Complements, government and other factors

Porter (2008) treats several important factors as influences on the forces rather than as forces of their own:

• Complements are products used together with the industry's product (software with hardware, charging networks with electric vehicles, apps with a platform). Their effect runs through the forces: a complement can raise buyer willingness to pay, raise or lower entry barriers (for example, through a proprietary standard) and create new switching costs. Brandenburger and Nalebuff (1996) placed complementors beside customers, suppliers and competitors in their "value net", which is the main reason some courses add complements as a sixth element. Either way, the question is the same: does the complement help incumbents capture more of the value, or does the complement owner capture it?
• Government is analysed by its effect on each force: licensing raises entry barriers, procurement rules strengthen buyers, patents protect suppliers or incumbents, subsidies support substitutes. Regulation is not good or bad for profitability in itself.
• Industry growth rate affects rivalry (slow growth intensifies it) but is not a force; high growth with weak entry barriers attracts entrants and can strengthen suppliers whose capacity is scarce.
• Technology and innovation matter through what they do to entry barriers, substitutes and buyer information.

When a factor changes, trace it through each force and write the direction (stronger or weaker) and the size. That discipline keeps the analysis causal.

7. Assumptions, limits and critiques

Assumptions built into the framework.

• Profitability is measured over the long run (return on invested capital across a cycle, not one year's margin).
• The industry can be bounded, and its participants are roughly identifiable.
• Firms are profit seekers; bargaining outcomes depend on relative power and alternatives.

Limits and critiques.

1. Industry is only part of the story. Variance-decomposition studies find that industry membership explains a meaningful but limited share of the differences in business-unit profitability. Rumelt (1991) found a small industry effect and a large business-unit effect; McGahan and Porter (1997) found a larger industry share in their sample, with firm-specific effects still important. The practical message: industry analysis tells you the average; firm strategy explains the spread.
2. Static snapshot. The framework describes structure at a point in time. In fast-changing industries, add the question "how will each force move?" and look at dynamic capabilities (Teece, Pisano and Shuen 1997).
3. Cooperation is underweighted. The language is about bargaining power. Alliances, standards bodies and complementors can enlarge the pie before it is divided (Brandenburger and Nalebuff 1996).
4. Platforms and network effects. In multi-sided markets the same party can be buyer on one side and supplier on the other, and demand-side scale can make entry extremely hard. The framework still works, but scale effects on the demand side need explicit treatment (Rochet and Tirole 2003).
5. Scoring is judgement. Numerical scores look precise and are not. Two teams can score the same evidence differently; the reasoning is what should be compared.
6. Not a strategy. Knowing that buyers are powerful does not tell you what to do. The output must lead to a choice of position or a move that changes the structure.

8. How managers use it

• Entry and exit decisions. Investors and corporate development teams compare industries by structural profitability before they compare individual targets.
• Positioning. A firm looks for segments where the forces are weakest, for example customers who value quality more than price, or a geography with fewer rivals.
• Shaping structure. Firms raise switching costs (integration, training, data), build scale to raise entry barriers, standardise inputs to reduce supplier power, or consolidate to reduce rivalry where competition law allows.
• Anticipating change. A new technology or regulation is traced through each force to see who will capture the value it creates.
• Due diligence and valuation. The analysis disciplines the long-run margin and growth assumptions in a valuation model (mba/mba-dcf-valuation-card): a forecast of rising margins in an industry with weakening barriers needs a reason.

9. The analysis process

Work through the steps in this order. Start from profitability, because the purpose of the analysis is to explain it: if the industry's return on invested capital has been above its cost of capital for a full cycle, at least some forces must be weak, and your analysis should find which. Then assess each force with evidence, name the strongest, trace outside factors through them and finish with a decision.

10. Worked example A (fully solved): mid-market warehouse robotics

Setting. Corvane Robotics (fictional) sells autonomous mobile robots (AMRs) and fleet software to mid-market warehouses (sites with roughly 20 to 200 robots) in North America and Europe. The team defines the industry as "autonomous mobile robots and fleet software for mid-market warehouses, North America and Europe, 2025". Large fixed automation systems are treated as a substitute, not as part of the industry, because they face different buyers (enterprise capital programmes), suppliers and entry barriers.

Exhibit A1. Segment structure, 2025 (fictional).

The HHI is $24^2 + 17^2 + 12^2 + 9^2 + 8^2 + 6^2 + 12 \times 2^2 = 576 + 289 + 144 + 81 + 64 + 36 + 48 = 1{,}238$ (Excel: =SUMSQ(B2:B19) with the 18 shares in B2:B19). The supplier HHI is $41^2 + 30^2 + 15^2 + 8^2 + 6^2 = 2{,}906$: the input market is far more concentrated than the robot market.

Exhibit A2. Scored drivers (1 = force weak, 5 = force strong). The product column is weight times score; the force score is the sum of products, =SUMPRODUCT(weights, scores).

Exhibit A3. Summary.

Interpretation. No force is extreme, and the two strongest are on the value chain's edges: supplier power (3.60) and buyer power (3.50). That explains why the segment grows fast while most vendors, Corvane included, still report operating losses: concentrated sensor suppliers take part of the value, and large buyers with multi-vendor pilots take another part. Rivalry is moderate because growth is high, but it will intensify when growth slows and venture-funded rivals stay in. Threat of entry is the weakest force (2.90): integration switching costs and software scale deter entrants, but available venture capital and weak retaliation keep the threat real.

Merger check (industry economics). If Competitor B (17%) and Competitor D (8%) merged, $\Delta HHI = 2 \times 17 \times 8 = 272$ and the post-merger HHI is $1{,}238 + 272 = 1{,}510$, below the 1,800 level, with a combined share of 25%. If the leader, Competitor A (24%), bought Competitor C (12%), $\Delta HHI = 576$, the HHI becomes 1,814 and the combined share 36%: both the HHI test and the 30% share test in the 2023 US guidelines would be met (Excel: =2*B2*B4 for the change, =SUMSQ(B2:B19)+2*B2*B4 for the new level).

So what. Corvane's strategic options follow from the strongest forces: second-source or co-design the sensor module to reduce supplier power (see the make-or-buy analysis in mba/mba-strategy-guide), deepen integration and fleet analytics to raise switching costs and weaken buyer power, and focus on customer segments that value uptime over price. The weighted mean of 3.255 says only that the industry is middling on average; the decision comes from the two forces at the top of the chart.

11. Worked example B (half solved): specialty outdoor retail

Setting. Northfield Outdoor Co. (fictional) is a mid-size outdoor-gear retailer and brand with stores and an e-commerce site. The team defines the industry as "specialty outdoor-gear retail, stores and online, home country, 2025". Evidence collected: premium outdoor brands increasingly sell direct to consumers; price comparison online is easy; rental and resale platforms are growing; seasonal markdowns are deep.

Tasks:

1. Complete the five missing products and the three missing force scores.
2. Compute the unweighted mean of the five force scores: [ ].
3. Which force is strongest, and what does that imply for the share of value Northfield can keep? [ ]
4. Name one move that would weaken that force, and the driver it acts on. [ ]

12. Exercise C (unsolved): a regional hospital market

Tallow Creek Medical Center (fictional) is one of five hospitals serving a regional market. Inpatient admissions shares are: Tallow Creek 27%, Hospital P 34%, Hospital Q 18%, Hospital R 12%, Hospital S 9%. Most revenue comes from three large health insurers and one public payer; nurses are scarce and represented by a regional union; outpatient surgery centres and telehealth are growing.

1. Define the industry (product, geography, customers) in one line, and say why "all healthcare" would be too wide.
2. Compute the HHI and CR4 for the market. Show the Excel formula.
3. Hospitals Q and R propose to merge. Compute the change in HHI, the post-merger HHI and the combined share, and say how the 2023 US guidelines would classify it.
4. Score buyer power and supplier power with at least three drivers each, with weights and a "Why" column.
5. Which force best explains hospital margins in this market, and how would the merger change it?

13. Connections to other cards

14. Common mistakes and misconceptions

1. Skipping the industry definition. Analysing "technology" or "retail" produces forces that describe nothing.
2. Listing factors without saying strong or weak. Each driver must end with a direction and a reason.
3. Treating growth as a force. Growth affects rivalry and attracts entry; it does not by itself make an industry attractive.
4. Confusing rivals and substitutes. A substitute meets the same need in a different way (video calls for business travel); a rival offers the same kind of product.
5. Ignoring potential entrants. Firms that could enter cap prices even if they never do.
6. Averaging away the story. A weighted mean near 3 can hide one force at 5 that takes all the profit.
7. Treating the analysis as static. The decision horizon matters: say how each force will move.
8. Adding complements as a sixth force without tracing their effect. Ask which force the complement changes and who captures the value.
9. Using industry analysis to explain one firm's performance. All firms in the industry face the same forces; differences between them need firm-level analysis.
10. Stopping at description. The analysis must end in a choice: position, shape or exit.

15. Self-test questions

1. State the five forces and, for each, one driver that makes the force strong.
2. Why does Porter argue that rivalry on price is more damaging than rivalry on product features?
3. An industry grows 30% a year. Is it attractive? What else do you need to know?
4. Explain the difference between buyer bargaining power and buyer price sensitivity, with an example of each.
5. Market shares are 40, 25, 20, 10 and 5 percent. Compute the HHI and CR4.
6. In question 5, the firms with 20% and 10% merge. Compute the change in HHI and the new HHI. How would the 2023 US guidelines classify it?
7. Why do Porter (2008) and many courses treat complements as a factor rather than a force? Give one example where a complement weakens the industry's position.
8. What did Rumelt (1991) and McGahan and Porter (1997) study, and what is the main lesson for strategy?
9. In Worked example A, why is the weighted mean of 3.255 not the conclusion?
10. Give two ways a firm can reduce supplier power without vertical integration.

16. My notes and next steps

Sources and further reading

Primary works.

• Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, 57(2), 137-145.
• Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
• Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.
• Bain, J. S. (1956). Barriers to New Competition. Cambridge, MA: Harvard University Press.
• Brandenburger, A. M., and Stuart, H. W. (1996). Value-based business strategy. Journal of Economics & Management Strategy, 5(1), 5-24.
• Brandenburger, A. M., and Nalebuff, B. J. (1996). Co-opetition. New York: Currency Doubleday.
• Rumelt, R. P. (1991). How much does industry matter? Strategic Management Journal, 12(3), 167-185.
• McGahan, A. M., and Porter, M. E. (1997). How much does industry matter, really? Strategic Management Journal, 18(S1), 15-30.
• Rochet, J.-C., and Tirole, J. (2003). Platform competition in two-sided markets. Journal of the European Economic Association, 1(4), 990-1029.
• Teece, D. J., Pisano, G., and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533.
• Hirschman, A. O. (1945). National Power and the Structure of Foreign Trade. Berkeley: University of California Press.
• Herfindahl, O. C. (1950). Concentration in the Steel Industry. Doctoral dissertation, Columbia University.
• US Department of Justice and Federal Trade Commission (2023). Merger Guidelines. Released 18 December 2023 (ftc.gov, justice.gov).

Textbooks (further reading only). Besanko, Dranove, Shanley and Schaefer, Economics of Strategy (Wiley); Grant, Contemporary Strategy Analysis (Wiley); Magretta, Understanding Michael Porter (Harvard Business Review Press, 2012).

Open resource. OpenStax, Principles of Management (CC BY-NC-SA 4.0), chapters on strategic analysis.

Answer key

Worked example B.

1. Online entry cost $0.30 \times 4 = 1.20$; entry force score $0.90 + 0.40 + 1.20 + 0.60 = 3.10$. Private-label capability $0.20 \times 2 = 0.40$ (supplier score 3.60 as shown). Price transparency $0.50 \times 4 = 2.00$; buyer force score $2.00 + 1.50 + 0.40 = 3.90$. Seasonal markdowns $0.40 \times 4 = 1.60$; rivalry score $0.90 + 1.60 + 1.20 = 3.70$.
2. Unweighted mean $(3.10 + 3.60 + 3.90 + 3.00 + 3.70) / 5 = 3.46$ (=AVERAGE(B2:B6)).
3. Buyer power (3.90) is strongest, followed by rivalry (3.70) and supplier power (3.60). Consumers can compare prices instantly and switch at no cost, while brands sell direct and rivals discount at season end. Northfield is squeezed from three sides, so it can keep only a thin share of the value it helps create unless it differentiates.
4. Examples: grow private-label lines and exclusive products (reduces price comparability, acts on price transparency); build a repair, rental and community programme that raises the value of buying from Northfield (acts on loyalty and switching cost). See mba/mba-value-chain-card Worked example B.

Exercise C.

1. "Inpatient acute-care hospital services, [region], paid by commercial insurers and the public payer." "All healthcare" mixes industries with different buyers, suppliers and entry barriers (pharmacies, clinics, insurers).
2. $HHI = 34^2 + 27^2 + 18^2 + 12^2 + 9^2 = 1{,}156 + 729 + 324 + 144 + 81 = 2{,}434$ (=SUMSQ(B2:B6)); $CR_4 = 34 + 27 + 18 + 12 = 91\%$.
3. $\Delta HHI = 2 \times 18 \times 12 = 432$; post-merger HHI $2{,}434 + 432 = 2{,}866$; combined share 30%. The market is already highly concentrated (above 1,800) and the increase exceeds 100, so it falls under the presumption in the 2023 US guidelines. The combined share of exactly 30% does not exceed 30%, so the share test alone would not apply.
4. Sample buyer drivers: payer concentration (high, 4 or 5), payers' ability to steer patients to rivals (moderate), public payer price setting (high). Supplier drivers: nurse scarcity and union bargaining (high), concentration of device and drug suppliers (moderate), physician groups (moderate to high).
5. Buyer power from concentrated payers usually explains margins best. A merger of Q and R raises the hospitals' bargaining position against payers, which is why such mergers are reviewed closely.

Self-test.

1. Entry (low switching costs), suppliers (concentrated suppliers), buyers (few large buyers), substitutes (attractive price-performance alternative), rivalry (slow growth or high fixed costs). Other valid drivers from section 3 count.
2. Price rivalry transfers profit straight to customers and is easy for rivals to match, so it often leads to repeated cuts; rivalry on features or service can raise willingness to pay and enlarge the value created.
3. Not necessarily. Growth can attract entrants and strengthen suppliers. You need the other forces, especially entry barriers and supplier and buyer power, and the long-run return on capital.
4. Power is the ability to bargain (a large retailer buying 20% of a supplier's output). Price sensitivity is the willingness to use that power, high when the purchase is a large share of the buyer's costs or the buyer earns low profits (a low-margin distributor buying a commodity input).
5. $HHI = 1{,}600 + 625 + 400 + 100 + 25 = 2{,}750$; $CR_4 = 95\%$.
6. $\Delta HHI = 2 \times 20 \times 10 = 400$; new HHI 3,150. Highly concentrated market with an increase above 100, so it falls under the 2023 presumption; the combined share is also exactly 30%, so only the HHI test applies.
7. Because a complement's effect works through the existing forces (entry barriers, willingness to pay, switching costs) and depends on who controls it. Example: an operating-system owner that controls the main complement (the app store) can capture value that device makers would otherwise keep.
8. They decomposed variance in business-unit profitability into industry, corporate and business-unit effects. Industry matters, but firm-specific effects explain a large share, so strategy must work at both levels.
9. Because the averages hide which forces dominate. The conclusion comes from supplier and buyer power being the strongest forces and from how each force will move.
10. Qualify a second supplier; standardise the input design; form a buying consortium; sign long-term contracts with volume commitments; co-develop the input with a supplier that wants to enter the market.

Revision history

Standard and licence note

Structure aligned with the five competitive forces as published by Porter (1979, 1980, 2008), with the value-based view of Brandenburger and Stuart (1996), the critiques named above, and the HHI thresholds of the US Merger Guidelines (2023) as checked in October 2026. The explanations, scoring method, worked examples, exercises and answers are original; no textbook or published case text is copied or paraphrased, and Corvane Robotics, Northfield Outdoor Co., Tallow Creek Medical Center and all competitors are fictional. This template is independent and not affiliated with or endorsed by any author, publisher, school or agency. Check the current version of the merger guidelines in your jurisdiction before you rely on them. Template licence: MIT.