The 5 Forces Strategy was written by Michael E. Porter in 1979. Since then, it has been used by acedemics and businessmen alike to better understand the framework and strategy of doing business in general.

The 5 Forces Strategy is an all encompassing study of all the influencing factors on a business in an industry. It allows you to understand what is causing the profitability of the industry, what trends are significant and changing the industry and identify constraints that is holding back the growth and profitability of the business. In my opinion, the 5 Forces Strategy can be used by anyone in the industry, from established businesses or new ventures, as it is a very useful tool to fully understand the forces and determinants that shape the industry that the business will be or has been operating in.

The 5 Forces are:
1. Industry Rivalry
2. Bargaining Power of Suppliers
3. Bargaining Power of Customers
4. Threat of New Entrants
5. Threat of Substitutes

In short, these 5 factors shape the industry that a business is operating in.

Industry rivalry are the competitors that that sell similar product/service and compete for the same market share. Rivalry is intense when
- the product/service is nearly identical
- product has high fixed costs and low marginal costs
- no clear leader in the industry
- there is easy market entry
- and when there are many substitutes for the product

For industries with intense competition, it is important for these businesses to engage in dimension competition instead of price competition. While dimension competition is a positive sum competition, where businesses find their niche and compete on offering different services to meet the needs of different segments in the market; price competition results in a zero sum rivalry where both the business stand to lose by making less profits and comsumers end up with lesser choices at the end of the day.

The bargaining power of suppliers is the dynamic between the business and its supply chain.
Supplier is powerful when industry is
- Dominated by few companies
- Suppliers does not depend heavily on the industry for revenue
- Unique products
- High switching costs
- When supplier group can credibly threaten to integrate forward

One industry that is has very powerful suppliers is the airline industry. Firstly, in terms of hardware, namely the aircraft itself, the airlines only can purchase it from the 2 dominant large jet airliner company, Boeing or Airbus. This gives the suppliers a powerful bargaining power as the airlines is subjected to the prices of a duopoly and has no means of backwards integration due to the high knowlege and high start up cost of the aircraft construction industry. Besides hardware, the crucial human resource for flying aircrafts, the pilots are strongly unionized and therefore commands high compensation and rights, limiting the manuverability of enlarging profits by airlines.

The bargaining power of consumers is the relationship a business has with this target market.
Consumers have stong bargaining power when
- they are price sensitive
- there are few buyers and each one purchases in large volumes
- the business offers standardized or undifferentiated products
- there are few switching costs
- buyers can integrate backwards and produce product themselves

A perfect example of removing the bargaining power of consumers can be seen with the revoltion of the Ipod. Technically, the Ipod is simply a device for consumers to listen to music on the go. The mp3 player is offered by many electronic heavy weights, at a better quality and better price. The intense rilvary and the almost undifferential product of an mp3 player, would generally mean strong bargaining power of consumers. However, the ipod managed to successfully elimate that by creating an almost perfect brand, offering variety, and even horizonal integration into the music selling business that is exculsive to users. They have successfully differentiated themselves from other industry heavy weights and created a unique market for their mp3 players.

The threat of substitutes which is the replacement of current product/service offered by a business by a substitute product/service. The threat is high if
- the substitute offers an attractive price-performance trade-off to the industry’s product
- and there are switching costs

The threat of substutites is generally brought about by changes in technology which shifts costs and prices or regulatory changes. Some of the replacements by substutites that can be seen over history includes the revolution of travel, from steam engines to aircrafts, the replacement of physical mails to email, and the revolution of the mobile phone. On a smaller scale, skype has made calling overseas completely free through the internet. This poses a threat to conventional mobile phone communication services as consumers now have a less expensive alternative to calling overseas.

The threat of new entrants is the competition of new ventures in the similar industry faced by existing businesses, causing a fight for market share and an erosion of profits.
The determinants of the level of threat of new entrants are
- Supply side economies of scale
- Demand side economies of scale
- Customer switching costs
- Incumbency advantages independent of size
- Capital requirements
- Unequal Access to distribution channels
- Government/regulatory policies

On top of the above mentioned barriers to entry, existing business may also engage in retaliation to potential entrants of the industry. Industries that will face fierce retaliation are those that current businesses have substantial resources to fight back, with excess cash, unused borrowing power, available productive capacity and control over distribution channel and customers.