What is the premise behind Micheal Porter's "five forces," and what are the advantages?
The premise of Michael Porter's "five forces" is that external and internal sources directly influence the competitiveness of markets and that understanding these sources is the key to remaining competitive.
Porter's "five forces," postulated in his 1980 book Competitive Strategy: Techniques for Analyzing Industries and Competitors, posits a series of variables that directly impact a company's ability to be competitive within a given industry. These forces have been commonly presented in graph form as a circle of variables -- the amount of competition within the specific industry sector; the potential for new competitors to enter the market; the ability of suppliers to influence the market; the power of customers to influence the level and intensity of competition; and the potential for product substitution -- orbiting around the central component of the exercise, the intensity of the competitiveness. The aggregate of those variables produces the level of intensity.
The advantage of Porter's model is that it presents a clear and eminently logical picture of an individual company's position within a specific sector of industry. As both Porter and his critics point out, the model is not necessarily conclusive, as additional variables -- for example, collusion among supplies or buyers -- can radically influence the level of intensity of competition, but as a starting point for understanding an industry, it has proven useful.