Business Growth
How to Do a Porter's Five Forces Analysis (Template, Example, and Steps)
How to do a Porter's Five Forces analysis for a small business: what the five forces are, the questions to ask for each one, a step-by-step process, a simple template, a worked example, how it fits with a PESTLE analysis and a SWOT analysis, mistakes to avoid, and a Claude workflow for mapping the pressure on your profits.
Founder, AI Tools and Training Club · November 7, 2026 · 8 min read
The short version
- A Porter's Five Forces analysis looks at the five pressures that decide how much profit is available in your market: rivalry between competitors, the threat of new entrants, the power of buyers, the power of suppliers, and the threat of substitutes.
- Rate each force as low, medium, or high for your specific market and customer, write down why, and focus on the one or two strongest forces. Those are the ones squeezing your prices and margins.
- The analysis is only useful if it ends in decisions: how you will price, position, and protect the business against the forces that are strongest today.
What is a Porter's Five Forces analysis?
A Porter's Five Forces analysis is a framework for understanding how attractive and how profitable a market is. Instead of looking only at your direct competitors, it looks at five pressures at once: how hard your competitors fight each other, how easy it is for new players to enter, how much bargaining power your customers have, how much bargaining power your suppliers have, and how easily customers can solve the problem another way. When those forces are strong, prices get pushed down and costs get pushed up. When they are weak, there is more room for profit.
My strong opinion: most small business owners think their problem is "too much competition" when the real squeeze is coming from a different force. A cleaner whose margins keep shrinking may be losing to one big buyer who sets the price, not to the cleaner down the road. Five Forces makes you look at all five before you decide what to fix.
The five forces explained
| Force | What it means | Questions to ask |
|---|---|---|
| Competitive rivalry | How intensely existing businesses compete for the same customers | How many competitors are there? Do they compete mostly on price? Is the market growing or shrinking? |
| Threat of new entrants | How easy it is for someone new to start competing with you | How much money, skill, licensing, or reputation does it take to start? Could a customer switch to a newcomer easily? |
| Bargaining power of buyers | How much your customers can push your prices down or demand more | Do a few customers make up most of your revenue? Can they compare prices easily? Is it cheap for them to switch? |
| Bargaining power of suppliers | How much the people you buy from can raise your costs | How many suppliers could you use? How hard is it to switch? Do they offer something nobody else does? |
| Threat of substitutes | How easily customers can solve the same problem a different way | Could they do it themselves, use software, or spend the money on something else entirely? |
The five forces and the questions to ask for each
Substitutes are the force people miss most. A substitute is not a competitor offering the same thing. It is a different way of getting the same result, such as a do-it-yourself tool replacing a service, or an online course replacing one-to-one coaching.
How to do a Five Forces analysis step by step
- Define the market narrowly. Write down exactly what you sell, to whom, and where. "Bookkeeping for restaurants in one city" gives a far more useful answer than "accounting services".
- List the players for each force. Name your main competitors, likely new entrants, your biggest customer groups, your key suppliers, and the realistic substitutes.
- Answer the questions for each force. Use the table above and write short, specific answers based on what you can see in your own market, your own sales data, and conversations with customers.
- Rate each force low, medium, or high. Add one sentence explaining the rating. If you cannot explain it, you probably need more information before you rate it.
- Find the strongest one or two forces. These are the pressures doing the most damage to your prices, costs, or sales right now.
- Decide what you will do. For each strong force, write one or two moves that reduce its pressure, and give each move an owner and a date.
- Review it every six to twelve months. Markets shift. Re-rate the forces when a big competitor arrives, a supplier changes terms, or customer behavior changes.
Porter's Five Forces template
A one-page document or spreadsheet with these sections is enough.
- Market definition: what you sell, to whom, and where.
- Competitive rivalry: main competitors, how they compete, rating, and why.
- Threat of new entrants: what it takes to start, who could enter, rating, and why.
- Buyer power: your customer groups, how concentrated they are, how easy switching is, rating, and why.
- Supplier power: your key suppliers, how many alternatives exist, rating, and why.
- Threat of substitutes: other ways customers could get the same result, rating, and why.
- Strongest forces: the top one or two, in a sentence each.
- Moves: what you will do about each strong force, with an owner and date.
- Next review date.
A Five Forces analysis example
Here is an illustrative example for a made-up independent coffee shop near an office district. The ratings and details are invented to show how the template works.
| Force | Rating | Why |
|---|---|---|
| Competitive rivalry | High | Several chains and two other independents within walking distance, all selling similar drinks |
| Threat of new entrants | Medium | Opening a shop takes a lease and equipment, but kiosks and carts can start quickly |
| Buyer power | Medium | Individual customers have little power alone, but they can switch shops with zero cost |
| Supplier power | Low | Many roasters and milk suppliers to choose from |
| Threat of substitutes | High | Office coffee machines, home brewing, and energy drinks all solve the same need |
Illustrative Five Forces analysis for a small independent coffee shop
The two strongest forces are rivalry and substitutes, so competing on price is a losing game. Better moves would be to give office workers a reason a machine cannot match, such as a pre-order and pickup option that saves time, a loyalty offer for regulars, and catering orders for the offices nearby that turn one buyer into many cups.
Five Forces vs PESTLE vs SWOT
| Framework | What it looks at | When to use it |
|---|---|---|
| PESTLE analysis | Broad outside forces such as economy, law, and technology | To scan the wider environment for changes coming your way |
| Porter's Five Forces | The pressures inside your industry that shape prices and profit | To understand how hard it is to make money in your market and where the squeeze comes from |
| SWOT analysis | Your strengths and weaknesses, plus opportunities and threats | To turn what you learned into a view of where you stand and what to do |
| Gap analysis | The distance between current and target performance | To turn the chosen direction into measurable targets and actions |
How Five Forces fits with other strategy frameworks
A practical sequence: start wide with How to Do a PESTLE Analysis (Template, Example, and Steps), narrow to your industry with Five Forces, pull the findings into How to Write a SWOT Analysis for a Small Business (Template and Examples), and then set targets with How to Do a Gap Analysis (Template, Example, and Steps). For a closer look at individual rivals, use How to Do Competitive Analysis With AI (The Competitor Map Framework).
How to respond to each strong force
- Strong rivalry: stop competing on the same terms. Sharpen who you serve and why you are different, using How to Write a Positioning Statement for a Small Business (Template and Examples).
- Strong threat of new entrants: build things that are hard to copy quickly, such as reputation, reviews, relationships, and a community of repeat customers.
- Strong buyer power: spread revenue across more customers so no single one can dictate terms, and make your value clear enough that price is not the only comparison.
- Strong supplier power: find and test a second supplier, or reduce how much you depend on the scarce input.
- Strong threat of substitutes: make the outcome you deliver obvious and hard to get any other way. How to Write a Value Proposition Customers Understand in One Read helps you say it clearly.
If several forces are strong at once, the issue may be the business model itself rather than any one tactic. Redraw it with How to Create a Business Model Canvas (Template, Example, and Steps).
Five Forces mistakes to avoid
- Defining the market so broadly that every force looks medium.
- Only looking at direct competitors and skipping substitutes.
- Rating forces on gut feel with no reason written next to the rating.
- Treating it as a one-time school exercise instead of a decision tool.
- Ending with a list of ratings and no moves, owners, or dates.
- Assuming the forces are the same for every customer segment you serve.
How to do a Five Forces analysis with Claude
Claude is useful for structuring the analysis and challenging your ratings. Open the Claude desktop app and work through it in passes.
- Describe your market in a few sentences: what you sell, to whom, where, and who you usually lose deals to.
- Paste in the template and ask Claude to list possible players for each force, including substitutes you might not have considered.
- Fill in what you actually know from your own sales data and customer conversations, then ask Claude to suggest a rating for each force and explain its reasoning.
- Ask it to argue against your two highest and two lowest ratings, so you can see where your view is weakest. Check anything it claims about your market against what you can see yourself.
- Ask it to draft two moves for each strong force, then edit them into your own words and add owners and dates.
Frequently asked questions
What are Porter's Five Forces?
The five forces are competitive rivalry, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, and the threat of substitutes. Together they shape how much profit is available in a market.
How do you do a Five Forces analysis for a small business?
Define your market narrowly, list the players for each force, answer a few questions about each one, rate each force low, medium, or high with a reason, then decide what to do about the strongest one or two.
What is the difference between Five Forces and SWOT?
Five Forces looks at the pressures in your industry that affect profit. A SWOT analysis looks at your own strengths and weaknesses alongside outside opportunities and threats. Five Forces findings often feed into the opportunities and threats in a SWOT.
What is a substitute in Porter's Five Forces?
A substitute is a different way for customers to get the same result, such as doing it themselves, using software instead of a service, or spending the money on something else. It is not a competitor selling the same thing.
How often should you update a Five Forces analysis?
Review it every six to twelve months, and sooner when something big changes, such as a major competitor entering, a key supplier changing terms, or customers starting to buy in a new way.