The Five Forces: Why Even Great Companies Die in Lousy Industries

Warren Buffett’s axiom—'When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact'—captures a brutal truth. Even superstar teams get chewed up in industries where the basic structure is unforgiving. The dot-com crash of the early 2000s left thousands of devastated hopefuls, many serving markets that looked attractive but whose industries were nightmarishly easy to enter, making it impossible to fend off clones and slash-price competitors.

Business researchers Michael Porter and others formalized this with the 'five forces'—threat of new entrants, power of suppliers, power of buyers, threat of substitutes, and industry rivalry. Each force presses against your business’s survival odds. For example, in the daily deals industry (like Groupon), there were virtually no barriers to entry, and both merchants and customers grew weary quickly as competitors flooded inboxes. Conversely, the pharmaceutical industry had monstrous regulatory and patent hurdles, allowing companies like GlaxoSmithKline to bank billions for over a decade on a single product.

The lesson, backed by decades of industrial organization research, is simple: before betting big on talent, recognize if the game is rigged against you by the industry structure itself. Smart founders run a five forces check before diving in—because no amount of hustle beats gravity.

Before jumping into that shiny business opportunity, step back and walk through five clear questions: How tough is it for others to follow you in? Could a few suppliers or buyers dictate terms and drain your profits? Are there alternatives lurking that could easily replace you? And, just how ferocious is the competition? Write down your thinking for each area, using real-world data or stories from similar ventures. Only when you can stare down ugly industry truths and still see a path, should you double down; otherwise, adjust your approach or pick a different battle.