COMPETITIVE STRATEGY AND REAL ESTATE DEVELOPMENT
REMARKS TO THE 1989 HARVARD BUSINESS SCHOOL REAL ESTATE SYMPOSIUM1 The real estate industry is an industry in which many of you will have to make some choices about how you will compete in the future. Past modes of behavior probably will not carry you through the next decade. The questions are how do you think about the question of strategy for your business and how do you do that in a constructive way. In looking at any industry, whether it is real estate or whether it is making widgets, there are two basic questions that each of you has to answer if you are going to develop an effective strategy. The first question has to do with what’s going on in the industry itself. Industries differ dramatically in their profit potential and their profit potential changes over time. You have to understand this because there is something about the game in which you are playing that is going to determine how successful you are going to be. There are some games that are good to play in and some games that are not good games to play in. When I talk about the word industry, there is going to be a tendency for the people in this room to think of real estate. But that’s not what I mean. Real estate isn’t an industry. It’s a whole sector of the economy. It is composed of many distinct businesses, each of which is an industry. So developing shopping malls, putting up prime downtown commercial space, and brokerage are all industries. Each of these industries has a different economic logic. Each of them is different in terms of its fundamental attractiveness. You’ve got to understand how attractive the industries are in which you are competing and you have to understand how they are likely to change over time. Hopefully, your job is not only to compete in a way that is going to improve your position but also that will make your industry better. The second basic question in strategy has to do with your position within the industry. No matter where you are operating, you are going to have to decide exactly how your company is going to compete and how you are going to position your company to be a superior performer. What we see from looking at every industry is that, no matter how attractive or unattractive an industry is, some companies do a lot better than others, year in and year out, because they have found exactly the right position. One of the most profitable companies in the United States in the last decade has been a steel company. It’s in a lousy industry but it’s in just the right position. 1
This presentation was delivered to a group of leading real estate executives who convened at Harvard Business School in December 1989. The presentation’s analysis of the emerging changes in real estate proved to correspond well with actual events, and the same principles remain important today. In the current real estate downturn, these principles are especially timely. June 2002. Copyright 1989 Michael E. Porter
Professor Michael E. Porter Harvard Business School
These two questions are the fundamental questions in strategy. How can you understand your industry and your competitive environment, and how can you understand how to position your company within that environment? Basically in any industry, there are five forces of competition. The first is rivalry amongst competitors. This takes many forms. One of which is the threat of substitute products or services. In your business, this might be some type of totally new retail space, some new location for office space or rehab instead of new construction. The second is the threat of new entrants into the industry. This is always a threat whenever there is something profitable going on. If they do enter, they are going to erode the profitability of that segment. The third and fourth forces are the bargaining power of the suppliers, from whom you are purchasing critical inputs, and the...