“the Competitive Five Forces That Shape Strategy”

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“the Competitive Five Forces That Shape Strategy”

By | October 2011
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“The Competitive Five Forces that Shape Strategy”
Hand-in Article Summary

In this theoretical piece Porter explains how there are five main forces that shape competition in a company’s external environment. There are various different techniques for identifying strategic opportunities and it differs by industry. The classic five forces are: threat of entry: the risk of new entry by potential competitors, the power of supplies: the bargaining power of suppliers, the power of buyers: the bargaining power of buyers, the threat of substitute: the competitive force of substitute products and finally rivalry among existing competitors: the degree of rivalry among established companies. The article discusses how to put the five forces into practice while addressing common misunderstandings.

As Porter explains the forces he touches on the possibility of threat of entry with a particular consideration paid to the causes of barriers to entry and expected retaliation. The risk of entry by potential competitors is a function of the height of barriers to entry. This is determined by the extent of brand loyalty, absolute cost advantage over potential entrants and the possibility of scale economies.

Porter also explains how retaliation will influence a new entrant’s decision to enter or stay out of an industry. It is clear that changes in macro environment like industry growth rate, technology and the government can have a direct impact on any one of the five forces altering the attractiveness of an industry. It is important to recognize that a fast-growing industry is not always a profitable one and expanding not only benefits you but also expands opportunities for all competitors.

Next, Porters emphasizes the role of complements or products or services used together with an industry’s product. Without a sufficient supply of complementary products, demand in the industry will be weak, and revenues and profits will be low. By eliminating today's competitors...