Competitive Forces

Topics: Barriers to entry, Strategic management, Barriers to exit Pages: 19 (6184 words) Published: February 25, 2013

How competitive forces shape strategy

Awareness of these forees can help a company stake out a position in its industry that is less vulnerable to attack

Michael E. Porter

The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services (where applicahle), and the jockeying among current contestants. To estahlish a strategic agenda for dealing with these contending currents and to grow despite them, a company must understand how they work in its industry and how they affect the company in its particular situation. The author details how these forces operate and suggests ways of adjusting to them, and, where possihle, of taking advantage of them. Mr. Porter is a specialist in industrial economics and business strategy. An associate professor of husiness administration at the Harvard Business School, he has created a course there entitled "Industry and Competitive Analysis." He sits on the hoards of three companies and

consults on strategy matters, and he has written many articles for economics journals and published two books. One of them, Interbrand Choice, Strategy and Bilateral Market Power (Harvard University Press, 1976) is an outgrowth of his doctoral thesis, for which he won the coveted Wells prize awarded by the Harvard economics department. He has recently completed two book manuscripts, one on competitive analysis in industry and the other (written with Michael Spence and Richard Caves) on competition in the open economy.

The essenee of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears executives eomplaining to the eontrary, intense eompetition in an industry is neither coineidence nor bad luck. Moreover, in the fight for market share, competition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry. The state of competition in an industry depends on five basic forces, which are diagrammed in the Exhibit on page 141. The collective strength of these forces determines the ultimate profit potential of an industry. It ranges from intense in industries like tires, metal eans, and steel, where no company earns spectacular returns on investment, to mild in industries like oil field services and equipment, soft drinks, and toiletries, where there is room for quite high returns. In the economists' "perfeetly competitive" industry, jockeying for position is unbridled and entry to the industry very easy. This kind of industry structure, of course, offers the worst prospect for longrun profitability. The weaker the forces collectively, however, the greater the opportunity for superior performance. Whatever their eoUeetive strength, the eorporate strategist's goal is to find a position in the industry where his or her company can best defend itself against these forees or ean influence them in its favor. The collective strength of the forces may be


Harvard Business Review

March-April 1979

painfully apparent to all the antagonists; hut to cope with them, the strategist must delve below the surface and analyze the sources of each. For example, what makes the industry vulnerable to entry? What determines the bargaining power of suppliers? Knowledge of these underlying sources of eompetitive pressure provides the groundwork for a strategic agenda of action. They highlight the critieal strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic ehanges may...
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