Porters Five Forces
Topics:
Barriers to entry, Competition, Switching barriers Pages: 37 (11070 words)
Published: November 21, 2009
Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack.
78 Harvard Business Review
|
January 2008
|
hbr.org
STRATEGY STRATEGY
by Michael E. Porter
Peter Crowther
SHAPE
THE FIVE COMPETITIVE FORCES THAT
Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.
IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care
hbr.org
|
January 2008
|
Harvard Business Review 79
LEADERSHIP AND STRATEGY
|
The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to understand industry competition and profitabilThe Five Forces That Shape Industry Competition ity in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exThreat hibit “The Five Forces That Shape Industry of New Competition.”) Entrants If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, Rivalry as they are in industries such as software, Among Bargaining Bargaining soft drinks, and toiletries, many companies Power of Power of Existing Suppliers are profitable. Industry structure drives Buyers Competitors competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability Threat of in the short run – including the weather Substitute Products or and the business cycle – industry structure, Services manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in Industry Profitability.”) Understanding the competitive forces, and their underThe strongest competitive force or forces determine the lying causes, reveals the roots of an industry’s current profitprofitability of an industry and become the most important ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is influencing competition (and profitability) over time. A not always obvious. healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in comconcern to strategists as their company’s own...
78 Harvard Business Review
|
January 2008
|
hbr.org
STRATEGY STRATEGY
by Michael E. Porter
Peter Crowther
SHAPE
THE FIVE COMPETITIVE FORCES THAT
Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.
IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care
hbr.org
|
January 2008
|
Harvard Business Review 79
LEADERSHIP AND STRATEGY
|
The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to understand industry competition and profitabilThe Five Forces That Shape Industry Competition ity in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exThreat hibit “The Five Forces That Shape Industry of New Competition.”) Entrants If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, Rivalry as they are in industries such as software, Among Bargaining Bargaining soft drinks, and toiletries, many companies Power of Power of Existing Suppliers are profitable. Industry structure drives Buyers Competitors competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability Threat of in the short run – including the weather Substitute Products or and the business cycle – industry structure, Services manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in Industry Profitability.”) Understanding the competitive forces, and their underThe strongest competitive force or forces determine the lying causes, reveals the roots of an industry’s current profitprofitability of an industry and become the most important ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is influencing competition (and profitability) over time. A not always obvious. healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in comconcern to strategists as their company’s own...
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