The Five Competitive Forces That Shape Strategy
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The Five Competitive Forces That Shape Strategy

I'm Tom Stewart editor and managing director of the Harvard Business Review our guest today is Michael Porter professor at Harvard University and head of the Institute for strategy and competitiveness he is the author of the forthcoming HBR article the five competitive forces that shape strategy a reaffirmation update and extension of his groundbreaking 1979 article how competitive forces shape strategy Mike thanks for joining the program to start let's remind our viewers of what the five competitive forces are well Tom the basic idea of the competitive forces starts with the notion that competition is often looked at too narrowly by managers and the Five Forces say that yes you're competing with your direct competitors but you're also in a fight for profits with a broader extended set of competitors customers who have bargaining power suppliers who can have bargaining power new entrants who might come in and kind of grab a piece of the action and and substitute products or services that essentially place a constraint or a cap on your profitability and growth so the Five Forces is kind of a holistic way of looking at any industry understanding the structural underlying drivers of profitability and competition so I use these to think about my rival makes it difficult for me the threat of substitutes means I can't overcharge the threat of new entrants means I can't overcharge right and and the same thing the same thing with the bottle advisors class and and the end there's underlying drivers of each of those forces that that the model really sort of unveils and then you can actually apply this every industry is different every industry will have a different set of economic fundamentals but the Five Forces help you home in on first of all what's really causing profitability your industry what are the trends of the most likely to be significant and changing them to get the game in the industry you know where are the constraints which which if you can relax them might allow you to find a really strong competitive position so how would you apply this analysis to an mystery Airlines for example Airlines is a great industry it's actually you'll see in the article you've seen in the article that that there's a chart that compares profitability of industries and Airlines I think has been on the bottom of that list for decades it's a month one the least profitable industries known to man and and and the Five Forces really allows you very quickly to understand why I mean let's just let's just go around the go around the chart that nature of rivalry is incredibly intense and it's almost exclusively on price it's been very hard to differentiate to get the customer to wait even an extra two or three minutes for another flight if they can get on the fly to the cheaper price so there's there's been a very intense price competition low barriers to entry a constant stream of new airlines coming into the industry despite the fact that the probability is low it's always puzzling the low barriers to entry because you can rent a plane you know the kind of pain you can Lisa gate you know it's all generic technology you can you can start with one flight between two city pairs you don't have to you know there's no real need to have a whole network in the beginning and yet people keep coming in I think it's just one of those sexy industry it's a great example of how sexiness or coolness or hotness or sheepish has nothing to do with industry profitability it's the underlying structure is what drives profitability you know the the customer is very fickle and price sensitive suppliers of aircraft and aircraft engines and and even aircraft gates at airports now have a lot of clout they can bargain away mark most of the profits you know GE and rolls-royce and and and Airbus and Boeing make a lot more money than Airlines they get most of the profit and then of course there's always a substitute of getting on the train or driving your car or or shipping your goods by by by air and and that that's kind of kept to continue have powerful suppliers of labor to that's another powerful all right exactly here there's a great case where you have where you have unionized labor and and and and in unlike other industries and this in this industry particularly with the pilots the labor can literally shut you down and there's no way around them so it's an industry where there are spurts of what you might call mediocre profitability punctuated by long pier areas of terrible profitability so every one of the five forces is very strong in that industry and you could take another industry where the Five Forces are relatively benign like soft drinks I mean soft drinks has been a license to commit money and again it's the opposite kind of analysis when I talk with students we kind of joke around there's five star industries where all the forces are attractive like soft drinks there's zero star industries where all the forces are unfavorable like Airlines and and we're always trying to understand okay what's the configuration of underlying economic drivers that's going to really shape the proper potential of this industry and then armed with that insight what do I do about it you know how do I try to relax the constraint that's holding back industry profitability how can I position myself to kind of insulate from some of the the gales gale winds of those forces and those implications of the Five Forces are something that this new article has developed in much more detail you conceived this framework nearly three decades ago and it has been the most extensively used both in management scholarship and management practice of any of any strategy framework and it really is change it changed the definition of strategy in a lot of ways in these three decades what have you learned what have you learned about the application of these ideas in the real world of business well the the wonderful thing of course we learned is that that these these concepts can be applied to literally any any industry to product a service high tech low tech emerging economies developed economies indeed what what one of the powers of the framework is it helps you get avoid getting trapped or tricked by the latest trend or the latest technological sensation and really allows you to focus on the underlying fundamentals the Internet's a good example we got very very confused by the internet because people saw the Internet as a force as opposed to really enabling technology that that might might or might not impact the underlying structure of the industry so so the I think one thing I've learned is is is the framework is is very very robust but I've also learned that there's a lot of fusion and complexity and actually applying the framework in actual practice and we've tried to clear as many of those areas up as we could in this new article for example how to think about rivalry what what's the really how do we understand when rivalry is really positive some which allows companies to you know many companies to do well and when is rivalry become really zero-sum where where where everybody's kind of dragged down into kind of a destructive battle that you can't win that that's just n zero-sum I mean if we get in a price war the only one one who wins is the consumer which yep it's nice if you're a consumer yeah but what's what do you mean by positive some competition well you know the trouble with the zero-sum competition is then the the consumer gets a low price but they they really get no choice and and in a positive some competitions where companies can compete on different attributes services features customer support that's actually relevant to particular groups of customers and and the most really positive some competition is where companies are really competing on different things in order to meet the needs of different relatives I and there's a piece for each other as a piece of us in fact one of the things we talk about in the new article or the things I did in the new article that that we really probably didn't have the experience to do so so many years ago was really talked a lot about the implications if this is the way competition works what do you do about it and and one of them is might be in some industries rather than go for market share against your rivals you might be much better off just really expanding the pie expanding the whole profit pool the industry that may be the best way for a market leader to actually improve their circumstances rather than to trigger a destructive battle you know with their head-to-head rival how should a company use get or get started using the Five Forces framework you're working your strategy up you both decide this really works for me I don't yeah how do you how do you begin well I think industry analysis and looking at the competitive environment is of course probably the starting basic discipline of any strategy formulation process if you don't know what your industry looks like you know how it's changing if you don't know what the drivers of competition are am I is well you know strategy is going to be you know marginally useful if not destructive so so we got to start with industry analysis you know figuring out what your industry is and drawing the right boundaries and that's not always it's not always easy we've added a box in this new article which really addresses that question because I encountered so many companies that struggled with industry definition you know identifying really what the industry structure is in in your particular industry and then there's another thing that a lot of managers do they kind of go through the industry analysis and they say okay this is good this is bad this is good this is bad so this is a attractive industry or an unattractive industry but of course the real question is how's that industry changing some have believed it taken the five forces is really a static snapshot but of course the five forces give you the tools for understanding the dynamics and where's that industry structure changing Howard buyers and suppliers and substitutes and potential entry evolving and then what implications does that hold for your strategy how do you position yourself to find that spot within the industry that you're at where you can command a really good profit given the Five Forces how can you maybe reshape the nature of the industry structure and we've got some great new examples that are very very contemporary in this article that I think will help the manager community and the investor community really understand the application of this sometimes when people think about strategy they think about a group of people maybe from a management consulting firm or maybe on the 33rd floor of the building whatever it is but but this sort of you know elite strategy priesthood that goes in and does this and they're almost divorced from the front from the rest of the management of the of the company the 99% of the other people working in the company how can how can a strategy become part of the day-to-day life of a working stiff manager in a company how do you apply this framework this thinking how to use it well we think that this way of looking at an industry needs to be very very broadly understood in the organization I mean and and and the thing about it is is that that managers even rank-and-file employees it's intuitive people understand yet we have these customers we have these suppliers we're struggling with them every day trying to they're trying to get a better deal we're trying to get a better deal so intuitively I think this is a way of helping people sort of step back from all the excruciating little details that that characterize any business and say what's really important here and then and then of course we've learned that strategy is completely useless again unless the results of the strategy process the position that you choose to occupy the way you're going to drive your company is well understood quite broadly because the number one purpose of strategy is aligned it's really to get all the people in the organization making good choices reinforcing each other's choices because everybody's pursuing a common value proposition a problem common way of gaining competitive advantage so you know and I remember when I wrote this article there are many people who believe that strategy documents should be locked in the safe at night and should not be made available to the rank and file there was a concern that some competitor would find some secret well we've actually learned now that it's the opposite you know you've got your employees got to know your strategy your channels have to know your strategy your suppliers have to know your strategy and your competitors probably knew it already well and and frankly if you know again there's the the competition is not zero-sum if every company finds a unique need that it can set out to meet if it if it tries to differs to deliver something different than its rivals multiple rivals can be successful and and if your competitors kind of understand what you stand for and what you're committed to maybe they'll make a different choice rather than get dragged into these kind of mindless price wars that we see in so many industries the five forces that shape strategy have been around for 30 years they're going to be around for well they've been around but they've been around for long they were around long before you wrote about that's right they've been around as long as business has been around they're going to be a lot around as long as business is around the new articles just fabulous and thank you so much forward to kind of getting another surge of of feedback from the practitioners and and and and we'll keep learning thanks thanks

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29 thoughts on “The Five Competitive Forces That Shape Strategy

  1. Man, knowing to articulate in such a graphic and yet precise manner is a hell of a trait. Makes it really interesting to listen to this.

  2. cada día me esfuerzo para entender el ingles ,no entiendo me dificultad mucho mis clases son en ingles ,precisamente los temas son the theories portes 5 forces,,,algún consejito para entender el ingles?

  3. The article being mentioned here is actually the 3 assigned reading in my Strategy course for the Executive MBA program – 10 years after it was published. I think Porter knows his stuff!

  4. What a profound session on real business world scenarios, times are changing but fundamentals are the key to progression 5 Forces are those factors.

  5. Mevcut iş geliştirmede stratejiyi belirlemeye yarayan 5 rekabetçi kuvvet şu şekilde;

    (1) Müşterilerin pazarlık gücü ->
    (2) Tedarikçilerin pazarlık gücü ->
    (3) Yeni girenlerin (rakiplerin) tehdidi ->
    (4) Yerini alan ürün veya hizmet tehditi ->
    (5) Rakipler arasındaki rekabet (Döngü)

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