Summary of The Five Competitive Forces That Shape Strategy by Michael E. Porter Michael E. Porter's article "The Five Competitive Forces That Shape Strategy," originally published in the Harvard Business Review in 1979 and updated in 2008, introduces a framework that identifies five forces determining the competitive intensity and attractiveness of a market. This model is widely used for analyzing industry structure and strategy. Five Forces of Competition 1. Threat of New Entrants: High barriers to entry protect existing firms and reduce competition. These barriers may include economics, capital requirements, customer loyalty, access to distribution channels, and government policies. Low barriers to entry allow new entrants to enter the market earlier, increasing competition and reducing the advantage of incumbents. 2. Market Power of Suppliers: Supplier can exert power over firms in the industry by raising prices, lowering quality, or reducing the availability of products. These forces are greater when there are few suppliers offering unique or differentiated products, and when a firm's transfer costs are high. A strong supplier power can increase the costs of firms within the industry, putting pressure on industry margins. 3. Bargaining power of the buyer: Buyers have the right to demand lower prices, higher quality or additional services. Buyer power is greater if customers are few, sold in large quantities, or can be easily switched to a competitor's product. This forces powerful buyers to lower prices or demand higher quality, affecting the profitability of companies in the sector. 4. Threat of substitute products or services: Substitute products or services that meet the same requirements can limit the company's profits by fixing prices. Substitutes come from outside the boundaries of traditional industry. On the other hand, the presence of substitutes can reduce the attractiveness of the industry and its profitability, especially when price/performance is traded. 5. Competition among existing competitors: Intense competition among existing firms can lead to price wars, increasing marketing and innovation costs, thereby reducing profitability. The intensity of competition is influenced by the number of competitors, the growth rate of the industry, product differentiation and transaction costs. Factors that influence the five factors Porter also shows many factors that can change the strength of these factors. • Rapid industry growth: High growth reduces competition by providing more opportunities for companies to grow without taking market share away from competitors. • Technology and Innovation: Advances can create new barriers to entry or better describe other products. • Government Policy: Laws can affect the five forces by influencing barriers to entry, influencing the influence of consumers and suppliers, and creating environmental competition. • Additional products and services: The availability of additional products affects the attractiveness and dynamism of the industry. Conclusion Porter's five-point framework provides a comprehensive approach to analyzing industry structure and understanding the fundamental drivers of capital. It helps companies assess their competitive environment, identify strategic opportunities and threats, and develop strategies to achieve a sustainable competitive advantage. By systematically evaluating each of the five factors, companies can better navigate the complexities of their business and improve strategic decisionmaking.
