THE FIVE COMPETITIVE
FORCES THAT SHAPE
STRATEGY
MICHAEL E PORTER
HARVARD BUSINESS
SCHOOL
JOB OF A STRATEGIST
• UNDERSTAND AND COPE WITH
COMPETITION
• NOT ONLY DIRECT COMPETITION
• DRIVERS OF PROFITABILITY SAME
ACROSS INDUSTRIES
• INTENSE FORCES-DRIVE DOWN
PROFITABILITY
• BENIGN FORCES-DRIVE UP
• INDUSTRY STRUCTURE DECIDES
THE FORCES
SHAPING STRATEGY
• THE FIVE COMPETITIVE FORCES
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POTENTIAL ENTRANTS
SUPPLIERS
CUSTOMERS
SUBSTITUTE PRODUCTS
EXISTING COMPETITION
• DEFENDING & SHAPING THE C.F
• KEY C.F SHAPES STRATEGY
FORMULATION
POTENTIAL ENTRANTS
–THREAT OF ENTRY
• NEW ENTRANTS
• ADD ADDITIONAL CAPACITY
• PUT A CAP ON PROFIT BY
DRIVING DOWN PRICES
BARRIERS TO ENTRY
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SUPPLY SIDE (INTEL)
DEMAND SIDE (IBM, e-BAY)
CUSTOMER SWITHCING COSTS (SAP)
CAPITAL REQUIREMENTS
INCUMBANCY ADVANTAGES
INDEPENDENT OF SIZE
• UNEQUAL ACCESS TO DISTRBN
CHANNELS-Eg: LOW COST AIRLINES
• RESTRICTIVE GOVT.POLICY
• EXPECTED RETALIATION (Retail
Associations in India)
POWER OF SUPPLIERS
• MORE POWERFUL CAPTURE
MORE VALUE (MICROSOFT)
• SUPPLIER DEPENDENCY
(BLOOMBERG)
• DIFFERENTIATED PRODUCTS
• HIGH CUSTOMER SWITCHING
COSTS
POWER OF BUYERS
• FEW BUYERS HIGH VOLUMES
Eg;BSNL
• STANDARDISED PRODUCTS
• LOW/MINIMUM SWITHCING
COSTS
• POSSIBILITY OF BACKWARD
INTERGARTION BY CUSTOMERS
THREATS OF
SUBSTITUTES
• ALTERNATE CHEAPER
PRODUCTS/ SERVICES
• ATTRACTIVE PRICE
PERFORMANCE TRADE OFF
• SWITHCING COSTS TO NEW
SUBSTITUTE LOW
RIVALRY AMONG
EXISTING COMPETITORS
• NUMEROUS COMPETITORS OF
EQUIVALENT SIZE
• SLOW GROWTH RATE
• HIGH EXIT BARRIERS
• HIGHLY COMMITTED RIVALS
• HIGH PRICE COMPETITION
VISIBLE INDUSTRY
ATTRIBUTES
• INDUSTRY GROWTH RATE
• TECHNOLOGY AND
INNOVATION
• GOVERNMENT
• COMPLEMENTARY PRODUCTS
AND SERVICES (Eg: Microsoft,
Antivirus bundled PC)
CHANGES IN INDUSTRY
STRUCTURE
• INDUSTRY DEVELOPMENTS DICTATE
CHANGE
• SHIFTING THREAT OF NEW ENTRY
(Eg;PATENT EXPIRY FOR DRUGS)
• CHANGING SUPPLIER OR BUYER
POWER (BIG BAZAR)
• SHIFTING THREAT OF
SUBSTITUTION (Eg:PENDRIVE)
• NEW BASES OF RIVALRY
IMPLICATIONS FOR
STRATEGY
• FIVE FORCES REVEAL MOST SIGNIFICANT
OF THE INDUSTRY ASPECTS
• SWOT ANALYSIS
• SHAPING THE FORCES
• POSITIONING THE COMPANY
• EXPLOITING INDUSTRY CHANGE (Apple itunes)
• SHAPING INDUSTRY STRUCTURE
• REDIVIDING PROFITABILITY
• EXPNADING PROFIT POOL
DEFINING INDUSTRY
• SCOPE OF PRODUCTS/
SERVICES
• GEOGRAPHICAL SCOPE
TYPICAL STEPS IN
INDUSTRY ANALYSIS
• DEFINE THE RELEVANT INDUSTRY
• IDENTIFY PARTICIPANTS
• ASSESS DRIVERS OF COMPETITIVE
FORCES
• DETERMINE OVERALL INDUSTRY
STRUCTURE
• TEST ANALYSIS FOR CONSISTENCY
TYPICAL STEPS IN
INDUSTRY ANALYSIS
(Contd..)
• ANALYSE RECENT AND LIKELY
FUTURE CHANGES
• POSITIVE / NEGATIVE
• INDUSTRY ASPECTS
INFLUENCED BY OTHER
FORCES
• COMMON PITFALLS
COMPETITION AND
VALUE
• UNCOVERING OPPORTUNITIES
• THINKING STRUCTURALLY
ABOUT COMPETITION
• ATTRACTION TO THE INDUSTRY
• CREATE TRUE ECONOMIC
VALUE THAN “ PLEASSING THE
WALL STREET”
THANK YOU
SLIDES BY
P. RAJU IYER