The Five Competitive Forces That Shape Strategy

Summary

In this insightful discussion, Harvard Business Review's Tom Stewart interviews Michael Porter, renowned professor and author of 'The Five Competitive Forces That Shape Strategy'. Porter revisits his influential 1979 article, explaining how these forces—rivalry, threat of substitutes, new entrants, bargaining power of buyers and suppliers—holistically assess industry competition and profitability. Using the airline industry as an example, Porter illustrates the framework's application, emphasizing its robustness and relevance across various sectors. He also highlights the importance of strategy alignment within an organization and the potential for positive-sum competition to benefit all players.

Takeaways

• 📚 Michael Porter's 'Five Competitive Forces' framework is a holistic approach to understanding the structural drivers of profitability and competitive advantage within an industry.
• 🤝 The framework considers not only direct competitors but also the broader set of competitors, including customers, suppliers, new entrants, and substitute products or services.
• 💡 The five forces help identify what causes profitability in an industry and the trends that could significantly change the competitive landscape.
• ✈️ The airline industry serves as a clear example where all five forces are strong, leading to intense rivalry, low barriers to entry, and low profitability.
• 🥤 In contrast, the soft drink industry is characterized by benign forces, making it a 'five-star' industry with high profitability and less intense competition.
• 🔍 Porter emphasizes the importance of understanding the underlying economic fundamentals of an industry rather than being misled by temporary trends or technological fads.
• 🛠 The framework is robust and applicable to any industry, including high-tech and low-tech sectors, as well as emerging and developed economies.
• 🔄 The five forces provide insights into the dynamics of industry change, helping to identify evolving trends and strategic opportunities.
• 💼 Strategy should be a widely understood concept within an organization, with all employees aligned towards a common value proposition or competitive advantage.
• 📈 The framework encourages companies to consider expanding the industry's profit pool rather than engaging in destructive battles for market share.
• 🔑 The five forces analysis is a foundational step in strategy formulation, essential for understanding the competitive environment and making informed strategic decisions.
• 🌐 The internet, while often misunderstood as a standalone force, is an enabling technology that may or may not impact the underlying structure of an industry, according to Porter.

Q & A

Who is the guest in the discussion about the five competitive forces?

The guest is Michael Porter, a Professor at Harvard University and Head of the Institute for Strategy and Competitiveness.

What is the main topic of Michael Porter's forthcoming HBR article?

The main topic is 'The Five Competitive Forces That Shape Strategy', which is a reaffirmation, update, and extension of his 1979 article 'How Competitive Forces Shape Strategy'.

What is the fundamental idea behind the five competitive forces framework?

The fundamental idea is that competition is not just with direct competitors but also with a broader set of competitors including customers, suppliers, new entrants, and substitute products or services that affect profitability.

How does the framework of the five competitive forces help in understanding an industry?

The framework provides a holistic way to look at any industry, helping to identify the structural underlying drivers of profitability and competitive advantage.

What are the implications of the threat of substitutes in an industry?

The threat of substitutes places a constraint or cap on profitability and growth, preventing companies from overcharging for their products or services.

Why is the airline industry considered to be among the least profitable?

The airline industry is considered least profitable due to intense rivalry, low barriers to entry, powerful suppliers, fickle customers, and the availability of substitutes like trains or cars.

What does Michael Porter suggest as a potential strategy for industries with intense rivalry?

Porter suggests that rather than focusing on market share, companies might be better off expanding the whole profit pool of the industry, thus growing the pie for everyone.

What is the difference between positive-sum and zero-sum competition according to the discussion?

Positive-sum competition allows companies to compete on different attributes, growing the market for everyone, while zero-sum competition leads to destructive battles that benefit only the consumers in the short term.

How can the five forces framework be applied to strategy formulation?

The framework should be used as the starting point for industry analysis, understanding the competitive environment, and identifying how the industry is changing to inform strategic decisions.

Why is it important for a company's strategy to be understood by all employees?

It is important for alignment; strategy should guide all employees in making choices that reinforce each other, pursuing a common value proposition or competitive advantage.

What has Michael Porter learned about the application of the five forces framework in the real world?

Porter has learned that the framework is robust and can be applied to any industry, but there is often confusion and complexity in its application, which he aims to clear up in his new article.