1. the Five Competitive Forces That Shape Strategy

8/13/2019 1. the Five Competitive Forces That Shape Strategy

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THE FIVE COMPETITIVE FORCES

THAT SHAPE STRATEGY

Awareness of the five forces can help a company understand the structure of its industry andstake out a position that is more profitable and less vulnerable to attack.

Michael E. Porter is the Bishop William Lawrence University Professor at Harvard University,

based at Harvard Business School in Boston. He is a sixtime !c"insey #ward winner, includin$ for his

most recent HB% article, &Strate$y and Society,' coauthored with !ar( %. "ramer )*ecember +-.

Editors Note: /n 0121, HARVARD BUSINESS REVIEW published &How 3ompetitive 4orces ShapeStrate$y' by a youn$ economist and associate professor, !ichael 5. Porter. /t was his first HB% article,and it started a revolution in the strate$y field. /n subse6uent decades, Porter has brou$ht his si$natureeconomic ri$or to the study of competitive strate$y for corporations, re$ions, nations, and, morerecently, health care and philanthropy. &Porter7s five forces' have shaped a $eneration of academic

research and business practice. With proddin$ and assistance from Harvard Business School Professor8an %iv(in and lon$time collea$ue 8oan !a$retta, Porter here reaffirms, updates, and extends theclassic wor(. He also addresses common misunderstandin$s, provides practical $uidance for users ofthe framewor(, and offers a deeper view of its implications for strate$y today.

In essence, the job of the strategist is to understand and cope ith co!petition"#ften, hoe$er, !anagers define co!petition too narro%&, as if it occurred on%&a!ong toda&'s direct co!petitors" (et co!petition for profits goes be&ondestab%ished industr& ri$a%s to inc%ude four other co!petiti$e forces as e%%) custo!ers,supp%iers, potentia% entrants, and substitute products" *he e+tended ri$a%r& thatresu%ts fro! a%% fi$e forces defines an industr&'s structure and shapes the nature ofco!petiti$e interaction ithin an industr&"

As different fro! one another as industries !ight appear on the surface, theunder%&ing dri$ers of profitabi%it& are the sa!e" *he g%oba% auto industr&, for instance,appears to ha$e nothing in co!!on ith the or%dide !aret for art !asterpiecesor the hea$i%& regu%ated hea%th-care de%i$er& industr& in Europe" But to understandindustr& co!petition and profitabi%it& in each of those three cases, one !ust ana%&.ethe industr&'s under%&ing structure in ter!s of the fi$e forces" /See the e+hibit 0*he1i$e 1orces *hat Shape Industr& 2o!petition"34


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THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY_ __ __ PA GE 2 OF 22

If the forces are intense, as the& are in such industries as air%ines, te+ti%es, andhote%s, a%!ost no co!pan& earns attracti$e returns on in$est!ent" If the forces are

benign, as the& are in industries such as softare, soft drins, and toi%etries, !an&co!panies are profitab%e" Industr& structure dri$es co!petition and profitabi%it&, nothether an industr& produces a product or ser$ice, is e!erging or !ature, high techor %o tech, regu%ated or unregu%ated" Whi%e a !&riad of factors can affect industr&profitabi%it& in the short run5inc%uding the eather and the business c&c%e5industr&structure, !anifested in the co!petiti$e forces, sets industr& profitabi%it& in the!ediu! and %ong run" /See the e+hibit 0Differences in Industr& 6rofitabi%it&"34

Differences in Industry Profitai!ity "#ocated at t$e end of t$is artic!e%

Understanding the co!petiti$e forces, and their under%&ing causes, re$ea%s the rootsof an industr&'s current profitabi%it& hi%e pro$iding a fra!eor for anticipating and

inf%uencing co!petition /and profitabi%it&4 o$er ti!e" A hea%th& industr& structureshou%d be as !uch a co!petiti$e concern to strategists as their co!pan&'s onposition" Understanding industr& structure is a%so essentia% to effecti$e strategicpositioning" As e i%% see, defending against the co!petiti$e forces and shapingthe! in a co!pan&'s fa$or are crucia% to strateg&"

FORCES TAT SA!E CO"!ET#T#O$

*he configuration of the fi$e forces differs b& industr&" In the !aret for co!!ercia%aircraft, fierce ri$a%r& beteen do!inant producers Airbus and Boeing and the

bargaining poer of the air%ines that p%ace huge orders for aircraft are strong, hi%ethe threat of entr&, the threat of substitutes, and the poer of supp%iers are !ore


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benign" In the !o$ie theater industr&, the pro%iferation of substitute for!s ofentertain!ent and the poer of the !o$ie producers and distributors ho supp%&!o$ies, the critica% input, are i!portant"

*he strongest co!petiti$e force or forces deter!ine the profitabi%it& of an industr&

and beco!e the !ost i!portant to strateg& for!u%ation" *he !ost sa%ient force,hoe$er, is not a%a&s ob$ious"

1or e+a!p%e, e$en though ri$a%r& is often fierce in co!!odit& industries, it !a& notbe the factor %i!iting profitabi%it&" 7o returns in the photographic fi%! industr&, forinstance, are the resu%t of a superior substitute product5as 8oda and 1uji, theor%d's %eading producers of photographic fi%!, %earned ith the ad$ent of digita%photograph&" In such a situation, coping ith the substitute product beco!es thenu!ber one strategic priorit&"

Industr& structure gros out of a set of econo!ic and technica% characteristics thatdeter!ine the strength of each co!petiti$e force" We i%% e+a!ine these dri$ers in

the pages that fo%%o, taing the perspecti$e of an incu!bent, or a co!pan& a%read&present in the industr&" *he ana%&sis can be readi%& e+tended to understand thecha%%enges facing a potentia% entrant"

Industry Ana!ysis in Practice "#ocated at t$e end of t$is artic!e%

*HREA* #1 EN*R("

Ne entrants to an industr& bring ne capacit& and a desire to gain !aret sharethat puts pressure on prices, costs, and the rate of in$est!ent necessar& to co!pete"

6articu%ar%& hen ne entrants are di$ersif&ing fro! other !arets, the& can %e$eragee+isting capabi%ities and cash f%os to shae up co!petition, as 6epsi did hen itentered the bott%ed ater industr&, 9icrosoft did hen it began to offer internetbrosers, and App%e did hen it entered the !usic distribution business"

*he threat of entr&, therefore, puts a cap on the profit potentia% of an industr&" Whenthe threat is high, incu!bents !ust ho%d don their prices or boost in$est!ent todeter ne co!petitors" In specia%t& coffee retai%ing, for e+a!p%e, re%ati$e%& %o entr&barriers !ean that Starbucs !ust in$est aggressi$e%& in !oderni.ing stores and!enus"

*he threat of entr& in an industr& depends on the height of entr& barriers that are

present and on the reaction entrants can e+pect fro! incu!bents" If entr& barriersare %o and neco!ers e+pect %itt%e reta%iation fro! the entrenched co!petitors, thethreat of entr& is high and industr& profitabi%it& is !oderated" It is the *HREA*of entr&,not hether entr& actua%%& occurs, that ho%ds don profitabi%it&"

B#%%/5%S 9: 5;9%


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entrant either to co!e into the industr& on a %arge sca%e, hich re;uires dis%odgingentrenched co!petitors, or to accept a cost disad$antage"

Sca%e econo!ies can be found in $irtua%%& e$er& acti$it& in the $a%ue chain< hichones are !ost i!portant $aries b& industr&":In !icroprocessors, incu!bents such as

Inte% are protected b& sca%e econo!ies in research, chip fabrication, and consu!er!areting" 1or %an care co!panies %ie Scotts 9irac%e-=ro, the !ost i!portantsca%e econo!ies are found in the supp%& chain and !edia ad$ertising" In s!a%%-pacage de%i$er&, econo!ies of sca%e arise in nationa% %ogistica% s&ste!s andinfor!ation techno%og&"

>" DE9AND-SIDE BENE1I*S #1 S2A7E"*hese benefits, a%so non as netor effects,arise in industries here a bu&er's i%%ingness to pa& for a co!pan&'s productincreases ith the nu!ber of other bu&ers ho a%so patroni.e the co!pan&" Bu&ers!a& trust %arger co!panies !ore for a crucia% product) Reca%% the o%d adage that noone e$er got fired for bu&ing fro! IB9 /hen it as the do!inant co!puter !aer4"Bu&ers !a& a%so $a%ue being in a 0netor3 ith a %arger nu!ber of fe%%o custo!ers"

1or instance, on%ine auction participants are attracted to eBa& because it offers the!ost potentia% trading partners" De!and-side benefits of sca%e discourage entr& b&%i!iting the i%%ingness of custo!ers to bu& fro! a neco!er and b& reducing theprice the neco!er can co!!and unti% it bui%ds up a %arge base of custo!ers"

?" 2US*#9ER SWI*2HIN= 2#S*S"Sitching costs are fi+ed costs that bu&ers facehen the& change supp%iers" Such costs !a& arise because a bu&er ho sitches$endors !ust, for e+a!p%e, a%ter product specifications, retrain e!p%o&ees to use ane product, or !odif& processes or infor!ation s&ste!s" *he %arger the sitchingcosts, the harder it i%% be for an entrant to gain custo!ers" Enterprise resourcep%anning /ER64 softare is an e+a!p%e of a product ith $er& high sitching costs"#nce a co!pan& has insta%%ed SA6's ER6 s&ste!, for e+a!p%e, the costs of !o$ing

to a ne $endor are astrono!ica% because of e!bedded data, the fact that interna%processes ha$e been adapted to SA6, !ajor retraining needs, and the !ission-critica% nature of the app%ications"

@" 2A6I*A7 REUIRE9EN*S"*he need to in$est %arge financia% resources in order toco!pete can deter ne entrants" 2apita% !a& be necessar& not on%& for fi+edfaci%ities but a%so to e+tend custo!er credit, bui%d in$entories, and fund start-up%osses" *he barrier is particu%ar%& great if the capita% is re;uired for unreco$erab%e andtherefore harder-to-finance e+penditures, such as up-front ad$ertising or researchand de$e%op!ent" Whi%e !ajor corporations ha$e the financia% resources to in$adea%!ost an& industr&, the huge capita% re;uire!ents in certain fie%ds %i!it the poo% of

%ie%& entrants" 2on$erse%&, in such fie%ds as ta+ preparation ser$ices or short-hau%trucing, capita% re;uire!ents are !ini!a% and potentia% entrants p%entifu%"

It is i!portant not to o$erstate the degree to hich capita% re;uire!ents a%one deterentr&" If industr& returns are attracti$e and are e+pected to re!ain so, and if capita%!arets are efficient, in$estors i%% pro$ide entrants ith the funds the& need" 1oraspiring air carriers, for instance, financing is a$ai%ab%e to purchase e+pensi$e aircraftbecause of their high resa%e $a%ue, one reason h& there ha$e been nu!erous neair%ines in a%!ost e$er& region"

" IN2U9BEN2( ADVAN*A=ES INDE6ENDEN* #1 SICE" No !atter hat their si.e,incu!bents !a& ha$e cost or ;ua%it& ad$antages not a$ai%ab%e to potentia% ri$a%s"

*hese ad$antages can ste! fro! such sources as proprietar& techno%og&,preferentia% access to the best ra !ateria% sources, pree!ption of the !ost


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fa$orab%e geographic %ocations, estab%ished brand identities, or cu!u%ati$ee+perience that has a%%oed incu!bents to %earn ho to produce !ore efficient%&"Entrants tr& to b&pass such ad$antages" Upstart discounters such as *arget andWa%-9art, for e+a!p%e, ha$e %ocated stores in freestanding sites rather than regiona%shopping centers here estab%ished depart!ent stores ere e%% entrenched"

" UNEUA7 A22ESS *# DIS*RIBU*I#N 2HANNE7S"*he ne entrant !ust, of course,secure distribution of its product or ser$ice" A ne food ite!, for e+a!p%e, !ustdisp%ace others fro! the super!aret she%f $ia price breas, pro!otions, intensese%%ing efforts, or so!e other !eans" *he !ore %i!ited the ho%esa%e or retai%channe%s are and the !ore that e+isting co!petitors ha$e tied the! up, the tougherentr& into an industr& i%% be" So!eti!es access to distribution is so high a barrierthat ne entrants !ust b&pass distribution channe%s a%together or create their on"*hus, upstart %o-cost air%ines ha$e a$oided distribution through tra$e% agents /hotend to fa$or estab%ished higher-fare carriers4 and ha$e encouraged passengers toboo their on f%ights on the internet"

" RES*RI2*IVE =#VERN9EN* 6#7I2("=o$ern!ent po%ic& can hinder or aid ne entr&direct%&, as e%% as a!p%if& /or nu%%if&4 the other entr& barriers" =o$ern!ent direct%&%i!its or e$en forec%oses entr& into industries through, for instance, %icensingre;uire!ents and restrictions on foreign in$est!ent" Regu%ated industries %ie %i;uorretai%ing, ta+i ser$ices, and air%ines are $isib%e e+a!p%es" =o$ern!ent po%ic& canheighten other entr& barriers through such !eans as e+pansi$e patenting ru%es thatprotect proprietar& techno%og& fro! i!itation or en$iron!enta% or safet& regu%ationsthat raise sca%e econo!ies facing neco!ers" #f course, go$ern!ent po%icies !a&a%so !ae entr& easier5direct%& through subsidies, for instance, or indirect%& b&funding basic research and !aing it a$ai%ab%e to a%% fir!s, ne and o%d, reducingsca%e econo!ies"

Entr& barriers shou%d be assessed re%ati$e to the capabi%ities of potentia% entrants,hich !a& be start-ups, foreign fir!s, or co!panies in re%ated industries" And, asso!e of our e+a!p%es i%%ustrate, the strategist !ust be !indfu% of the creati$e a&sneco!ers !ight find to circu!$ent apparent barriers"

5=P5395* %59#L/#9/:;.

Ho potentia% entrants be%ie$e incu!bents !a& react i%% a%so inf%uence their decisionto enter or sta& out of an industr&" If reaction is $igorous and protracted enough, theprofit potentia% of participating in the industr& can fa%% be%o the cost of capita%"Incu!bents often use pub%ic state!ents and responses to one entrant to send a

!essage to other prospecti$e entrants about their co!!it!ent to defending !aretshare"

Neco!ers are %ie%& to fear e+pected reta%iation if)

Incu&ents $a'e (re'ious!y res(onded 'i)orous!y to ne* entrants+

Incu&ents (ossess sustantia! resources to fi)$t ac,- inc!udin) e.cess cas$ and

unused orro*in) (o*er- a'ai!a!e (roducti'e ca(acity- or c!out *it$ distriution

c$anne!s and custo&ers+

Incu&ents see& !i,e!y to cut (rices ecause t$ey are co&&itted to retainin)

&ar,et s$are at a!! costs or ecause t$e industry $as $i)$ fi.ed costs- *$ic$create a stron) &oti'ation to dro( (rices to fi!! e.cess ca(acity+


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Industry )ro*t$ is s!o* so ne*co&ers can )ain 'o!u&e on!y y ta,in) it fro&

incu&ents+

An ana%&sis of barriers to entr& and e+pected reta%iation is ob$ious%& crucia% for an&co!pan& conte!p%ating entr& into a ne industr&" *he cha%%enge is to find a&s tosur!ount the entr& barriers ithout nu%%if&ing, through hea$& in$est!ent, theprofitabi%it& of participating in the industr&"

*HE 6#WER #1 SU667IERS"

6oerfu% supp%iers capture !ore of the $a%ue for the!se%$es b& charging higherprices, %i!iting ;ua%it& or ser$ices, or shifting costs to industr& participants" 6oerfu%supp%iers, inc%uding supp%iers of %abor, can s;uee.e profitabi%it& out of an industr& thatis unab%e to pass on cost increases in its on prices" 9icrosoft, for instance, hascontributed to the erosion of profitabi%it& a!ong persona% co!puter !aers b& raisingprices on operating s&ste!s" 62 !aers, co!peting fierce%& for custo!ers ho can

easi%& sitch a!ong the!, ha$e %i!ited freedo! to raise their prices according%&"

2o!panies depend on a ide range of different supp%ier groups for inputs" A supp%iergroup is poerfu% if)

It is &ore concentrated t$an t$e industry it se!!s to+ Microsoft/s near &ono(o!y in

o(eratin) syste&s- cou(!ed *it$ t$e fra)&entation of PC asse&!ers- e.e&(!ifies

t$is situation+

T$e su((!ier )rou( does not de(end $ea'i!y on t$e industry for its re'enues+

Su((!iers ser'in) &any industries *i!! not $esitate to e.tract &a.i&u& (rofits

fro& eac$ one+ If a (articu!ar industry accounts for a !ar)e (ortion of a su((!ier

)rou(/s 'o!u&e or (rofit- $o*e'er- su((!iers *i!! *ant to (rotect t$e industryt$rou)$ reasona!e (ricin) and assist in acti'ities suc$ as R0D and !oyin)+

Industry (artici(ants face s*itc$in) costs in c$an)in) su((!iers+ For e.a&(!e-

s$iftin) su((!iers is difficu!t if co&(anies $a'e in'ested $ea'i!y in s(ecia!i1ed

anci!!ary e2ui(&ent or in !earnin) $o* to o(erate a su((!ier/s e2ui(&ent "as *it$

3!oo&er) ter&ina!s used y financia! (rofessiona!s%+ Or fir&s &ay $a'e !ocated

t$eir (roduction !ines ad4acent to a su((!ier/s &anufacturin) faci!ities "as in t$e

case of so&e e'era)e co&(anies and container &anufacturers%+ 5$en s*itc$in)

costs are $i)$- industry (artici(ants find it $ard to (!ay su((!iers off a)ainst one

anot$er+ "6ote t$at su((!iers &ay $a'e s*itc$in) costs as *e!!+ T$is !i&its t$eir

(o*er+%

Su((!iers offer (roducts t$at are differentiated+ P$ar&aceutica! co&(anies t$at

offer (atented dru)s *it$ distincti'e &edica! enefits $a'e &ore (o*er o'er

$os(ita!s- $ea!t$ &aintenance or)ani1ations- and ot$er dru) uyers- for e.a&(!e-

t$an dru) co&(anies offerin) &e7too or )eneric (roducts+

T$ere is no sustitute for *$at t$e su((!ier )rou( (ro'ides+ Pi!ots/ unions- for

e.a&(!e- e.ercise considera!e su((!ier (o*er o'er air!ines (art!y ecause t$ere

is no )ood a!ternati'e to a *e!!7trained (i!ot in t$e coc,(it+

T$e su((!ier )rou( can credi!y t$reaten to inte)rate for*ard into t$e industry+ In

t$at case- if industry (artici(ants &a,e too &uc$ &oney re!ati'e to su((!iers- t$ey

*i!! induce su((!iers to enter t$e &ar,et+


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*HE 6#WER #1 BU(ERS"

6oerfu% custo!ers5the f%ip side of poerfu% supp%iers5can capture !ore $a%ue b&forcing don prices, de!anding better ;ua%it& or !ore ser$ice /thereb& dri$ing upcosts4, and genera%%& p%a&ing industr& participants off against one another, a%% at thee+pense of industr& profitabi%it&" Bu&ers are poerfu% if the& ha$e negotiating%e$erage re%ati$e to industr& participants, especia%%& if the& are price sensiti$e, usingtheir c%out pri!ari%& to pressure price reductions"

As ith supp%iers, there !a& be distinct groups of custo!ers ho differ in bargainingpoer" A custo!er group has negotiating %e$erage if)

T$ere are fe* uyers- or eac$ one (urc$ases in 'o!u&es t$at are !ar)e re!ati'e to

t$e si1e of a sin)!e 'endor+ #ar)e7'o!u&e uyers are (articu!ar!y (o*erfu! in

industries *it$ $i)$ fi.ed costs- suc$ as te!eco&&unications e2ui(&ent- offs$ore

dri!!in)- and u!, c$e&ica!s+ Hi)$ fi.ed costs and !o* &ar)ina! costs a&(!ify t$e

(ressure on ri'a!s to ,ee( ca(acity fi!!ed t$rou)$ discountin)+

T$e industry/s (roducts are standardi1ed or undifferentiated+ If uyers e!ie'e

t$ey can a!*ays find an e2ui'a!ent (roduct- t$ey tend to (!ay one 'endor a)ainst

anot$er+

3uyers face fe* s*itc$in) costs in c$an)in) 'endors+

3uyers can credi!y t$reaten to inte)rate ac,*ard and (roduce t$e industry/s

(roduct t$e&se!'es if 'endors are too (rofita!e+ Producers of soft drin,s and

eer $a'e !on) contro!!ed t$e (o*er of (ac,a)in) &anufacturers y t$reatenin)

to &a,e- and at ti&es actua!!y &a,in)- (ac,a)in) &ateria!s t$e&se!'es+

A bu&er group is price sensiti$e if)

T$e (roduct it (urc$ases fro& t$e industry re(resents a si)nificant fraction of its

cost structure or (rocure&ent ud)et+ Here uyers are !i,e!y to s$o( around and

ar)ain $ard- as consu&ers do for $o&e &ort)a)es+ 5$ere t$e (roduct so!d y an

industry is a s&a!! fraction of uyers/ costs or e.(enditures- uyers are usua!!y

!ess (rice sensiti'e+

T$e uyer )rou( earns !o* (rofits- is stra((ed for cas$- or is ot$er*ise under

(ressure to tri& its (urc$asin) costs+ Hi)$!y (rofita!e or cas$7ric$ custo&ers- in

contrast- are )enera!!y !ess (rice sensiti'e "t$at is- of course- if t$e ite& does not

re(resent a !ar)e fraction of t$eir costs%+

T$e 2ua!ity of uyers/ (roducts or ser'ices is !itt!e affected y t$e industry/s

(roduct+ 5$ere 2ua!ity is 'ery &uc$ affected y t$e industry/s (roduct- uyers

are )enera!!y !ess (rice sensiti'e+ 5$en (urc$asin) or rentin) (roduction 2ua!ity

ca&eras- for instance- &a,ers of &a4or &otion (ictures o(t for $i)$!y re!ia!e

e2ui(&ent *it$ t$e !atest features+ T$ey (ay !i&ited attention to (rice+

T$e industry/s (roduct $as !itt!e effect on t$e uyer/s ot$er costs+ Here- uyers

focus on (rice+ Con'erse!y- *$ere an industry/s (roduct or ser'ice can (ay for

itse!f &any ti&es o'er y i&(ro'in) (erfor&ance or reducin) !aor- &ateria!- or

ot$er costs- uyers are usua!!y &ore interested in 2ua!ity t$an in (rice+ E.a&(!es

inc!ude (roducts and ser'ices !i,e ta. accountin) or *e!! !o))in) "*$ic$

&easures e!o*7)round conditions of oi! *e!!s% t$at can sa'e or e'en &a,e t$e


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uyer &oney+ Si&i!ar!y- uyers tend not to e (rice sensiti'e in ser'ices suc$ as

in'est&ent an,in)- *$ere (oor (erfor&ance can e cost!y and e&arrassin)+

9ost sources of bu&er poer app%& e;ua%%& to consu!ers and to business-to-business custo!ers" 7ie industria% custo!ers, consu!ers tend to be !ore pricesensiti$e if the& are purchasing products that are undifferentiated, e+pensi$e re%ati$eto their inco!es, and of a sort here product perfor!ance has %i!ited conse;uences"*he !ajor difference ith consu!ers is that their needs can be !ore intangib%e andharder to ;uantif&"

Inter!ediate custo!ers, or custo!ers ho purchase the product but are not the enduser /such as asse!b%ers or distribution channe%s4, can be ana%&.ed the sa!e a&as other bu&ers, ith one i!portant addition" Inter!ediate custo!ers gain significantbargaining poer hen the& can inf%uence the purchasing decisions of custo!ersdonstrea!" 2onsu!er e%ectronics retai%ers, jee%r& retai%ers, and agricu%tura%-e;uip!ent distributors are e+a!p%es of distribution channe%s that e+ert a stronginf%uence on end custo!ers"

6roducers often atte!pt to di!inish channe% c%out through e+c%usi$e arrange!entsith particu%ar distributors or retai%ers or b& !areting direct%& to end users"2o!ponent !anufacturers see to de$e%op poer o$er asse!b%ers b& creatingpreferences for their co!ponents ith donstrea! custo!ers" Such is the case ithbic&c%e parts and ith seeteners" Du6ont has created enor!ous c%out b&ad$ertising its Stain!aster brand of carpet fibers not on%& to the carpet !anufacturersthat actua%%& bu& the! but a%so to donstrea! consu!ers" 9an& consu!ers re;uestStain!aster carpet e$en though Du6ont is not a carpet !anufacturer"

*HE *HREA* #1 SUBS*I*U*ES"

A substitute perfor!s the sa!e or a si!i%ar function as an industr&'s product b& adifferent !eans" Videoconferencing is a substitute for tra$e%" 6%astic is a substitute fora%u!inu!" E-!ai% is a substitute for e+press !ai%" So!eti!es, the threat ofsubstitution is donstrea! or indirect, hen a substitute rep%aces a bu&er industr&'sproduct" 1or e+a!p%e, %an-care products and ser$ices are threatened hen!u%tifa!i%& ho!es in urban areas substitute for sing%e-fa!i%& ho!es in the suburbs"Softare so%d to agents is threatened hen air%ine and tra$e% ebsites substitute fortra$e% agents"

Substitutes are a%a&s present, but the& are eas& to o$er%oo because the& !a&appear to be $er& different fro! the industr&'s product) *o so!eone searching for a1ather's Da& gift, necties and poer too%s !a& be substitutes" It is a substitute to doithout, to purchase a used product rather than a ne one, or to do it &ourse%f /bringthe ser$ice or product in-house4"

When the threat of substitutes is high, industr& profitabi%it& suffers" Substituteproducts or ser$ices %i!it an industr&'s profit potentia% b& p%acing a cei%ing on prices" Ifan industr& does not distance itse%f fro! substitutes through product perfor!ance,!areting, or other !eans, it i%% suffer in ter!s of profitabi%it&5and often grothpotentia%"

Substitutes not on%& %i!it profits in nor!a% ti!es, the& a%so reduce the bonan.a an

industr& can reap in good ti!es" In e!erging econo!ies, for e+a!p%e, the surge in


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de!and for ired te%ephone %ines has been capped as !an& consu!ers opt to !aea !obi%e te%ephone their first and on%& phone %ine"

*he threat of a substitute is high if)

It offers an attracti'e (rice7(erfor&ance trade7off to t$e industry/s (roduct+ T$eetter t$e re!ati'e 'a!ue of t$e sustitute- t$e ti)$ter is t$e !id on an industry/s

(rofit (otentia!+ For e.a&(!e- con'entiona! (ro'iders of !on)7distance te!e($one

ser'ice $a'e suffered fro& t$e ad'ent of ine.(ensi'e internet7ased ($one

ser'ices suc$ as Vona)e and S,y(e+ Si&i!ar!y- 'ideo renta! out!ets are stru))!in)

*it$ t$e e&er)ence of ca!e and sate!!ite 'ideo7on7de&and ser'ices- on!ine 'ideo

renta! ser'ices suc$ as 6etf!i.- and t$e rise of internet 'ideo sites !i,e Goo)!e/s

YouTue+

T$e uyer/s cost of s*itc$in) to t$e sustitute is !o*+ S*itc$in) fro& a

(ro(rietary- randed dru) to a )eneric dru) usua!!y in'o!'es &ini&a! costs- for

e.a&(!e- *$ic$ is *$y t$e s$ift to )enerics "and t$e fa!! in (rices% is so

sustantia! and ra(id+

Strategists shou%d be particu%ar%& a%ert to changes in other industries that !a& !aethe! attracti$e substitutes hen the& ere not before" I!pro$e!ents in p%astic!ateria%s, for e+a!p%e, a%%oed the! to substitute for stee% in !an& auto!obi%eco!ponents" In this a&, techno%ogica% changes or co!petiti$e discontinuities insee!ing%& unre%ated businesses can ha$e !ajor i!pacts on industr& profitabi%it&" #fcourse the substitution threat can a%so shift in fa$or of an industr&, hich bodes e%%for its future profitabi%it& and groth potentia%"

RIVA7R( A9#N= EFIS*IN= 2#96E*I*#RS"

Ri$a%r& a!ong e+isting co!petitors taes !an& fa!i%iar for!s, inc%uding pricediscounting, ne product introductions, ad$ertising ca!paigns, and ser$icei!pro$e!ents" High ri$a%r& %i!its the profitabi%it& of an industr&" *he degree to hichri$a%r& dri$es don an industr&'s profit potentia% depends, first, on the IN*ENSI*(ithhich co!panies co!pete and, second, on the BASISon hich the& co!pete"

*he intensit& of ri$a%r& is greatest if)

Co&(etitors are nu&erous or are rou)$!y e2ua! in si1e and (o*er+ In suc$

situations- ri'a!s find it $ard to a'oid (oac$in) usiness+ 5it$out an industry

!eader- (ractices desira!e for t$e industry as a *$o!e )o unenforced+

Industry )ro*t$ is s!o*+ S!o* )ro*t$ (reci(itates fi)$ts for &ar,et s$are+

E.it arriers are $i)$+ E.it arriers- t$e f!i( side of entry arriers- arise ecause of

suc$ t$in)s as $i)$!y s(ecia!i1ed assets or &ana)e&ent/s de'otion to a (articu!ar

usiness+ T$ese arriers ,ee( co&(anies in t$e &ar,et e'en t$ou)$ t$ey &ay e

earnin) !o* or ne)ati'e returns+ E.cess ca(acity re&ains in use- and t$e

(rofitai!ity of $ea!t$y co&(etitors suffers as t$e sic, ones $an) on+

Ri'a!s are $i)$!y co&&itted to t$e usiness and $a'e as(irations for !eaders$i(-

es(ecia!!y if t$ey $a'e )oa!s t$at )o eyond econo&ic (erfor&ance in t$e

(articu!ar industry+ Hi)$ co&&it&ent to a usiness arises for a 'ariety of reasons+For e.a&(!e- state7o*ned co&(etitors &ay $a'e )oa!s t$at inc!ude e&(!oy&ent


10/22


or (resti)e+ 8nits of !ar)er co&(anies &ay (artici(ate in an industry for i&a)e

reasons or to offer a fu!! !ine+ C!as$es of (ersona!ity and e)o $a'e so&eti&es

e.a))erated ri'a!ry to t$e detri&ent of (rofitai!ity in fie!ds suc$ as t$e &edia

and $i)$ tec$no!o)y+

Fir&s cannot read eac$ ot$er/s si)na!s *e!! ecause of !ac, of fa&i!iarity *it$

one anot$er- di'erse a((roac$es to co&(etin)- or differin) )oa!s+

*he strength of ri$a%r& ref%ects not just the intensit& of co!petition but a%so the basisof co!petition" *he DI9ENSI#NSon hich co!petition taes p%ace, and hether ri$a%scon$erge to co!pete on the SA9E DI9ENSI#NS, ha$e a !ajor inf%uence on profitabi%it&"

Ri$a%r& is especia%%& destructi$e to profitabi%it& if it gra$itates so%e%& to price becauseprice co!petition transfers profits direct%& fro! an industr& to its custo!ers" 6ricecuts are usua%%& eas& for co!petitors to see and !atch, !aing successi$e rounds ofreta%iation %ie%&" Sustained price co!petition a%so trains custo!ers to pa& %essattention to product features and ser$ice"

6rice co!petition is !ost %iab%e to occur if)

Products or ser'ices of ri'a!s are near!y identica! and t$ere are fe* s*itc$in)

costs for uyers+ T$is encoura)es co&(etitors to cut (rices to *in ne* custo&ers+

Years of air!ine (rice *ars ref!ect t$ese circu&stances in t$at industry+

Fi.ed costs are $i)$ and &ar)ina! costs are !o*+ T$is creates intense (ressure for

co&(etitors to cut (rices e!o* t$eir a'era)e costs- e'en c!ose to t$eir &ar)ina!

costs- to stea! incre&enta! custo&ers *$i!e sti!! &a,in) so&e contriution to

co'erin) fi.ed costs+ Many asic7&ateria!s usinesses- suc$ as (a(er and

a!u&inu&- suffer fro& t$is (ro!e&- es(ecia!!y if de&and is not )ro*in)+ So do

de!i'ery co&(anies *it$ fi.ed net*or,s of routes t$at &ust e ser'ed re)ard!essof 'o!u&e+

Ca(acity &ust e e.(anded in !ar)e incre&ents to e efficient+ T$e need for !ar)e

ca(acity e.(ansions- as in t$e (o!y'iny! c$!oride usiness- disru(ts t$e industry/s

su((!y7de&and a!ance and often !eads to !on) and recurrin) (eriods of

o'erca(acity and (rice cuttin)+

T$e (roduct is (eris$a!e+ Peris$ai!ity creates a stron) te&(tation to cut (rices

and se!! a (roduct *$i!e it sti!! $as 'a!ue+ More (roducts and ser'ices are

(eris$a!e t$an is co&&on!y t$ou)$t+ 9ust as to&atoes are (eris$a!e ecause

t$ey rot- &ode!s of co&(uters are (eris$a!e ecause t$ey soon eco&e oso!ete-

and infor&ation &ay e (eris$a!e if it diffuses ra(id!y or eco&es outdated-

t$erey !osin) its 'a!ue+ Ser'ices suc$ as $ote! acco&&odations are (eris$a!e in

t$e sense t$at unused ca(acity can ne'er e reco'ered+

2o!petition on di!ensions other than price5on product features, support ser$ices,de%i$er& ti!e, or brand i!age, for instance5is %ess %ie%& to erode profitabi%it&because it i!pro$es custo!er $a%ue and can support higher prices" A%so, ri$a%r&focused on such di!ensions can i!pro$e $a%ue re%ati$e to substitutes or raise thebarriers facing ne entrants" Whi%e non price ri$a%r& so!eti!es esca%ates to %e$e%sthat under!ine industr& profitabi%it&, this is %ess %ie%& to occur than it is ith priceri$a%r&"

As i!portant as the di!ensions of ri$a%r& is hether ri$a%s co!pete on the SA9Edi!ensions" When a%% or !an& co!petitors ai! to !eet the sa!e needs or co!pete


11/22


on the sa!e attributes, the resu%t is .ero-su! co!petition" Here, one fir!'s gain isoften another's %oss, dri$ing don profitabi%it&" Whi%e price co!petition runs astronger ris than non price co!petition of beco!ing .ero su!, this !a& not happenif co!panies tae care to seg!ent their !arets, targeting their %o-price offerings todifferent custo!ers"

Ri$a%r& can be positi$e su!, or actua%%& increase the a$erage profitabi%it& of anindustr&, hen each co!petitor ai!s to ser$e the needs of different custo!erseg!ents, ith different !i+es of price, products, ser$ices, features, or brandidentities" Such co!petition can not on%& support higher a$erage profitabi%it& but a%soe+pand the industr&, as the needs of !ore custo!er groups are better !et" *heopportunit& for positi$e-su! co!petition i%% be greater in industries ser$ing di$ersecusto!er groups" With a c%ear understanding of the structura% underpinnings ofri$a%r&, strategists can so!eti!es tae steps to shift the nature of co!petition in a!ore positi$e direction"

FACTORS% $OT FORCES

Industr& structure, as !anifested in the strength of the fi$e co!petiti$e forces,deter!ines the industr&'s %ong-run profit potentia% because it deter!ines ho theecono!ic $a%ue created b& the industr& is di$ided5ho !uch is retained b&co!panies in the industr& $ersus bargained aa& b& custo!ers and supp%iers,%i!ited b& substitutes, or constrained b& potentia% ne entrants" B& considering a%%fi$e forces, a strategist eeps o$era%% structure in !ind instead of gra$itating to an&one e%e!ent" In addition, the strategist's attention re!ains focused on structura%conditions rather than on f%eeting factors"

It is especia%%& i!portant to a$oid the co!!on pitfa%% of !istaing certain $isib%eattributes of an industr& for its under%&ing structure" 2onsider the fo%%oing)

INDUS*R( =R#W*H RA*E"

A co!!on !istae is to assu!e that fast-groing industries are a%a&s attracti$e"=roth does tend to !ute ri$a%r&, because an e+panding pie offers opportunities fora%% co!petitors" But fast groth can put supp%iers in a poerfu% position, and highgroth ith %o entr& barriers i%% dra in entrants" E$en ithout ne entrants, a highgroth rate i%% not guarantee profitabi%it& if custo!ers are poerfu% or substitutes areattracti$e" Indeed, so!e fast-groth businesses, such as persona% co!puters, ha$e

been a!ong the %east profitab%e industries in recent &ears" A narro focus on grothis one of the !ajor causes of bad strateg& decisions"

*E2HN#7#=( AND INN#VA*I#N"

Ad$anced techno%og& or inno$ations are not b& the!se%$es enough to !ae anindustr& structura%%& attracti$e /or unattracti$e4" 9undane, %o-techno%og& industriesith price-insensiti$e bu&ers, high sitching costs, or high entr& barriers arising fro!sca%e econo!ies are often far !ore profitab%e than se+& industries, such as softareand internet techno%ogies, that attract co!petitors">


12/22


=#VERN9EN*"

=o$ern!ent is not best understood as a si+th force because go$ern!entin$o%$e!ent is neither inherent%& good nor bad for industr& profitabi%it&" *he best a&to understand the inf%uence of go$ern!ent on co!petition is to ana%&.e ho specific

go$ern!ent po%icies affect the fi$e co!petiti$e forces" 1or instance, patents raisebarriers to entr&, boosting industr& profit potentia%" 2on$erse%&, go$ern!ent po%iciesfa$oring unions !a& raise supp%ier poer and di!inish profit potentia%" Banruptc&ru%es that a%%o fai%ing co!panies to reorgani.e rather than e+it can %ead to e+cesscapacit& and intense ri$a%r&" =o$ern!ent operates at !u%tip%e %e$e%s and through!an& different po%icies, each of hich i%% affect structure in different a&s"

2#967E9EN*AR( 6R#DU2*S AND SERVI2ES"

2o!p%e!ents are products or ser$ices used together ith an industr&'s product"2o!p%e!ents arise hen the custo!er benefit of to products co!bined is greater

than the su! of each product's $a%ue in iso%ation" 2o!puter hardare and softare,for instance, are $a%uab%e together and orth%ess hen separated"

In recent &ears, strateg& researchers ha$e high%ighted the ro%e of co!p%e!ents,especia%%& in high-techno%og& industries here the& are !ost ob$ious"?B& no !eans,hoe$er, do co!p%e!ents appear on%& there" *he $a%ue of a car, for e+a!p%e, isgreater hen the dri$er a%so has access to gaso%ine stations, roadside assistance,and auto insurance"

2o!p%e!ents can be i!portant hen the& affect the o$era%% de!and for an industr&'sproduct" Hoe$er, %ie go$ern!ent po%ic&, co!p%e!ents are not a si+th force

deter!ining industr& profitabi%it& since the presence of strong co!p%e!ents is notnecessari%& bad /or good4 for industr& profitabi%it&" 2o!p%e!ents affect profitabi%it&through the a& the& inf%uence the fi$e forces"

*he strategist !ust trace the positi$e or negati$e inf%uence of co!p%e!ents on a%% fi$eforces to ascertain their i!pact on profitabi%it&" *he presence of co!p%e!ents canraise or %oer barriers to entr&" In app%ication softare, for e+a!p%e, barriers to entr&ere %oered hen producers of co!p%e!entar& operating s&ste! softare, notab%&9icrosoft, pro$ided too% sets !aing it easier to rite app%ications" 2on$erse%&, theneed to attract producers of co!p%e!ents can raise barriers to entr&, as it does in$ideo ga!e hardare"

*he presence of co!p%e!ents can a%so affect the threat of substitutes" 1or instance,the need for appropriate fue%ing stations !aes it difficu%t for cars using a%ternati$efue%s to substitute for con$entiona% $ehic%es" But co!p%e!ents can a%so !aesubstitution easier" 1or e+a!p%e, App%e's i*unes hastened the substitution fro! 2Dsto digita% !usic"

2o!p%e!ents can factor into industr& ri$a%r& either positi$e%& /as hen the& raisesitching costs4 or negati$e%& /as hen the& neutra%i.e product differentiation4"Si!i%ar ana%&ses can be done for bu&er and supp%ier poer" So!eti!es co!paniesco!pete b& a%tering conditions in co!p%e!entar& industries in their fa$or, such ashen $ideocassette-recorder producer GV2 persuaded !o$ie studios to fa$or itsstandard in issuing prerecorded tapes e$en though ri$a% Son&'s standard asprobab%& superior fro! a technica% standpoint"


13/22


Identif&ing co!p%e!ents is part of the ana%&st's or" As ith go$ern!ent po%icies ori!portant techno%ogies, the strategic significance of co!p%e!ents i%% be bestunderstood through the %ens of the fi$e forces"

CA$&ES #$ #$'(STR) STR(CT(RESo far, e ha$e discussed the co!petiti$e forces at a sing%e point in ti!e" Industr&structure pro$es to be re%ati$e%& stab%e, and industr& profitabi%it& differences arere!arab%& persistent o$er ti!e in practice" Hoe$er, industr& structure is constant%&undergoing !odest adjust!ent5and occasiona%%& it can change abrupt%&"

Shifts in structure !a& e!anate fro! outside an industr& or fro! ithin" *he& canboost the industr&'s profit potentia% or reduce it" *he& !a& be caused b& changes intechno%og&, changes in custo!er needs, or other e$ents" *he fi$e co!petiti$e forcespro$ide a fra!eor for identif&ing the !ost i!portant industr& de$e%op!ents and foranticipating their i!pact on industr& attracti$eness"

SHI1*IN= *HREA* #1 NEW EN*R("

2hanges to an& of the se$en barriers described abo$e can raise or %oer the threatof ne entr&" *he e+piration of a patent, for instance, !a& un%eash ne entrants" #nthe da& that 9erc's patents for the cho%estero% reducer Cocor e+pired, threephar!aceutica% !aers entered the !aret for the drug" 2on$erse%&, the pro%iferationof products in the ice crea! industr& has gradua%%& fi%%ed up the %i!ited free.er spacein grocer& stores, !aing it harder for ne ice crea! !aers to gain access todistribution in North A!erica and Europe"

Strategic decisions of %eading co!petitors often ha$e a !ajor i!pact on the threat ofentr&" Starting in the :s, for e+a!p%e, retai%ers such as Wa%-9art, 8!art, and*o&s 0R3 Us began to adopt ne procure!ent, distribution, and in$entor& contro%techno%ogies ith %arge fi+ed costs, inc%uding auto!ated distribution centers, barcoding, and point-of-sa%e ter!ina%s" *hese in$est!ents increased the econo!ies ofsca%e and !ade it !ore difficu%t for s!a%% retai%ers to enter the business /and fore+isting s!a%% p%a&ers to sur$i$e4"

2HAN=IN= SU667IER #R BU(ER 6#WER"

As the factors under%&ing the poer of supp%iers and bu&ers change ith ti!e, theirc%out rises or dec%ines" In the g%oba% app%iance industr&, for instance, co!petitorsinc%uding E%ectro%u+, =enera% E%ectric, and Whir%poo% ha$e been s;uee.ed b& theconso%idation of retai% channe%s /the dec%ine of app%iance specia%t& stores, forinstance, and the rise of big-bo+ retai%ers %ie Best Bu& and Ho!e Depot in theUnited States4" Another e+a!p%e is tra$e% agents, ho depend on air%ines as a e&supp%ier" When the internet a%%oed air%ines to se%% ticets direct%& to custo!ers, thissignificant%& increased their poer to bargain don agents' co!!issions"

SHI1*IN= *HREA* #1 SUBS*I*U*I#N"

*he !ost co!!on reason substitutes beco!e !ore or %ess threatening o$er ti!e isthat ad$ances in techno%og& create ne substitutes or shift price-perfor!ance


14/22


co!parisons in one direction or the other" *he ear%iest !icroa$e o$ens, fore+a!p%e, ere %arge and priced abo$e J>,, !aing the! poor substitutes forcon$entiona% o$ens" With techno%ogica% ad$ances, the& beca!e serious substitutes"1%ash co!puter !e!or& has i!pro$ed enough recent%& to beco!e a !eaningfu%substitute for %o-capacit& hard-dis dri$es" *rends in the a$ai%abi%it& or perfor!anceof co!p%e!entar& producers a%so shift the threat of substitutes"

NEW BASES #1 RIVA7R("

Ri$a%r& often intensifies natura%%& o$er ti!e" As an industr& !atures, groth s%os"2o!petitors beco!e !ore a%ie as industr& con$entions e!erge, techno%og&diffuses, and consu!er tastes con$erge" Industr& profitabi%it& fa%%s, and eaerco!petitors are dri$en fro! the business" *his stor& has p%a&ed out in industr& afterindustr&< te%e$isions, sno!obi%es, and te%eco!!unications e;uip!ent are just a fee+a!p%es"

A trend toard intensif&ing price co!petition and other for!s of ri$a%r&, hoe$er, isb& no !eans ine$itab%e" 1or e+a!p%e, there has been enor!ous co!petiti$e acti$it&in the U"S" casino industr& in recent decades, but !ost of it has been positi$e-su!co!petition directed toard ne niches and geographic seg!ents /such asri$erboats, troph& properties, Nati$e A!erican reser$ations, internationa% e+pansion,and no$e% custo!er groups %ie fa!i%ies4" Head-to-head ri$a%r& that %oers prices orboosts the pa&outs to inners has been %i!ited"

*he nature of ri$a%r& in an industr& is a%tered b& !ergers and ac;uisitions thatintroduce ne capabi%ities and a&s of co!peting" #r, techno%ogica% inno$ation canreshape ri$a%r&" In the retai% broerage industr&, the ad$ent of the internet %oered!argina% costs and reduced differentiation, triggering far !ore intense co!petition onco!!issions and fees than in the past"

In so!e industries, co!panies turn to !ergers and conso%idation not to i!pro$e costand ;ua%it& but to atte!pt to stop intense co!petition" E%i!inating ri$a%s is a ris&strateg&, hoe$er" *he fi$e co!petiti$e forces te%% us that a profit indfa%% fro!re!o$ing toda&'s co!petitors often attracts ne co!petitors and bac%ash fro!custo!ers and supp%iers" In Ne (or baning, for e+a!p%e, the :Ks and :ssa esca%ating conso%idations of co!!ercia% and sa$ings bans, inc%uding9anufacturers Hano$er, 2he!ica%, 2hase, and Di!e Sa$ings" But toda& the retai%-baning %andscape of 9anhattan is as di$erse as e$er, as ne entrants such asWacho$ia, Ban of A!erica, and Washington 9utua% ha$e entered the !aret"

#"!*#CAT#O$S FOR STRATE&)

Understanding the forces that shape industr& co!petition is the starting point for de$e%opingstrateg&" E$er& co!pan& shou%d a%read& no hat the a$erage profitabi%it& of its industr& isand ho that has been changing o$er ti!e" *he fi$e forces re$ea% WH( industr& profitabi%it& ishat it is" #n%& then can a co!pan& incorporate industr& conditions into strateg&"

*he forces re$ea% the !ost significant aspects of the co!petiti$e en$iron!ent" *he& a%sopro$ide a base%ine for si.ing up a co!pan&'s strengths and eanesses) Where does theco!pan& stand $ersus bu&ers, supp%iers, entrants, ri$a%s, and substitutesL 9ost i!portant%&,an understanding of industr& structure guides !anagers toard fruitfu% possibi%ities for

strategic action, hich !a& inc%ude an& or a%% of the fo%%oing) positioning the co!pan& tobetter cope ith the current co!petiti$e forces< anticipating and e+p%oiting shifts in the forces


15/22


and shaping the ba%ance of forces to create a ne industr& structure that is !ore fa$orab%e tothe co!pan&" *he best strategies e+p%oit !ore than one of these possibi%ities"

6#SI*I#NIN= *HE 2#96AN("

Strateg& can be $ieed as bui%ding defenses against the co!petiti$e forces or finding aposition in the industr& here the forces are eaest" 2onsider, for instance, the position of6accar in the !aret for hea$& trucs" *he hea$&-truc industr& is structura%%& cha%%enging"9an& bu&ers operate %arge f%eets or are %arge %easing co!panies, ith both the %e$erage andthe !oti$ation to dri$e don the price of one of their %argest purchases" 9ost trucs are bui%tto regu%ated standards and offer si!i%ar features, so price co!petition is ra!pant" 2apita%intensit& causes ri$a%r& to be fierce, especia%%& during the recurring c&c%ica% donturns" Unionse+ercise considerab%e supp%ier poer" *hough there are fe direct substitutes for an :K-hee%er, truc bu&ers face i!portant substitutes for their ser$ices, such as cargo de%i$er& b&rai%"

In this setting, 6accar, a Be%%e$ue, WashingtonMbased co!pan& ith about > of the NorthA!erican hea$&-truc !aret, has chosen to focus on one group of custo!ers) oner-operators5dri$ers ho on their trucs and contract direct%& ith shippers or ser$e assubcontractors to %arger trucing co!panies" Such s!a%% operators ha$e %i!ited c%out as trucbu&ers" *he& are a%so %ess price sensiti$e because of their strong e!otiona% ties to andecono!ic dependence on the product" *he& tae great pride in their trucs, in hich the&spend !ost of their ti!e"

6accar has in$ested hea$i%& to de$e%op an arra& of features ith oner-operators in !ind)%u+urious s%eeper cabins, p%ush %eather seats, noise-insu%ated cabins, s%ee e+terior st&%ing,and so on" At the co!pan&'s e+tensi$e netor of dea%ers, prospecti$e bu&ers use softareto se%ect a!ong thousands of options to put their persona% signature on their trucs" *hesecusto!i.ed trucs are bui%t to order, not to stoc, and de%i$ered in si+ to eight ees" 6accar'strucs a%so ha$e aerod&na!ic designs that reduce fue% consu!ption, and the& !aintain their

resa%e $a%ue better than other trucs" 6accar's roadside assistance progra! and I*-supporteds&ste! for distributing spare parts reduce the ti!e a truc is out of ser$ice" A%% these arecrucia% considerations for an oner-operator" 2usto!ers pa& 6accar a : pre!iu!, and its8enorth and 6eterbi%t brands are considered status s&!bo%s at truc stops"

6accar i%%ustrates the princip%es of positioning a co!pan& ithin a gi$en industr& structure"*he fir! has found a portion of its industr& here the co!petiti$e forces are eaer5here itcan a$oid bu&er poer and price-based ri$a%r&" And it has tai%ored e$er& sing%e part of the$a%ue chain to cope e%% ith the forces in its seg!ent" As a resu%t, 6accar has been profitab%efor K &ears straight and has earned a %ong-run return on e;uit& abo$e >"

In addition to re$ea%ing positioning opportunities ithin an e+isting industr&, the fi$e forcesfra!eor a%%os co!panies to rigorous%& ana%&.e entr& and e+it" Both depend on ansering

the difficu%t ;uestion) 0What is the potentia% of this businessL3 E+it is indicated hen industr&structure is poor or dec%ining and the co!pan& has no prospect of a superior positioning" Inconsidering entr& into a ne industr&, creati$e strategists can use the fra!eor to spot anindustr& ith a good future before this good future is ref%ected in the prices of ac;uisitioncandidates" 1i$e forces ana%&sis !a& a%so re$ea% industries that are not necessari%& attracti$efor the a$erage entrant but in hich a co!pan& has good reason to be%ie$e it can sur!ountentr& barriers at %oer cost than !ost fir!s or has a uni;ue abi%it& to cope ith the industr&'sco!petiti$e forces"

EF67#I*IN= INDUS*R( 2HAN=E"

Industr& changes bring the opportunit& to spot and c%ai! pro!ising ne strategic positions ifthe strategist has a sophisticated understanding of the co!petiti$e forces and theirunderpinnings" 2onsider, for instance, the e$o%ution of the !usic industr& during the past


16/22


decade" With the ad$ent of the internet and the digita% distribution of !usic, so!e ana%&stspredicted the birth of thousands of !usic %abe%s /that is, record co!panies that de$e%op artistsand bring their !usic to !aret4" *his, the ana%&sts argued, ou%d brea a pattern that hadhe%d since Edison in$ented the phonograph) Beteen three and si+ !ajor record co!panieshad a%a&s do!inated the industr&" *he internet ou%d, the& predicted, re!o$e distribution asa barrier to entr&, un%eashing a f%ood of ne p%a&ers into the !usic industr&"

A carefu% ana%&sis, hoe$er, ou%d ha$e re$ea%ed that ph&sica% distribution as not the crucia%barrier to entr&" Rather, entr& as barred b& other benefits that %arge !usic %abe%s enjo&ed"7arge %abe%s cou%d poo% the riss of de$e%oping ne artists o$er !an& bets, cushioning thei!pact of ine$itab%e fai%ures" E$en !ore i!portant, the& had ad$antages in breaing throughthe c%utter and getting their ne artists heard" *o do so, the& cou%d pro!ise radio stations andrecord stores access to e%%-non artists in e+change for pro!otion of ne artists" Ne%abe%s ou%d find this near%& i!possib%e to !atch" *he !ajor %abe%s sta&ed the course, andne !usic %abe%s ha$e been rare"

*his is not to sa& that the !usic industr& is structura%%& unchanged b& digita% distribution"Unauthori.ed don%oading created an i%%ega% but potent substitute" *he %abe%s tried for &earsto de$e%op technica% p%atfor!s for digita% distribution the!se%$es, but !ajor co!panieshesitated to se%% their !usic through a p%atfor! oned b& a ri$a%" Into this $acuu! steppedApp%e ith its i*unes !usic store, %aunched in >? to support its i6od !usic p%a&er" B&per!itting the creation of a poerfu% ne gateeeper, the !ajor %abe%s a%%oed industr&structure to shift against the!" *he nu!ber of !ajor record co!panies has actua%%& dec%ined5fro! si+ in : to four toda&5as co!panies strugg%ed to cope ith the digita%pheno!enon"

When industr& structure is in f%u+, ne and pro!ising co!petiti$e positions !a& appear"Structura% changes open up ne needs and ne a&s to ser$e e+isting needs" Estab%ished%eaders !a& o$er%oo these or be constrained b& past strategies fro! pursuing the!" S!a%%erco!petitors in the industr& can capita%i.e on such changes, or the $oid !a& e%% be fi%%ed b&ne entrants"

SHA6IN= INDUS*R( S*RU2*URE"

When a co!pan& e+p%oits structura% change, it is recogni.ing, and reacting to, the ine$itab%e"Hoe$er, co!panies a%so ha$e the abi%it& to shape industr& structure" A fir! can %ead itsindustr& toard ne a&s of co!peting that a%ter the fi$e forces for the better" In reshapingstructure, a co!pan& ants its co!petitors to fo%%o so that the entire industr& i%% betransfor!ed" Whi%e !an& industr& participants !a& benefit in the process, the inno$ator canbenefit !ost if it can shift co!petition in directions here it can e+ce%"

An industr&'s structure can be reshaped in to a&s) b& redi$iding profitabi%it& in fa$or ofincu!bents or b& e+panding the o$era%% profit poo%" Redi$iding the industr& pie ai!s to

increase the share of profits to industr& co!petitors instead of to supp%iers, bu&ers,substitutes, and eeping out potentia% entrants" E+panding the profit poo% in$o%$es increasingthe o$era%% poo% of econo!ic $a%ue generated b& the industr& in hich ri$a%s, bu&ers, andsupp%iers can a%% share"

%5*/>/*/;? P%:4/9#B/L/9


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*o neutra%i.e supp%ier poer, for e+a!p%e, a fir! can standardi.e specifications for parts to!ae it easier to sitch a!ong supp%iers" It can cu%ti$ate additiona% $endors, or a%tertechno%og& to a$oid a poerfu% supp%ier group a%together" *o counter custo!er poer,co!panies !a& e+pand ser$ices that raise bu&ers' sitching costs or find a%ternati$e !eansof reaching custo!ers to neutra%i.e poerfu% channe%s" *o te!per profit-eroding price ri$a%r&,co!panies can in$est !ore hea$i%& in uni;ue products, as phar!aceutica% fir!s ha$e done, or

e+pand support ser$ices to custo!ers" *o scare off entrants, incu!bents can e%e$ate thefi+ed cost of co!peting5for instance, b& esca%ating their ROD or !areting e+penditures" *o%i!it the threat of substitutes, co!panies can offer better $a%ue through ne features or iderproduct accessibi%it&" When soft-drin producers introduced $ending !achines andcon$enience store channe%s, for e+a!p%e, the& dra!atica%%& i!pro$ed the a$ai%abi%it& of softdrins re%ati$e to other be$erages"

S&sco, the %argest food-ser$ice distributor in North A!erica, offers a re$ea%ing e+a!p%e ofho an industr& %eader can change the structure of an industr& for the better" 1ood-ser$icedistributors purchase food and re%ated ite!s fro! far!ers and food processors" *he& thenarehouse and de%i$er these ite!s to restaurants, hospita%s, e!p%o&er cafeterias, schoo%s,and other food-ser$ice institutions" =i$en %o barriers to entr&, the food-ser$ice distributionindustr& has historica%%& been high%& frag!ented, ith nu!erous %oca% co!petitors" Whi%e

ri$a%s tr& to cu%ti$ate custo!er re%ationships, bu&ers are price sensiti$e because foodrepresents a %arge share of their costs" Bu&ers can a%so choose the substitute approaches ofpurchasing direct%& fro! !anufacturers or using retai% sources, a$oiding distributorsa%together" Supp%iers ie%d bargaining poer) *he& are often %arge co!panies ith strongbrand na!es that food preparers and consu!ers recogni.e" A$erage profitabi%it& in theindustr& has been !odest"

S&sco recogni.ed that, gi$en its si.e and nationa% reach, it !ight change this state of affairs" It%ed the !o$e to introduce pri$ate-%abe% distributor brands ith specifications tai%ored to thefood-ser$ice !aret, !oderating supp%ier poer" S&sco e!phasi.ed $a%ue-added ser$ices tobu&ers such as credit, !enu p%anning, and in$entor& !anage!ent to shift the basis ofco!petition aa& fro! just price" *hese !o$es, together ith stepped-up in$est!ents ininfor!ation techno%og& and regiona% distribution centers, substantia%%& raised the bar for neentrants hi%e !aing the substitutes %ess attracti$e" Not surprising%&, the industr& has beenconso%idating, and industr& profitabi%it& appears to be rising"

Industr& %eaders ha$e a specia% responsibi%it& for i!pro$ing industr& structure" Doing so oftenre;uires resources that on%& %arge p%a&ers possess" 9oreo$er, an i!pro$ed industr& structureis a pub%ic good because it benefits e$er& fir! in the industr&, not just the co!pan& thatinitiated the i!pro$e!ent" #ften, it is !ore in the interests of an industr& %eader than an&other participant to in$est for the co!!on good because %eaders i%% usua%%& benefit the !ost"Indeed, i!pro$ing the industr& !a& be a %eader's !ost profitab%e strategic opportunit&, in partbecause atte!pts to gain further !aret share can trigger strong reactions fro! ri$a%s,custo!ers, and e$en supp%iers"

*here is a dar side to shaping industr& structure that is e;ua%%& i!portant to understand" I%%-ad$ised changes in co!petiti$e positioning and operating practices can UNDER9INEindustr&structure" 1aced ith pressures to gain !aret share or ena!ored ith inno$ation for its onsae, !anagers !a& trigger ne inds of co!petition that no incu!bent can in" Whentaing actions to i!pro$e their on co!pan&'s co!petiti$e ad$antage, then, strategistsshou%d as hether the& are setting in !otion d&na!ics that i%% under!ine industr& structurein the %ong run" In the ear%& da&s of the persona% co!puter industr&, for instance, IB9 tried to!ae up for its %ate entr& b& offering an open architecture that ou%d set industr& standardsand attract co!p%e!entar& !aers of app%ication softare and periphera%s" In the process, itceded onership of the critica% co!ponents of the 625the operating s&ste! and the!icroprocessor5to 9icrosoft and Inte%" B& standardi.ing 62s, it encouraged price-basedri$a%r& and shifted poer to supp%iers" 2onse;uent%&, IB9 beca!e the te!porari%& do!inantfir! in an industr& ith an enduring%& unattracti$e structure"


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5=P#;*/;? 9H5 P%:4/9 P::L.

When o$era%% de!and gros, the industr&'s ;ua%it& %e$e% rises, intrinsic costs are reduced, oraste is e%i!inated, the pie e+pands" *he tota% poo% of $a%ue a$ai%ab%e to co!petitors,supp%iers, and bu&ers gros" *he tota% profit poo% e+pands, for e+a!p%e, hen channe%sbeco!e !ore co!petiti$e or hen an industr& disco$ers %atent bu&ers for its product that arenot current%& being ser$ed" When soft-drin producers rationa%i.ed their independent bott%er

netors to !ae the! !ore efficient and effecti$e, both the soft-drin co!panies and thebott%ers benefited" #$era%% $a%ue can a%so e+pand hen fir!s or co%%aborati$e%& ithsupp%iers to i!pro$e coordination and %i!it unnecessar& costs incurred in the supp%& chain"*his %oers the inherent cost structure of the industr&, a%%oing higher profit, greater de!andthrough %oer prices, or both" #r, agreeing on ;ua%it& standards can bring up industr&ide;ua%it& and ser$ice %e$e%s, and hence prices, benefiting ri$a%s, supp%iers, and custo!ers"

E+panding the o$era%% profit poo% creates in-in opportunities for !u%tip%e industr&participants" It can a%so reduce the ris of destructi$e ri$a%r& that arises hen incu!bentsatte!pt to shift bargaining poer or capture !ore !aret share" Hoe$er, e+panding the piedoes not reduce the i!portance of industr& structure" Ho the e+panded pie is di$ided i%%u%ti!ate%& be deter!ined b& the fi$e forces" *he !ost successfu% co!panies are those thate+pand the industr& profit poo% in a&s that a%%o the! to share disproportionate%& in thebenefits"

DE1ININ= *HE INDUS*R("

*he fi$e co!petiti$e forces a%so ho%d the e& to defining the re%e$ant industr& /or industries4 inhich a co!pan& co!petes" Draing industr& boundaries correct%&, around the arena inhich co!petition actua%%& taes p%ace, i%% c%arif& the causes of profitabi%it& and theappropriate unit for setting strateg&" A co!pan& needs a separate strateg& for each distinctindustr&" 9istaes in industr& definition !ade b& co!petitors present opportunities for staingout superior strategic positions" /See the sidebar 0Defining the Re%e$ant Industr&"34

Definin) t$e Re!e'ant Industry "#ocated at t$e end of t$is artic!e%

CO"!ET#T#O$ A$' +A*(E

*he co!petiti$e forces re$ea% the dri$ers of industr& co!petition" A co!pan& strategist hounderstands that co!petition e+tends e%% be&ond e+isting ri$a%s i%% detect ider co!petiti$ethreats and be better e;uipped to address the!" At the sa!e ti!e, thining co!prehensi$e%&about an industr&'s structure can unco$er opportunities) differences in custo!ers, supp%iers,substitutes, potentia% entrants, and ri$a%s that can beco!e the basis for distinct strategies&ie%ding superior perfor!ance" In a or%d of !ore open co!petition and re%ent%ess change, itis !ore i!portant than e$er to thin structura%%& about co!petition"

Ty(ica! Ste(s in Industry Ana!ysis "#ocated at t$e end of t$is artic!e%

Understanding industr& structure is e;ua%%& i!portant for in$estors as for !anagers" *he fi$eco!petiti$e forces re$ea% hether an industr& is tru%& attracti$e, and the& he%p in$estorsanticipate positi$e or negati$e shifts in industr& structure before the& are ob$ious" *he fi$eforces distinguish short-ter! b%ips fro! structura% changes and a%%o in$estors to taead$antage of undue pessi!is! or opti!is!" *hose co!panies hose strategies ha$eindustr&-transfor!ing potentia% beco!e far c%earer" *his deeper thining about co!petition isa !ore poerfu% a& to achie$e genuine in$est!ent success than the financia% projectionsand trend e+trapo%ation that do!inate toda&'s in$est!ent ana%&sis"

Co&&on Pitfa!!s "#ocated at t$e end of t$is artic!e%


19/22


If both e+ecuti$es and in$estors %ooed at co!petition this a&, capita% !arets ou%d be a far!ore effecti$e force for co!pan& success and econo!ic prosperit&" E+ecuti$es and in$estorsou%d both be focused on the sa!e funda!enta%s that dri$e sustained profitabi%it&" *hecon$ersation beteen in$estors and e+ecuti$es ou%d focus on the structura%, not thetransient" I!agine the i!pro$e!ent in co!pan& perfor!ance5and in the econo!& as aho%e5if a%% the energ& e+pended in 0p%easing the Street3 ere redirected toard the factors

that create true econo!ic $a%ue"

:" 1or a discussion of the $a%ue chain fra!eor, see 9ichae% E" 6orter, 2#96E*I*IVE ADVAN*A=E) 2REA*IN=AND SUS*AININ= SU6ERI#R 6ER1#R9AN2E /*he 1ree 6ress, :K4"

>" 1or a discussion of ho internet techno%og& i!pro$es the attracti$eness of so!e industries hi%e eroding theprofitabi%it& of others, see 9ichae% E" 6orter, 0Strateg& and the Internet3 /HBR, 9arch >:4"

?" See, for instance, Ada! 9" Brandenburger and Barr& G" Na%ebuff, 2#-#6E*I*I#N/2urrenc& Doub%eda&, :4"

DIFFERENCES IN INDUSTRY PROFITABILITY

*he a$erage return on in$ested capita% $aries !ared%& fro! industr& to industr&" Beteen:> and >, for e+a!p%e, a$erage return on in$ested capita% in U"S" industries ranged as%o as .ero or e$en negati$e to !ore than " At the high end are industries %ie soft drinsand prepacaged softare, hich ha$e been a%!ost si+ ti!es !ore profitab%e than the air%ineindustr& o$er the period"


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INDUSTRY ANALYSIS IN PRACTICE

&ood industry analysis looks ri,orously at the structural underpinnin,s of profitability.

A first step is to understand the appropriate time hori-on.#ne of the essentia% tass inindustr& ana%&sis is to distinguish te!porar& or c&c%ica% changes fro! structura% changes" Agood guide%ine for the appropriate ti!e hori.on is the fu%% business c&c%e for the particu%arindustr&" 1or !ost industries, a three-to-fi$e-&ear hori.on is appropriate, a%though in so!eindustries ith %ong %ead ti!es, such as !ining, the appropriate hori.on !ight be a decade or!ore" It is a$erage profitabi%it& o$er this period, not profitabi%it& in an& particu%ar &ear, thatshou%d be the focus of ana%&sis"

The point of industry analysis is not to declare the industry attractive or unattractivebut to understand the underpinnin,s of competition and the root causes ofprofitability. As !uch as possib%e, ana%&sts shou%d %oo at industr& structure ;uantitati$e%&,rather than be satisfied ith %ists of ;ua%itati$e factors" 9an& e%e!ents of the fi$e forces canbe ;uantified) the percentage of the bu&er's tota% cost accounted for b& the industr&'s product

/to understand bu&er price sensiti$it&4< the percentage of industr& sa%es re;uired to fi%% a p%antor operate a %ogistica% netor of efficient sca%e /to he%p assess barriers to entr&4< the bu&er'ssitching cost /deter!ining the induce!ent an entrant or ri$a% !ust offer custo!ers4"

The stren,th of the competitive forces affects prices% costs% and the investmentreuired to compete/ thus the forces are directly tied to the income statements andbalance sheets of industry participants. Industr& structure defines the gap beteenre$enues and costs" 1or e+a!p%e, intense ri$a%r& dri$es don prices or e%e$ates the costs of!areting, ROD, or custo!er ser$ice, reducing !argins" Ho !uchL Strong supp%iers dri$eup input costs" Ho !uchL Bu&er poer %oers prices or e%e$ates the costs of !eetingbu&ers' de!ands, such as the re;uire!ent to ho%d !ore in$entor& or pro$ide financing" Ho!uchL 7o barriers to entr& or c%ose substitutes %i!it the %e$e% of sustainab%e prices" Ho

!uchL It is these econo!ic re%ationships that sharpen the strategist's understanding ofindustr& co!petition"

Finally% ,ood industry analysis does not 0ust list pluses and minuses but sees anindustry in overall% systemic terms.Which forces are underpinning /or constraining4 toda&'sprofitabi%it&L Ho !ight shifts in one co!petiti$e force trigger reactions in othersL Anseringsuch ;uestions is often the source of true strategic insights"

DEFINING THE RELEVANT INDUSTRY

Defining the industr& in hich co!petition actua%%& taes p%ace is i!portant for good industr&ana%&sis, not to !ention for de$e%oping strateg& and setting business unit boundaries" 9an&

strateg& errors e!anate fro! !istaing the re%e$ant industr&, defining it too broad%& or toonarro%&" Defining the industr& too broad%& obscures differences a!ong products, custo!ers,or geographic regions that are i!portant to co!petition, strategic positioning, and profitabi%it&"Defining the industr& too narro%& o$er%oos co!!ona%ities and %inages across re%atedproducts or geographic !arets that are crucia% to co!petiti$e ad$antage" A%so, strategists!ust be sensiti$e to the possibi%it& that industr& boundaries can shift"

*he boundaries of an industr& consist of to pri!ar& di!ensions" 1irst is the S2#6E #16R#DU2*S #R SERVI2ES" 1or e+a!p%e, is !otor oi% used in cars part of the sa!e industr&as !otor oi% used in hea$& trucs and stationar& engines, or are these different industriesL*he second di!ension is =E#=RA6HI2 S2#6E" 9ost industries are present in !an& partsof the or%d" Hoe$er, is co!petition contained ithin each state, or is it nationa%L Does

co!petition tae p%ace ithin regions such as Europe or North A!erica, or is there a sing%eg%oba% industr&L


21/22


*he fi$e forces are the basic too% to reso%$e these ;uestions" If industr& structure for toproducts is the sa!e or $er& si!i%ar /that is, if the& ha$e the sa!e bu&ers, supp%iers, barriersto entr&, and so forth4, then the products are best treated as being part of the sa!e industr&" Ifindustr& structure differs !ared%&, hoe$er, the to products !a& be best understood asseparate industries"

In %ubricants, the oi% used in cars is si!i%ar or e$en identica% to the oi% used in trucs, but thesi!i%arit& %arge%& ends there" Auto!oti$e !otor oi% is so%d to frag!ented, genera%%&unsophisticated custo!ers through nu!erous and often poerfu% channe%s, using e+tensi$ead$ertising" 6roducts are pacaged in s!a%% containers and %ogistica% costs are high,necessitating %oca% production" *ruc and poer generation %ubricants are so%d to entire%&different bu&ers in entire%& different a&s using a separate supp%& chain" Industr& structure/bu&er poer, barriers to entr&, and so forth4 is substantia%%& different" Auto!oti$e oi% is thus adistinct industr& fro! oi% for truc and stationar& engine uses" Industr& profitabi%it& i%% differ inthese to cases, and a %ubricant co!pan& i%% need a separate strateg& for co!peting in eacharea"

Differences in the fi$e co!petiti$e forces a%so re$ea% the geographic scope of co!petition" Ifan industr& has a si!i%ar structure in e$er& countr& /ri$a%s, bu&ers, and so on4, thepresu!ption is that co!petition is g%oba%, and the fi$e forces ana%&.ed fro! a g%oba%perspecti$e i%% set a$erage profitabi%it&" A sing%e g%oba% strateg& is needed" If an industr& has;uite different structures in different geographic regions, hoe$er, each region !a& e%% be adistinct industr&" #therise, co!petition ou%d ha$e %e$e%ed the differences" *he fi$e forcesana%&.ed for each region i%% set profitabi%it& there"

*he e+tent of differences in the fi$e forces for re%ated products or across geographic areas isa !atter of degree, !aing industr& definition often a !atter of judg!ent" A ru%e of thu!b isthat here the differences in an& one force are %arge, and here the differences in$o%$e !orethan one force, distinct industries !a& e%% be present"

1ortunate%&, hoe$er, e$en if industr& boundaries are dran incorrect%&, carefu% fi$e forces

ana%&sis shou%d re$ea% i!portant co!petiti$e threats" A c%ose%& re%ated product o!itted fro!the industr& definition i%% sho up as a substitute, for e+a!p%e, or co!petitors o$er%ooed asri$a%s i%% be recogni.ed as potentia% entrants" At the sa!e ti!e, the fi$e forces ana%&sisshou%d re$ea% !ajor differences ithin o$er%& broad industries that i%% indicate the need toadjust industr& boundaries or strategies"

TYPICAL STEPS IN INDUSTRY ANALYSIS

'efine the relevant industry1

5$at (roducts are in it: 5$ic$ ones are (art of anot$er distinct industry:

5$at is t$e )eo)ra($ic sco(e of co&(etition:

#dentify the participants and se,ment them into ,roups% if appropriate1

2ho are

t$e uyers and uyer )rou(s:

t$e su((!iers and su((!ier )rou(s:

t$e co&(etitors:

t$e sustitutes:


22/22


t$e (otentia! entrants:

Assess the underlyin, drivers of each competitive force to determine which forces arestron, and which are weak and why.

'etermine overall industry structure% and test the analysis for consistency1

WH(is t$e !e'e! of (rofitai!ity *$at it is:

5$ic$ are t$e 2#N*R#77IN=forces for (rofitai!ity:

Is t$e industry ana!ysis consistent *it$ actua! !on)7run (rofitai!ity:

Are &ore7(rofita!e (!ayers etter (ositioned in re!ation to t$e fi'e forces:

Analy-e recent and likely future chan,es in each force% both positive and ne,ative.

#dentify aspects of industry structure that mi,ht be influenced by competitors% by newentrants% or by your company.

COMMON P ITFALLS

#n conductin, the analysis avoid the followin, common mistakes1

Definin) t$e industry too road!y or too narro*!y+

Ma,in) !ists instead of en)a)in) in ri)orous ana!ysis+

Payin) e2ua! attention to a!! of t$e forces rat$er t$an di))in) dee(!y into t$e &ost

i&(ortant ones+

Confusin) effect "(rice sensiti'ity% *it$ cause "uyer econo&ics%+

8sin) static ana!ysis t$at i)nores industry trends+

Confusin) cyc!ica! or transient c$an)es *it$ true structura! c$an)es+

8sin) t$e fra&e*or, to dec!are an industry attracti'e or unattracti'e rat$er t$an

usin) it to )uide strate)ic c$oices+

Documents

1. the Five Competitive Forces That Shape Strategy