>> THOMAS STEWART: I am 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 us remind our viewers of what

the five competitive forces are.

>> MICHAEL PORTER: 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 are competing with your

direct competitors, but you are also in a

fight for profits with a broader extended

set of competitors, customers who have bargaining

powers, suppliers who can have bargaining

power, new entrants who might come in and

kind of grab a piece of the action, 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 and understanding

the structural underlying drivers of profitability

and competence.

>> STEWART: So I use this to think about my

rival makes it difficult for me.

The threat of substitutes means I cannot overcharge.

The threat of new entrants’ means I cannot

overcharge.
>> PORTER: Right.

>> STEWART: The same thing with the buyers

and suppliers.

>> PORTER: The buyers and suppliers, and there

is underlying drivers of each of those forces

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 hone in on, first of all, what is

really causing profitability in the industry.

What are the trends that are most likely to

be significant in changing the game in the

industry?

Where are the constraints, which if you can

relax, it might allow you to find a really

strong competitive position?

>> STEWART: So how would you apply this analysis

to an industry?

Airlines for example.

>> PORTER: Airlines is a great industry.

Actually you will see in the article or you

have seen in the article that there is a chart

that compares profitability of industries,

and airlines, I think has been on the bottom

of that list for decades.

It is among the least profitable industries

known to man, and the five forces really allow

you very quickly to understand why.

I mean, let us just go around the chart.

The nature of rivalry is incredibly intense

and it is almost exclusively unpriced.

It has been very hard to differentiate, get

the customer to wait even an extra two or

three minutes for another flight if they can

get on the flight with a cheaper price.

So there has been a very intense price competition,

low barriers to entry.

Constant stream of new airlines coming into

the industry despite the fact that probability

is low.

It always puzzles me.

>> STEWART: Low barriers to entry because

you can rent a plane, you do not have to buy

them.

>> PORTER: You can rent a plane.

You can lease a gate.

It is all generic technology.

You can start with one flight between two

city pairs.

There is no real need to have a whole network

in the beginning, and yet, people keep coming

in.

I think it is just one of those "sexy" industries.

It is a great example of how sexiness or coolness

or hotness or cheapness has nothing to do

with industry profitability.

The underlying structure is what drives profitability.

Yeah, the customer is very fickle and price

sensitive.

Suppliers of aircraft and aircraft engines

and even aircraft gates at airports now have

a lot of clout.

They can bargain away most of the profits.

GE, and Rolls-Royce, and Airbus, and Boeing

make a lot more money than Airlines.

They get most of the profit.

And then of course, there is always the substitute

of getting on the train or driving your car

or shipping your goods by air and that sets

kind of kept the consumer.

>> STEWART: You have powerful suppliers of

labor too.

That is another powerful supplier.

>> PORTER: Right, exactly.

There is a great case where you have unionized

labor.

Unlike other industries, in this industry

particularly with the pilots, the labor can

literally shut you down, and there is no way

around them.

So, it is an industry where there are spurts

of what you might call mediocre profitability

punctuated by long periods of terrible profitability.

>> STEWART: So everyone of the five forces

is very strong in that industry and you could

take another industry where the five forces

are relatively benign.

>> PORTER: Right, like soft drinks.

I mean, soft drinks have been a license to

mint money and again, it is the opposite kind

of analysis.

When I talk with students, we kind of joke

around, there are five-star industries where

all the forces are attractive like soft drinks.

There are zero-star industries where all the

forces are unfavorable like airlines and we

are always trying to understand, okay, what

is the configuration of underlying economic

drivers that is going to really shape the

profit potential of this industry and then

armed with that insight, what do I do about

it?

How do I try to relax the constraint that

is holding back industry profitability?

How can I position myself to kind of insulate

from some of the gales, gale winds of those
forces?

Those implications of the five forces are

something that this new article has developed

in much more detail.

>> STEWART: 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 strategy framework,

and 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?

>> PORTER: Well, the wonderful thing of course

we learned is that these concepts can be applied

to literally any, any industry, to product,

to service, high-tech, low-tech, emerging

economies, developed economies.

Indeed, 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 is a good example.

We got very, very confused by the internet

because people saw the internet as a force

as supposed to really enabling technology

that might or might not impact the underlying

structure of the industry.

So I think one thing I have learned is the

framework is very, very robust, but I have

also learned that there is a lot of confusion

and complexity in actually applying the framework

in actual practice and we tried to clear as

many of those areas up as we could in this

new article.

For example, how to think about rivalry?

How do we understand when rivalry is really
positive-sum, which allows many companies

to do well?

When does rivalry become really zero-sum,

where everybody is kind of dragged down into

a destructive battle that you cannot win.

>> STEWART: Well, I can understand zero-sum.

I mean, if we get in a price war, the only

one who wins is the consumer, which is nice

if you are a consumer.

>> PORTER: Yeah.

>> STEWART: But what do you mean by positive-sum

competition?

>> PORTER: Well, the trouble with the zero-sum

competition is then the consumer gets a little

price, but they really got no choice, and

a positive-sum competition is where companies

can compete on different attributes, services,

features, customer support, that is actually

relevant to particular groups of customers.

The most really positive-sum competition is

where companies are really competing on different

things in order to meet the needs of different

segment.

>> STEWART: So we are growing the pie and

there is a piece for each of us.

>> PORTER: There is a piece for each of us.

In fact, one of the things we talked about

in the new article, one of the things I did

in the new article that we really probably

did not have the experience to do so many

years ago was really talk a lot about the

implications.

If this is the way competition works, what

do you do about it?

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 of the industry.

That may be the best way for a market leader

to actually improve their circumstances rather

than to trigger a destructive battle with

their head-to-head rival.

>> STEWART: How should a company get started

using the five forces framework?

You are working your strategy and you decide,

"This really works for me."

How do you begin?

>> PORTER: 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 do not know what your industry looks

like, if you do not know how it is changing,

if you do not know what the drivers or competition

are, strategy is going to be marginally useful,

if not destructive.

So we got to start with industry analysis

figuring out what your industry is and drawing

the right boundaries.

>> STEWART: That is not always easy.

>> PORTER: It is not always easy.

We have added a box in this new article, which

really addresses that question because I encountered

so many companies that struggled with industry

definition, identifying really what the industry

structure is in your particular industry.

And then there is 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 an attractive industry or unattractive

industry, but of course the real question

is how is that industry changing?

Some have believed and taken the five forces

as really a static snapshot, but of course

the five forces give you the tools for understanding

the dynamics and where is that industry structure

changing?

How are 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 where you can command

a really good profit given the five forces?

How can you maybe reshape the nature of the

industry structure?

We have 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.

>> STEWART: 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 it is sort of elite strategy priesthood

that goes in and does this.

They are almost divorced from the rest of

the management of the company, the 99% of

the other people working in the company.

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 do you use it?

>> PORTER: Well, we think that this way of

looking at an industry needs to be very, very

broadly understood in the organization.

The thing about it is that managers, even

rank and file employees, it is intuitive.

People understand.

We have these customers, we have these suppliers,

we are struggling with them everyday.

They are trying to get a better deal, we are

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 characterize any business

and say, “What is really important here?”

And then of course we have learned that strategy

is completely useless, again, unless the results

of the strategy process, the position that

you choose to occupy, the way you are going

to drive your company is well understood quite

broadly because the number one purpose of

strategy is alignment.

It is really to get all the people in the

organization, making good choices, reinforcing

each other's choices because everybody is

pursuing a common value proposition or common

way of gaining competitive advantage.

I remember when I wrote this article, there

were many people who believed 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 have actually learned now that it

is the opposite.

Your employees got to know your strategy,

your channels have to know your strategy,

your suppliers have to know your strategy.

>> STEWART: Your competitors probably knew
it already.

>> PORTER: Well, and frankly, again the competition

is not zero-sum.

If every company finds a unique need that

it can set out to meet, if it tries to deliver

something different than its rivals, multiple

rivals can be successful.

If your competitors can understand what you

stand for and what you are committed to, maybe

they will make a different choice, rather

than get dragged into this kind of mindless

price wars that we see in so many industries.

>> STEWART: The five forces that shape strategy

have been around for 30 years, they are going

to be around for, well, they have been around

long before you wrote about it.

>> PORTER: That is right.

>> STEWART: They have been around as long

as business has been around.

They are going to be around as long as business

is around.

The new article is just fabulous.

Thank you so much.

>> PORTER: Thank you.

Well, I am looking forward to kind of getting

another surge of feedback from the practitioners

and we will keep learning.

>> STEWART: Thanks.

>> PORTER: Thanks Tom.