ARTICLE REVIEW

The Five Competitive Forces That

Shape Strategy
Michael E. Porter|HBR

PRIYANKA SUNIL- 19120

10-Feb-21
 The Five Competitive Forces That Shape
Strategy- Review
Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Special Issue on HBS
Centennial. Harvard Business Review 86, no. 1 (January 2008): 78–93

This article includes a two-page review that quickly summarizes the key ideas of the article "The Five
Competitive Forces That Shape Strategy." ,written by Michael Porter in 2008. Michael Porter's explains
the five forces that determine the long-run profitability of any industry. His contribution has helped
shape a generation of academic research and business practice. In this article, Porter undertakes a
thorough reaffirmation and extension of his classic work of strategy formulation, which includes
substantial new sections showing how to put the five forces analysis into practice. The five competitive
forces are threat of entrants, power of suppliers, power of buyers, threat of substitute products or
services, and rivalry among existing competitors. Strategy can be viewed as building defenses against
the competitive forces or as finding a position in an industry where the forces are weaker .Porter
explains that by analyzing all five competitive forces, you gain a complete picture of what’s influencing
profitability in your industry. You identify game changing trends early, so you can swiftly exploit them.
And you spot ways to work around constraints on profitability or even reshape the forces in your favor.

The five forces govern the profit structure of an industry by determining how the economic value it
creates is apportioned. That value may be drained away through the rivalry among existing competitors.
As Porter explains in this update of his revolutionary 1979 HBR article, four additional competitive forces
can hurt your prospective profits as well. Value can also be bargained away through the power of
suppliers or the power of customers or be constrained by the threat of new entrants or the threat of
substitutes. Porter explains these forces through various industry examples. The job of the strategist is
to understand and cope with competition. Often, however, managers define competition too narrowly.
When the forces are benign, many if not all, companies are profitable. When some forces are stronger
than others, those forces determine the profitability of the industry and are the most important to look
at when you are forming a strategy. Industry structure sets profitability in the long run and provides a
framework for anticipating and influencing competition and profitability over time

• Aspiring entrants, hungry for market share, can snatch the investment required for you to stay
in the game. When the threat of new entrants is high, existing companies must hold down their
prices or boost investment to deter new entrants
• Powerful suppliers may constrain your profits if they charge higher prices. A supplier is powerful
if: it is more concentrated than the industry it sells to, the supplier groups does not depend
heavily on the industry for its revenues, industry participants face switching costs in changing
suppliers, suppliers offer products that are differentiated, there is no substitute for that the
supplier group provides, or if the supplier group can credibly threaten to integrate into the
industry
 • Powerful customers can force down prices by playing you and your rivals against one another.
Buyers are especially powerful if they have negotiating power in the industry. Buyers have
negotiating power if: there are few buyers, the industry’s products are standardized or
undifferentiated, and buyers face few switching costs in changing vendors.
• Substitute offerings can lure customers away.
• Rivalry among existing competitors with regards to price discounting, new product
introductions, advertising campaigns, and service improvements may limits the profitability of
an industry

The job of the strategist is to understand and cope with competition. Often, however, managers define
competition too narrowly. When the forces are benign, many if not all, companies are profitable. When
some forces are stronger than others, those forces determine the profitability of the industry and are
the most important to look at when you are forming a strategy. Industry structure sets profitability in
the long run and provides a framework for anticipating and influencing competition and profitability
over time

Strategy can be viewed as building defenses against the competitive forces or as finding a position in an
industry where the forces are weaker. Changes in the strength of the forces signal changes in the
competitive landscape critical to ongoing strategy formulation. In exploring the implications of the five
forces framework, Porter explains why a fast-growing industry is not always a profitable one, how
eliminating today's competitors through mergers and acquisitions can reduce an industry's profit
potential, how government policies play a role by changing the relative strength of the forces, and how
to use the forces to understand complements. He then shows how a company can influence the key
forces in its industry to create a more favorable structure for itself or to expand the pie altogether. By
understanding how the five competitive forces influence profitability in your industry, you can develop a
strategy for enhancing your company’s long-term profits. Porter suggests positioning your company
where the forces are weakest with the example of heavy-truck maker Paccar chose to focus on one
customer group i.e. individual drivers who own their trucks and contract directly with suppliers where
competitive forces are weakest. He also suggests exploiting changes in the forces like how Apple
introduced iTunes in an internet savvy world. The five forces reveal why industry profitability is what it
is. Only by understanding them, can a company incorporate industry conditions into strategy.

All of the five forces should be looked into concurrently when conducting an industry analysis. When a
strategist loses sight of the big picture, they are more likely to lose profitability. Differentiating your
product or service based on customer service can put you ahead of the competition in most industries