THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY by Michael E. Porter IN ESSENCE, the ob ofthe sratepst so under tors Noten 1978, Hana Buns Revi stand and cop with competion Of, however, puvssned row Cpetine ars Shoe Set ‘managers deine competion too narowly si fy" by a youn economia an soc pono, ‘occurred only ameng today’ dee compet Mel Pon hwos hi fat HR aril at tors. Yet competition for profits goes band ‘Haneda revouton inthe gy Fld Issey {abled industry als once four other Secon, Pore he brought asin conome competitive Fores a wel customer, supplies, poten ena andsustute products The ended ay tht revats fom all fe oss nd phlanvopy. Paar fret hve shaped eines an indst’s suucture and shapes the ‘Serene ecdc earch ad xoen pron future of competitive interaction within an ‘ean proding ad aesistane trom Hered Bune Indust. | Sno Profearor Jan iin od gine cleave ‘As diferent from one another a industries __doan Mages, Ponerhre eatin upd, rghit appear onthe sue, the unde de 9 ssc oases a ees aweneec ‘eof profitability are the same. The ob auto )_E sinsrtanings roves pte gins Indust, fo instance, appears wo have noting Frerotte amar, nd of deeper vow of in common with the wordvide mart frat Ee imoteaons tor setey today. masterpieces othe heal regulated health caeLEADERSHIP AND STRATEGY | The Fv Compestve Forces That Shape Si eter industry i Earope. But to unde ‘and industry competion and proftabi iy in each of thre thee cases, one must ftalyze the industry's underlying struc ture n rms ofthe ve for (Sethe Ibe Five Fores That Shape Industry Compettion”) TE te ores ae intense, a they are i sah insta ates, etl and bo- tel almost no company ears atrecve ‘tumson invest fee fore are bere, ts thoy ae in indies sch a otware, ‘of dns and tetris many companies fre profitable, Industry structre drives ompetiion and profitably, not whether nin producesa proctor sie, is merging oF mature, hgh tech or ow ech, ‘regulated or unrelated While myead of factors can affect Industry proftaiity fn te short run-incading the weather and the busines eel Indasystrocture, manifested inthe competitive Frese industry profabiy inthe medium and Tong an. See the exhibit "Diterences in Industry Prosabiis") ‘Understanding the compete tres, and their unde Iyingcames reveals the rots ofan industry's current profit bit whe providing a framework fr antiatng and Intuencing competition (and prostabiy) oer time. A ely industry suture shouldbe asmuchaompeive Concent stress their company’ own pasion. Ui- “ersanding indasty structure lo esenia to efetve ‘ate postoning AS we wil se, defending against the ‘competitive forces and shaping ther in a eoenpanys a0e ecru to sategy Forces That Shape Competition “The configuration of the Ae fres ders by industry. In the markt for commercial aca ere aly between fominan producers Afb apd Boelng and the bargain ing poe of he ines that place age onder for ata fe tong. while the threat Fez, te heat of subst fates and the power f supplies are more benign nthe ‘move theater indus. the proliferation of substitute foms of entrainment and the power ofthe move producers Sb datbutors who sipty mois he eal Input, are impor. ‘The Five Forces That Shape Industry Competition ne scongestcompestive fore ve fr tev the rota of an indstry and esome the most prea {osttstey formultion The most set free oweve, i ot alay obvious Tor empl, eventhough ay often fec n com ‘modi insti, may not be te ato ing Pos ably. Low tums inthe photograpie fm industry for insane ae the rest ofa superior subsite product —as Kak and Fu the wor’ leading produces of photo ‘rahi Jared wth the advent of gta phoeoraphy. Insucha staat, coping with the substitute product be- comes the number ne sae plots. Tinks structure grows out of ast of economic and technical characteris that determine the stength of ‘ach competitive face Weil ermine these des nthe pags tht flo taking the perspective ofan incumbent, ‘ra compa lady poset nthe inst. The analysis ‘nde rei exendedo understand the challenges cing Sten enant "THREAT OF ENTRY. New entans to an industry bring new cape ad a ds to gan market share that puts presto pres costs and the rate oF fvestment noe sary to compete, Paricully when new entrants ae ‘verifying tom other markets they can lverage exis Ing captlities and ash flows to shake up competion 35 Psp hen entre the bot water indy, Mic softld when began to fer intercon and Ape i when entered te msc dstbution buses“The threat of entry, therefore pus aap onthe prot pO ‘ental ofan industry. When the thea high ncumbents must old down thar pris o bos investment to deter new competitors. In speci cfc retain or example reitively low ery bares mean that Starbucks must ‘est aggresiely in modemizng te snd ems "The threat of etry in an industry depends onthe helght ‘of entry ares that are present and on the reaction en: trans cin enpect frm incumbents, entry aria ow and awcomers expect tie eaition frm he entenched competitors the thea of entry I high and indy profit bit is moderted ti the tse of entry, nt wheter ent actually ecu, that ols dawn profi. ory by ming the willingness of utomesto buy rom a nencomer andy edn the prc the neweomer can cor ‘mand unt it buds upa lage tase of customers. "Customer sviching casts Stching costs ar fed css ‘hat buyers fice whenthey change suppl Suchcoss may aie because a buyer who switches Fendors mus, fo ex mpl lter product specications retain employes to use ‘now product, or modify processor ifrmation systems “Te larger the sitchin othe Rarer wl be fran en trantto gan customers. Enterprise resource planing (ERP) software isan example ofa product with very hgh sttching ests Once company has installed SAP ERP stem fore ampethe costs of moving toa new vendor are asuonomal Industry structure drives competition and profitability, not whether an industry is emerging or mature, high tech or low tech, regulated or unregulated. ‘Samrs to ny nty bases ar avantagesthat incu bens have rete to new entrants There are seven mae "Supp economies af sal These economies aise when rms that produce larger olumes enn ower ons er unl because thy can spread aed cos ove ore Ut employ more fen technolo command beter tems ‘fom suppliers Suppside sal economies deter eny by forlng the spring entrant ether to come note indy on alae sale, which requires dling entrenched con ptor orto accep a cost dsavarage ‘Sle economies canbe found in valy every activity In the value chain; whieh ones ae mos important varies tind In mroprocesrs, incumbents Sih 3 nel ae proce by scale economies in esearch, chip fbi tion and consumer marketing For lawn care companies Ike Sots MiaceGro,the mos important sale econmies are found in the suply chain and media advertsing. In sal cage delivers eamomls fale are in national gst {alsjtems and information technology 2 Demand aide berefsesal These beeftaokPOW asetwork effets are in indties where buyer’ wg ‘estoy fora comps’ product increases ith them Derof other buyers who ako patronize the company Buyers ‘may tt larger companies ore fra crac produc Re fallthe old adage that no one ever got ied for uyig from TM (hen was the dominant computer maker). Buyers ‘may also value being in ane” wth larger number of flow customers Foe insane enn action patpants fe tracted to ebay becase ofr the mos potential ttadng partner. Demandside benefits of ale discourage because of embedded dat, the ft that intemal process have been adapted to SAP, major retaining ned, and the nisin nature of the applitions “Copal requirement. The need t vest lage Han al sours in order to compete ean deter new entrants ‘Copal may be necessary not oly or fed alte but aso tw ated customer cet bul inventories and fund star ‘up loses. The barter particularly great i the ep ‘required for unrecoverable and therefore harder toinance ‘expenditures, sich a upfront averting or research and evelopment Wile majreosporations hav the fnnelal resources to invade almost any industry, the huge capital ‘eqlrements in ertaln lds tthe pool of ikelyen- ‘tans Conversely in such els as tax preparation eves for shorehau ching, capital requlrements ae mininal and poten entrant plenti Tt simportant not towers the degree to which capital egulrement alone deter entry. If industry Teturs are at ‘wativeandare expected toremainsoandifsptl markets a efcen, investors wil prod entrants with the fs they eed. Fr asin i carer fr fstane,Srancing isvaabe to purchase expensive aera beau of their high esate vale one reson wit there have been nue ‘us newalitnesin alos every regio. 5 Incbeny advantages indpendent of sie. No ats what tel, incumbents may hae cost or gualty advan tages not valabe wo poten vals. These avartges can ‘tem om such sources as proprietary technology preferen tal aces othe best a material sources preemption of the most favorable geographic locations, exashd brant ‘entiesorcumutive experience that has allowed incuLEADERSHIP AND STRATEGY | The Fe Compettve Fotcs Tha Shape St bens toleam howto produce more efile. Entrants try to bypaes ave advantages Upstart dicount sich a Tar set and Wal Mar, for ample have located tres in re Sanding sts rather than goal shoping centers where ‘ablshd department stores were wll entrenched 6 Uneqoa acces to distin chanel. The new en- ‘rane must of cous, secure dteibtion ofits roduc tere A ow ood ter, for example, mos place others from the supermarket shelf la pie Breas, promtions, Inteme seling ero some ether means. The more lin itedthe wholesale o retail chanel a andthe more that ‘iting compestors have te them up, the tougher eney Joan industry wil be, Sometimes acess dstbution ‘ssohigh a brier that now entans mus bypass Astrb= tion channels kogether or crete tet own. Thus psa. lowsom sine have avoided ltnbution trough ave agents who tend to fevoreablihedhigherfe cars) tu ave encouraged passengers to book their wn ights onthe ineret 1, Restcive government poly. Government plcy can hinder or id nav enty direct a5 well as amplify (rn lig) he oer entry baer Gaverment cect Kimi fen foreclose entry im industries throug fr instance, Teensingveglrement ad resritons on foreign invest ‘ment Ruled indstes ike lquar retain tn services ft aifines ae sl examples Government POIcy can Tighten other enty barriers tough such means as x pansve patenting als that protect proprietary technol bg fom imation or ensrnentl er sae) regulations tht abe sale economies facing newcomer. OF couse, fovenment pois may ao make enty easier ~ directly rough sbi, or stance, ride by funding be sicrosarch and making avaal tolls new and oi, edocing sae economies Entybariers sould be assed eae tothe capa bales of poet eres wich may be stare aps fori fino compen in veld se. nd, a some of ‘urexampesiisrat the suatelst mst be mind ofthe reative was newcomers might find o icumvent appar cotbamirs ‘pected retain. How potential entrants belle in- ‘ambente may reat wil al inuence thelr dees to enter or ay out ofan nds. eacton vigorous and rotated enough, the prot potential of parte the indy an fl below the cost of capital Incumbents ‘often use puble statement and responses to on erat toseada mesg to oer prospect entrants about thet ‘commitment to defending marketshare ‘Neveomers ae ely ofa expected retaliation it Including excess cash and uniied barowing powe, aval Differences in Industry Profitability ‘Tre ste ltr on sid cassia mae om Iawes or men nepsivete mre thanS0%. Ae ha fear es eke napreecged sae ‘hi have ben rox sirbes rere pate rh te able productive capacity or cut wth itebuton channels Sand tomers incumbents cem likely to ct peices because they are committing matt share tal ests or because the industry has igh ed costs, which create astongmo- tiation to drop pees tol exes capac, “industry govt sw so neweomes can gain volume coniyby taking rom incumbents An analyse bares toenty an expected retaliation bviwsy ria for any company contemplating ery ito {ew indus. The challenge tod was to surmount the etry bares without malin through henry inves ‘ment the profitably of patiating nee Instr. "TH POWER OF SUPPLIERS. Powerful supplies capture mow ofthe value or themseies by charging hier Pies, Timing quality or eves o shin ost industy par thant Powerful suppl, inluding supplies of labor, an ageze profitably ot ofa instr thats unable to pss on cont ners in own pies. Moo fo in "Hance has contributed tote ers of probly among eronal computer makers by rasing peices on operating ‘tems PC makers competing fer) fr customers who ‘ined vite among them ave lied edo tore ‘heirpies acorns ‘Companies depend on wide range of ferent supplier soups fr inputs A sopler groups powerful fs more concentated than the industry i ses to Meroe near monopoly in operating stems, coupled wih the fagmentaton of PC seme exemple this stustion, The supplier goup dos not depend easly on thei tay forts rvenses. Supls serving any industries ‘wl ot estate wo extract maximum profits fom each oe apaniclrinusry accounts for lag portion ofa sup- ples group volume or prof, however, suppliers wil want te potet the industry throug reasonable ping and a- st inactive sch at RAD and obbyng. “industry patlpats face sitchin cons changing supplies Fr example, siting supplies is cic if com panes have Invested heal in specialized allay equipIn US: industries, 1992-2008 ‘ment or in earning bo to apes sup’ equipment (Gr with Bloomberg terminals ed by nell profson- ab. Or fms may have located thir partion lines ad ent to a supers manufcurng facies (a nthe ase lof some beverage companies and container manufactures). ‘When sitching costs re hgh nut print find It har to play suppers ef against one another. (Not that splis may have switching costs a wel This iis their power) “Supplies fer products that are diferetatd. Phar mace companies that offer patented drugs ih d= Sinctive medical Benefits have more power oer Roxby Iealth maintenance organizations and othe drug Bayes, for example than dug companies offering metoo or ge nec products, “The sno subtuefor what te suppl rp Pro: ides ts unions, for ample, exerci considerable up- ier poner over lines party because tere Is 0 gd tematie toa wel trained pt inthe cockpit. ‘The supple group can cedhy threaten integrate for ward ino the nds. n that ee indy papas ‘make to much money relative suppers they wilinduce supplies tener the market Profitability of Selected U.S. Industies "HE POWER OF BUYERS. Powel castamers the ip sid of powerflsupplers—can eapute moe vl by foe ing dven pices emanding beter quality or moe service (herby ding up cost), and genealy paying Induy participants of against one another, all tthe expense of Faust peotabity Buyers are powerful ithe have nes iting leverage relative to indus participant especially ifthey ae price sensi sing tel clot primary wo pre sure pice reductions ‘Aswith suppliers there may be distinc groups of ustom- es who dif in bargaining ower. customer group has nepoitng leverage ‘There are fe buyers reach one purchases in volumes tae at age relive tothe sizeof single vendo. arp ‘volume buyers are partculrlypowerfl i inde with high ied crs sha telecmmunicatons gulp of ‘ore dling and balk chemi High ed cos and Te ‘marinal coms amplify the pressure on a agp capa iyi trough dscounting The indus’ procs are standaried oe uniferent- sted buyers belle they can always in an egulent product, they tec to play one vendor agaist another. ‘uyes face few shige n changing vendorsLEADERSHIP AND STRATEGY | Tha Five Compattive Frees That Shape States) buyers can rei threaten to nterate backward and produce the Industry's product themselves vendors are {oo profitable, Producers of of ras an beer ave kong cote the power of packaging manufacturers y threat ‘ing to make anda times seul mang pacaging ma teva thems ‘Abajer group pie sensive “ne produc le purchases from the industry represents a sgnicant faction of ts cost structure or procurement budget Here buyer are helt shop around and bag ara consumers do forhame morgage. Where the pod uct sldby an industry ia small fraction of byes cos oF ceapencicres buyers ar stl les price sense. ‘The buyer group eas low profs, Strapped for cash, cris otherwise under preset trim its purchasing oss igh protable or eashch customer in contras ar e- cal es prises (thats ofcourse ifthe tem does ‘ot represent age ration of hel cos). ‘The quality of buyers’ produ o series site a fected bythe industry’ product Where quali syery much Mle by te industry prot, yer are general ess re sense When purchasing or ting production qual fy cameras, for instance, makers of majoe motion picts opt for highly reliable equipment withthe atest features. ‘They py ted tention to prc. teint put has ite eet on the buyers other cos Here, buyer foes on pe, Comers where ‘industry product oserie an pay foritelfmany times ‘fr by improving pefoeance or redoing labor, material, tr ther casts, buyers are usualy mor interested in qualty than npr. Eamples inl products ad ervies ke tax accountng or wel loging (which measures below rou erations fi wel) that an sav ever make the buyer ‘money, Similar, byerstend nto be pce enti in se ‘ies such as investment banking where por performance {an be ctl andembaressing Most sours of bayer power apply equally fo consum sand to busibestobusness customers. Like industrial astomers consumers tend tobe more prises they Srepurchasng products that are uliferetated expensive Felt to thelr incomes. and of sort where produ peor ‘mance ha inte onsequncss. The major derence with Consumer sth thle needs canbe more inangble and hares toguantiy. mtemedatecistomers or customers who purchase the product bare not teed use uch assembles dst ‘ution chanel cane analyzed the same way asthe buy cs, with one important addition, Inermediate customers sgn bargaining power when thy can infuence the purchasing decisns of customers downstream. Con- sumer electronic eta ely tals and agricultural ‘equipment disbutors ae examples of dstbuton chan- res that exert a strong infuene on end cstomers. Producers often attempt to diminish channel clout ‘hough excave arrangemens with particular ditbtos for etalers or by matetng dict to end wer. Compo- ‘ent manufacturers seek to develop power over asemblers ‘by creating peferenes for thelr components with dwn scam cuomers Sach the case with Bec parts and ith sweeteners DuPont has erated enompous clout by dvertsing fs Stainmastr brand of eames ers not only to te carpet manufacturer that actually buy them But leo to downstream consuters. Many consumers request Stainmaster capt eventhough DaPoot isnot a carpet ‘manufacture. THE THREAT OF SUBSTITUTES, A substute performs the sme oa simuarfuncuon as an industry's reduc by 3 ‘ierent means Vieoconeencngisa subsite for ute Plate substitute for aluminum. Ema is a subsute for express mall Sometimes the teat of sutton is domsream one, when subtalar 2 buyer Industry product For eample awe-care procs ade ‘cesare threatened when muta homes inurban areas ‘Subtitueforsingleamly homes inthe suburbs Software ‘olf to agen thretened when ane awa websites ‘bette for tavel agents. Subsite re aleays present bth ate est ve Took because they may appear tobe very diferent fom the Industry product To someone searching fr a Faters Day ‘neckties and power tools may be substates es sub- State to do without to purchase 2 sed proc rates tan new one, ot doit yousel frng he service or product iho) ‘Wen the threat of tite high, dus prob ny sufers Substtte products or serves limita indutys rd potential by placing eng om prices an ndsry foes not diane sel from sbsutes trough product performance, mariting, o other means wil safer in ‘erm of profitably ~andofen growth potential. Substtutes no nly limit pots in nora times, they sso ede the bonanza an industry can reap in god ines Im emerging economics, fo example the surg in demand for wired telephone lines hasbeen capped as many on- sumers opt to make @mobietekephone their fist a only ‘hone line. "The threat ofa substi high offers a atacive pie performance trade-off the Industry’ product. The beter the relate value ofthe sub strut, the gher ste don an indus’ pro poten tial For example, conventional proves of ng ance telephone serve have sufered from the advent of inex ‘ens internetbasst phone servic such as Vonage ab ‘Shop Similarly video ental outlets arestrugeing with the ‘emergence of able an sntelite video-on-demand series, nine video renal services such as Neti and there of Icemet video tes ke Googles YouTubeCompetition and Value “The compete forces revel the deers finde compe: ton company strategist who understands tht compet tion extends well beyond existing rials wil detect wider competitive teats andbe beter equipped to ade ther. [At the same tine, thinking comprehensively about a in sss structure can uncoer opportunites: ierencs ik tustomers, suppl sbsitutes, potential entrant and ‘als that can become the basi or daint tates elding ‘sperior performance na word of more open competion and relentless change, i more important than eer 0 ‘think sructrly about competion. ‘Understanding indy structure is equally important for investors as for managers The ve campetivefres reveal whether an industry istry tractive and hey help Anvestosanilpatepolve or nogaive sits in industry structure before they ae obvious Thee forces distinguish shoretermbiisrmstractural changes and allow neon to ake advantage of undue pessimism o optimism, Those companies whose strategies have indus transforming potential become far cere. This deeper thinking about ‘competion ia more power way to achieve genuine Jnvestment ces than the nancial projections an rend «extrapolation tat dominte today’ invent analysis. 1 both executes and investors looked a competion this wascapital markets would be afar ore eective force for company sucess and sconomle prosperity scutes nd investors would oth be fuse on the ame funds ‘mental that dive sustained profitably. The conversation Detwecn investors and excites would focus onthe str ‘Ul not the talent Imagine the mproveren i n- any performance and in the economy as a whole-if all the energy expended in pleasing the tect wee erected toward the factors that cess tue ecnome abe.LEADERSHIP AND STRATEGY | The Five Compattve Forces That Shape Statepy ‘ragernew kinds ofcompetton hat no incumbent an win ‘Wen taking sctions to improve thei wm companys com eve advantage then ates should ask wheter they eset a motion dani that wl undemine indy Struct nthe lng rin the ery da ofthe persona computer industry, or Instance, 15M eed tO make up fr is late entry by ofringan open architecture that would set nds standards and tact eomplementary makers of applkcaton software and peripherals Inthe proces ‘ceded ovmnerhi of the ctl component ofthe PC=the fperating stam andthe mlropocesor-t0 Micros and Intel By standardizing PCs iteneouraged pie based ley and shied power to supplies Consequently, IBN Became ‘the temporal dominant frm nan indy with an endur ingly unateative strcture ‘Expanding the pote pool. When overall demand grow the industry quality eel rises ins costae reduced, ‘oc waste i eliminated the pe expands The total pol of tale aval to competitors suppliers and buyer 0s ‘The total prof pool expands, or eample, when chanel become more competitive oF when an industry discovers Intent buyers for i produt that are not currently being serie. When Sftdrnk producers rationalized thet inde pendent hotler networks oma them ore een nd fective, bod the sotarink companies and the Boers benefited. Oeal value can alo expand when ins work allaboraty with appli to improve coordination and lm unpecesary eos incurred in the supply ean This tomers the ineren ist race ofthe Indust, allowing higher po, rater demand through lower rics or bth (r.agreing on quality standards can ring up indsrywlde ‘qual and servic ves and hence prices, benefiting ras Suppers and estore. Expanding the ovr prot ool creates win-win oppor ‘unis for multiple industry paripants can a reduce the kof destructive ely tha arses when incumbents attempt to shit bargaining power or captare more mar ot share However, expanding the pe dogs ao reduce the importance of Industry structure. How the expanded ie {svded wl ukimaely be determined bythe fe fre ‘The mot Succes empanles are those that expand the Industry eo pool in way that allow them to she dre Poronstey in the beet. Defining the industry. The Hve competitive Fores aso bolthe key a define relevant inst (or indus) invbich company competes Drawings boundaries correc around te arena in which campeon actualy ales plas, ly the cases of protabity ante a- Proprate tn foreting sty A company needs a eps fate satgy foreach tint inst: Mistakes in nsty fenton made by competitors present opportunities fr faking ou superior srategic postions (See the sidebar “Defining the Relevant nds) ‘Typical Steps in Industry Analysis, etn he rtovant industry int products eink? Wich one oe pt ot sate geopaghe tne of eoreton? ‘dently he partipants nd segment them its she baye andy uns? ‘Asses the underyng divers ofeach ompetive nays for consistney "mca th contin fe fr rately? + re more potae ersbeterpatened, ‘nate recon antl ature changes in ach fore, both positive and negative, deny apace of ingurtr stature tht might be Intuancoaby competitors, by new etrnt by ‘Common Pitfalls, Dang nasty to Body orto nay wae jr el atanton oat eas ern ‘dagna Spy imate mast para se ‘cons el ovnsers ange wen aeced, men planning, and inventory management to shi {he bas of competition ama fom us price. These moves, together With stepped-up isestnes i inoration tech nology andreponaldstrouton center substantially ase the Bar fr new entrants whe making the subsites Jess atative. No surprisingly the industry has been consi Ing and industry prfiaity appears tobe rng. Tus eee havea special spans for peor Ingindusty structure Doing woen requires resources that only lage players possess Moreover an improved nstry structure public goes because bene every im ik ‘the indus, not jst ch company that insted the i Defining the Relevant Industry Dati eins neh como ‘oroned nas ass rao ndinkagen sour eto adits or Fragrant geet ‘eopepe martes hat ee cuca Sorettne ataage Ao, se {00 seope cf produc orserces For fre sane nasty x mr ed In ame ask and ettonay ees second mensions oogahe sepa forNoth Ameren othe ain every sein hats, #ay nee Sone buyer supe, bars oar Insets, bream plone tsa stars mou nurerus en sve, Prose pacar ih, ncaszatg ne outa re own tren been Stop ean cry tte ber ower trars toon, dso) Inds poRainy it tern hse te frees ao rove ne gomaphe provement Often, is more in the interest of an industry leader than anyother patcpant to nest fr the common ood because ders il usually benef the mest. Indes, Amproving the industry may bea leaders most proftabe stati opportuni in part because tempts to gain fur ther market share can tiger stong ection from ras ‘estomes and even supers "Tere a dark se to shaping istry trate that i gual mporantto understand advised changes in com tive postioning and operating practices can undermine [nds Srctre ace wih pressresto gun marketshare ‘renamore th innovation for town ss, managers may (sb rds thee spton tat competion Got Dotaity Angle gba satey 2 ‘nol bes dint nau Orr, feercs. Theva oes sae or, ch og wl at poy ere {ero ron Atl of a bogs, edie erence inva moe han one te, ne xelU ne oces rai shoul ‘cose rabied oust ome tom astute orearsie orcomoetrs tir, Def floes ara shoulLEADERSHIP AND STRATEGY | The Five Compettve Forces That Shape Suateay ‘This is not to say thatthe mus industry i srctrally unchanged by dig! dstrbuton, Unauthorized download Ing created an legal but potent subst. The abel ed for years to develo tecnia lars for digi stb tion themselves but major companies Restated to ell their rv through platform ony a al. tes acum. share ofprofitstha ako supplies bers and subsites for are stricto deter entrants. ‘Tonesalz supper power frame 3 frm can an darle speiations for pars to make it easier to switch mong supp ean cuthat adaoal vendor ater ‘echnology to aos a powerful supper group altogether. Faced with pressures to gain market share or enamored with innovation for its own sake, managers can spark new kinds of competition that no incumbent can win. stepped Apple wit its Tunes musiestore ane in 2003 to supports Pod ms ple By permit he creation fof a power new gatekeeper, the majo labels alowed in hey srctre to shit aginst them The number a mae record companies has actualy decid from xin 19970 fourtoday-ascommpanies staged to cope wth thea phenomenon. ‘When industry structure sn Hus, new and promising comps postions may appear Sructra changes open up ew neds and new ways to sre exiting needs Eeab- lithe ener ay overt ths or bs sontaed By Pat Sages rom pusung them. Smale compettors inthe Industry can captain on sch changes or the oid may wel efile by new enna Shaping industry stcture. When 2 company exploits strat change recognising, apd eactng t,he i> lable However companies as ave the bility to shape Sse stacar. Afi ca ead is industry toward new ways of competing that ater the fie forces forthe beter. In reshaping structure, company wants is competitors to foo so thatthe etre industry wil be wansored While many indus partpants may benefit inthe pres, ‘he inmowtor an Reneé mos if ican shit competion in “dsctons where anes. “A ndistysstrctre can be reshaped nwo was be and industry profitably erences are remarkably perstent over tine in practice However, industry structure ‘eostanyundergolng modest adjustment an osason- ally tean change abr ‘Shits in structure may emanate from outs an instry or fom thin They an boot the Indust’ profit potential ‘reduce They maybe cased by change In teenloe, ‘changes in customer needs, of other evens. The fe com. ete foes provide rarbework or entiying theme Important ndsty developments an for anticipating tle Impact on industry atractvenes, ‘Shifting tvet of new arr Changestosny othe sven buries deserted abe can alse or lower the treat of ew entry. The expaton of patent, for instance, may unleash new eran On the day that Merk’ patents othe cho- lesterol reducer Zocor exped, thee pharmaceutical make ‘ersemtered the make fo the drug Converse, the polit ation of pout inthe ke eream industry has grad ‘ile up the ime exer space grey storey nang ‘harder fr neice ream maker to sin acess ois tion in North Americ nd sore Satie deisions of leading competion often have @ major impacton he heat fenty Staring int 1970 forLEADERSHIP AND STRATEGY | The Five Compettve Forces That Shape Staeay soon become obsolete, a information may be perkhable iti itsesapily or becomes outdated, thereby losing ts ‘alu Services such as hotel accommodation ae peihable ‘nth sens that unused capa can never be recovered ‘Competition on mensions other than pre =on product ‘features suppert servis delivery time or band imag for nsance ess ely tere protablity because ii roves customer value an can support higher pies. Also, rivalry focused on sch mensions can improve vale rl. tive 0 sb o rae the rien fing new entan While nonpie aly sometimes exalts o levels that undermine industry prota this ses iely to occur ‘than itis th pie aly "As Important asthe dimension of sly i wheter tals compete on the var mensions When al Or many “Competitors alm to meet the ume needs or compet nthe Same atriutes theres is zero sum competition. Here, ‘one rms gain ten another ls, ving down protit bli. While price competition runs a stonge sk than ronpric competion of becoming ef su ths may Dak Ihagpen if compenes take eae o segment their markets taneting thet loweprce fering to dierent customers Rill can be postive sum, o actually incest the a6 age profitably ofan industry, when each competitor aims {oveve the needs of dierent customer segments with ie ferent mises fpr, ruts, services, feats or bran Benes Suc oop anno en epeit Nehor rage postal but abo expand the industry, asthe needs fof more customer groups are beter met. The opportunity foe postvesum competion wil he greater in industries serving diverse costomer groups With a clear understand ingore structural underpinnings of aly strates ean sometimes ake eps to shi the nature of competion in Factors, Not Forces Industry structure, as maniestedin the sent ofthe five ‘competive forces determines he industry Slogan prot ptntal Because it determines how the econ value {rested by the indy vied how meh eta ty companies in the industry versus argalne aay by cus tomers an suppliers mite by sabes, or constaned ty poten new entans. By consiering al ve free, 2 aes keps overall uct in mind stead of grata ing to any one element in alan, the states ater: ton temans focused on strata comitions ater than “onietng ators Tei expecially important to ao the common pital riaking certain vsbleatibta ofan industry fr Ks ur dering structure Consider the flowing Industry growth ate. A cmon mistake I to sume tha fae growing Indus are alway tractive, Growth Coos end ta mae rary, beau an expanding pe oles opportunites for al competitors. But fast growth can put suppers ina powerfl positon and high owt with vt ty baies wl row in entrants, Even witout new en {eats high gow te wll noe guaranoeprftaiyiF customers are powerful rsubstutes ar atrativ Indeed, Some fst gronth business, suchas personal computes, have been among the leat proftale industri in recent {yeas Anarow focus on grote sane ofthe maar aes bad srategy decisions. Technology apd innovation. Adhanced techno on ovations a ot by themseves enough o make a ind try structrallyatative (or native). Mundane ve technology industries with prceinsenste buyer, high shitcing conto high entry bates arising fro sale conomies are often fr more proiable than sexy indus tres sch as stare and internet technologies that attract competitor ‘Government, Goverment i not best understood 3s 2 sith force Deeause goverment ivolement nite horetly good nor bad for indus proftaiy. The best vray to undetand the infuene of gonerment on compel ‘onto analy how specifi govemment poles eet the five competitive fore. For instance, patents abe aries to entry boosting Industry prot potential. Convery, go ferment polices favoring unions may raise super power Sn diminish prot potential. Bankruptcy rules hat alow ‘tes capac and iense rial. Goverment operates t ‘muluple eels and through many dierent policies each of eich wl fet struct in ferent ways ‘Complementary products and services. Complements ae products or services ued topther with an indy roduc. Complements arse when the customer benet {oF two products combined i greater than the sum ofeach Product vale in boation Compater hardware and st are frinstanee are valuable together and worthless wien Im recent ears strategy researchers hve highlighted he role of complements especially in hightecnlogy ind {oes where they ae moet obvious By no means, Howes, complements appear ony thee The vale of afore ‘mpl ls greater when the driver aloha aces to oine ‘tions, rose ssitanc, ad auto nuance ‘Complements can be important when they affect the ‘veal demand for an indty’s product. However, he ‘gvernment policy, complements ae ota sith force de fenmining ndtry pratt since the presence o Song complement [snot necessary bad (o god) for indy roftabiy. Complements act proftabiiy through the ‘ay hey intuonce he ve res. “The statgst ms trace the prtve or egaie ence of eompements onal fie facet scr thee pact on roftablity The presence ofeomplementscan ase wetthe bujer’s cost of siting to the subsite i on Switching fom a proprietary, branded drug to a generic drug usulytvcves minimal ots, fr example, which ‘thy the shi to generis (and the alin pies) 0 substan aland api Stratis sboulbe particularly arto changesin ther lds thar may mak them tractive subs when they were not before Improvements in paste materials oF example, lowed them to mbt for sel many as tomobie components. In ths way, technological changes ‘may priate in an industry for mage reasons ot fer 1 fl lin, Clases of personaly and ego have sometimes ‘ragerate aly tthe detriment of prostates ‘chs the medi and high technology. firms cannot read each others signals wel becase of ack of amar with ne another averse approaches 0 competing or fering gal. "The strength of aly reflects not just the intesty of competition bt alo the bal of competition, The diner: sons on which competition takes place, and wheter rials Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. ‘or competitive discontinue in semingly uneited bus nesses can hve maior impsts on industry profitably, Of cours the substation thea can alo sin fo of Industry, whieh bodes well fo ts future prota and RVALRY AMONG EXISTING COMPETITORS. Rivalry among exiting competitors takes many familar ors ‘Sting pie eicounting new produc noductions i ‘ets eampaipns and seve improvement High aly Tits the profit of an ins The degree o which + ‘aly drives dove an industry pros potential depends, rs, ‘onthe tensity with which companies compet sn second, ‘onthe hast on which they compete "Te intensity of ily retest Compattosae numerous or are roughly al nse and power In sich stutins, ras find han 9 void osching business Without an industry leader, races de Stable forthe Indust as whoa go unenoros. “Industry growth low. Show growth prelates hs ‘ormarlet share it ries are high xt bares the psd of etry turers arse Because of such things 38 high spelled sets or management's devotion to 4 pata business ‘These hares keep companies inthe markt even thug ‘they maybe eaming low or negative eur Bees copay remains in us, and the profitability of eal competion Surfers asthe sek ones hang on, “Rivals are highly commited othe business and have splations for leaders, special if they have pal that obeyond economic performance inthe artis inst, igh commitment toatusines arses fora variety of eso Tor example, sate owned competion may have gs that cia employment or prestige. Unis of lager companies ‘converge to compete onthe some ders have a major Intuence on probity: Rivalry expect destruct to proQtaily ii rv {ats oy to pie because re competion tasers pro ‘ally ea for compton tose and match, making eu cessive oun of retaition kel. Suained pie sompe ‘on aso trains customers to pay les attention to prot ‘ears and serie Pe competition most lable to occur Products or serves of rivals are nearly Mental and there ae few siting costs fo buyers. This encourages ompetiors to cut priest win new customers. Years oat line ple wats eft these ccustanes in that industry. ‘Fned cost are high and marginal casts are low. This creates intense pressure fo competitors to cut pies below theiraverapecots even lose to thelr marginal cos ose Incremental customer while ll making some contbuton tocoveringftedenss Many bacmateral tines ich spaper and aluminum sue fram tis problem especially ‘demand isnt growing So do delivery companies with aed networks of routes that must be Served gales of volume. “Capacity must be epanded in ag ierements tbe efit. The need fr large capacity expansions, a inthe oviny chloe busines, dup the indy’ pp aman balance and on esto long and eating per 08 of overapacy apie cutting Te products perishable Perishabilty rats strong ‘tempat wo ct pices and ela product while fest ha ‘ale: More prcts and serves ae pevshable than is ommeon! thought. Just as tomatoes are pershable because ‘they ro odel of computers ate perishable bee they