The Five Competitive Forces That Shape Strategy

In the article The five competitive forces that shape strategy the author discusses five specific forces that shape different industries, from auto industries to markets for art masterpieces. According to the author, although these industries might not relate to each other at first glance, they are driven by the same competitive forces. The forces are the following: the threat of entry, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among competitors.

As an example, the author suggests examining a company that is already present in the market. The first force, the threat of entry, creates additional rivalry, as new entrants can bring new capabilities to the market. Moreover, if entrants are different from the existing incumbents, it can also be regarded as a threat, because the existing company has to provide additional action to hold back competitors. However, some barriers can hinder the entrance of newcomers: supply-side scale economies, demand-side benefits of scale, switching costs that customers have to face when changing supplies, investment of considerable financial resources, advantages of the incumbents, specific government policies, and retaliation.

The second force is the power of suppliers. There are different conditions when suppliers are labeled as powerful, e.g. when a supplier group is more concentrated than the industry it works with when it is difficult for an industry to switch suppliers, when suppliers offer differentiated products when there are no substitutes for a supplier, etc.

The third force that Porter examines is the power of buyers. Buyers can force down prices or demand better quality, notices Porter. Buyers can have to negotiate leverage in the following situations: if buyers purchase product in large volumes, if buyers can find an equivalent to the product because it is standardized, if buyers face few switching costs, if buyers earn low profits, if the product does not particularly influence buyers’ other costs, etc.

The threat of substitutes is the fourth force that Porter approaches. This threat is high if the substitute is capable of offering an attractive trade-off for a better price and if buyers do not face serious costs switching to the substitute. It is necessary to be attentive to changes in the industry, as they can transform the incumbent into one of such advantageous substitutes.

The fifth and the last force discussed by Porter is the rivalry among competitors. If there is a high level of rivalry, it is more likely that the industry’s profitability will be limited as well. The intensity of rivalry can be extreme if multiple competitors are practically equal in size and power if the industry is growing slowly if exit barriers are high if competitors are highly committed to their business and industry, and if corporations and firms have different approaches to competing. What is more, one should also consider price competition as a part of rivalry in the market. There is a big chance that price competition will occur if products and services are identical, if fixed costs are high, while marginal costs are low if the product is perishable and needs to be sold while it is still consumable. Nevertheless, rivalry can also be profitable if competitors serve different types of customers and have different mixes of price, services, and brand identities, argues Porter.

Critical Analysis: Evaluation

Although the central themes of the article are forces that shape industry, Porter also stresses that other specific factors need to be regarded to fully understand what strategies are the best ones to implement. While a thorough examination of the forces that can shape an industry is helpful to any (future and professional) strategist, the section that discusses “fleeting factors” appears to have limited and generalized information about the mentioned factors. While Porter argues that a strategist needs to pay their attention to the industry’s structure rather than to visible attributes, it would be still helpful to examine these factors a little closer. As Porter himself notices, strategies are built with regard both to the forces and factors as well; therefore, although factors may change and are not as significant as some belief them to be, a closer review of these factors would be more useful than a quick overlook.

However, Porter also underlines some industry specifics that need to be accounted for, i.e. changes in industry structure. I believe that these are often underestimated when a strategy, especially a long-term one, is being developed. It seems that changes in the industry are sometimes overseen even by major players, not to mention beginners and smaller companies. The article puts great emphasis on the industry changes and how can they transform or influence it, whereby this section serves both as a reminder to advanced strategists and as a warning to students – changes are not to be neglected or underestimated. I cannot agree more with this statement as the right approach to changes can make the company highly profitable.

Main Takeaways

The key ideas that Porter expresses in his article are the importance of the five forces and changes in the industry and their influence on companies’ strategies, their successful presence, and competition in the market. According to the author, a strategy can be regarded as a defense against the five forces if the odds are not in the company’s favor. It is essential to position a company within the structure of a given industry, argues Porter, and mentions Paccar as an example. Thus, the framework that the author suggests (the five forces) is expected to help analyze the company’s entrance and exit. Moreover, this framework also helps understand what industries the company can choose to ensure that the entrance costs will not be too high.

Another main idea of the article is the ability of a strategist to use changes in the industry in their favor: a careful analysis of an industry can provide specific insights that will help promote and boost business in the future. Nevertheless, it notices Porter, a company that can also shape industry structure. If this is the aim, it is crucial to evaluate if the actions do not undermine the industry structure. Otherwise, the company is at risk of creating competitions that it cannot overcome. Thus, the ones that are capable of shaping an industry are usually experienced enough to attempt this. Therefore, the new entrants need to conduct a thorough analysis before trying to shape an industry that they have just entered. This factor should be taken into consideration by beginners who believe that a completely new approach might bring serious profits. As Porter notices, not all actions that aimed to improve the company’s ability to compete had a positive influence on it. To conclude, a deep understanding of industry structure could improve market effectiveness and economic prosperity.

References

Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.