The Five Competitive Forces That Shape Strategy

Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack. 78 Harvard Business Review 1808 Porter.indd 78 | January 2008 | hbr.org 12/5/07 5:33:57 PM THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY STRATEGY Peter Crowther by Michael E. Porter Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today. IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care hbr.org 1808 Porter.indd 79 | January 2008 | Harvard Business Review 79 12/5/07 5:34:06 PM LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy delivery industry in Europe. But to understand industry competition and profitabilThe Five Forces That Shape Industry Competition ity in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exThreat hibit “The Five Forces That Shape Industry of New Competition.”) Entrants If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, Rivalry as they are in industries such as software, Among Bargaining Bargaining soft drinks, and toiletries, many companies Power of Power of Existing Suppliers are profitable. Industry structure drives Buyers Competitors competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability Threat of in the short run – including the weather Substitute Products or and the business cycle – industry structure, Services manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in I