Notes on Michael Porters' Five Competitive Forces that Shape Strategy

• In essence, the job of the strategist is to understand and cope with competition.(79)

• If the forces are intense... almost no company earns attractive returns on investment. If the forces are benign... many companies are profitable. (80)

• The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. (80)

Threat of Entry: New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. (80)
• When threat is high, incumbents must hold down their prices or boost investment to deter new competitors. (81)
• It is the threat of entry, not whether entry actually occurs, that holds down profitability. (81)
• Supply-side economies of scale, Demand-side benefits of scale, customer switching costs, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, government restrictions.

Power of Suppliers: Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. (82)

Power of Buyers: Powerful customers can capture more value by forcing down prices, demanding better quality or more service, and generally playing industry participants off against one another, all at the expense of industry profitability. (83)

Threat of Substitutes: A substitute performs the same or a similar function as an industry's product by a different means.

Rivalry Among Competitors: price discounting, new innovations, advertising campaigns, and service improvements. Depends on the intensity and then the basis on which they compete
• Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. (85)
• When all or many competitors aim to meet the same needs or compete on the same attributes, the result is zero-sum competition. (86)

By considering all five forces, a strategist keeps overall structure in mind instead of gravitating to any one element. In addition, the strategist's attention remains focused on structural conditions rather than on fleeting factors. (86)

Good industry analysis looks rigorously at the structural underpinnings of profitability. A first step is to understand the appropriate time horizon. (87)

Differentiate temporary and cyclical changes from structural changes.

Eliminating rivals is a risky strategy. A profit windfall from removing today's competitors often attracts new competitors and backlash from customers and suppliers.