check the attachments and it should be in bluff format please
Exit ticket 2 Please review the additional materials on blue ocean strategy, transient advantage, and growth strategies. If you were a marketing management consultant, under what circumstances would you recommend each of the strategies we have discussed this week (including Porter)? 1808 Hill.indd Awareness of the fi ve forces can help a company understand the structure of its industry and stake out a position that is more profi table and less vulnerable to attack. 78 Harvard Business Review | January 2008 | hbr.org 1808 Porter.indd 781808 Porter.indd 78 12/5/07 5:33:57 PM12/5/07 5:33:57 PM P et er C ro w th er Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strat- egy” by a young economist and associate professor, Michael E. Porter. It was his fi rst HBR article, and it started a revolution in the strategy fi eld. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corpora- tions, regions, nations, and, more recently, health care and philanthropy. “Porter’s fi ve 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 reaffi rms, 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. THE FIVE COMPETITIVE FORCES THAT by Michael E. Porter hbr.org | January 2008 | Harvard Business Review 79 SHAPE IN ESSENCE, the job of the strategist is to under- STRATEGYSTRATEGY stand and cope with competition. Often, however, managers defi ne competition too narrowly, as if it occurred only among today’s direct competi- tors. Yet competition for profi ts goes beyond es- tablished industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all fi ve forces defi nes 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 driv- ers of profi tability 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 1808 Porter.indd 791808 Porter.indd 79 12/5/07 5:34:06 PM12/5/07 5:34:06 PM LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy 80 Harvard Business Review | January 2008 | hbr.org delivery industry in Europe. But to under- stand industry competition and profi tabil- ity in each of those three cases, one must analyze the industry’s underlying struc- ture in terms of the fi ve forces. (See the ex- hibit “The Five Forces That Shape Industry Competition.”) If the forces are intense, as they are in such industries as airlines, textiles, and ho- tels, almost no company earns attractive re- turns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profi table. Industry structure drives competition and profi tability, 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 profi tability in the short run – including the weather and the business cycle – industry structure, manifested in the competitive forces, sets industry profi tability in the medium and long run. (See the exhibit “Differences in Industry Profi tability.”) Understanding the competitive forces, and their under- lying causes, reveals the roots of an industry’s current profi t- ability while providing a framework for anticipating and infl uencing competition (and profi tability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Un- derstanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy. Forces That Shape Competition The confi guration of the fi ve forces differs by industry. In the market for commercial aircraft, fi erce rivalry between dominant producers Airbus and Boeing and the bargain- ing power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substi- tutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important. The strongest competitive force or forces determine the profi tability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious. For example, even though rivalry is often fi erce in com- modity industries, it may not be the factor limiting profi t- ability. Low returns in the photographic fi lm industry, for instance, are the result of a superior substitute product – as Kodak and Fuji, the world’s leading producers of photo- graphic fi lm, learned with the advent of digital photography. In such a situation, coping with the substitute product be- comes the number one strategic priority. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force. We will examine these drivers in the pages that follow, taking the perspective of an incumbent, or a company already present in the industry. The analysis can be readily extended to understand the challenges facing a potential entrant. 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 nec- essary to compete. Particularly when new entrants are diversifying from other markets, they can leverage exist- ing capabilities and cash fl ows to shake up competition, as Pepsi did when it entered the bottled water industry, Micro- soft did when it began to offer internet browsers, and Apple did when it entered the music distribution business. Michael E. Porter is the Bishop William Lawrence University Pro- fessor at Harvard University, based at Harvard Business School in Boston. He is a six-time McKinsey Award winner, including for his most recent HBR article, “Strategy and Society,” coauthored with Mark R. Kramer (December 2006). The Five Forces That Shape Industry Competition Bargaining Power of Suppliers Threat of New Entrants Bargaining Power of Buyers Threat of Substitute Products or Services Rivalry Among Existing Competitors 1808 Porter.indd 801808 Porter.indd 80 12/5/07 5:34:13 PM12/5/07 5:34:13 PM hbr.org | January 2008 | Harvard Business Review 81 The threat of entry, therefore, puts a cap on the profi t po- tential of an industry. When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors. In specialty coffee retailing, for example, relatively low entry barriers mean that Starbucks must in- vest aggressively in modernizing stores and menus. The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction en- trants can expect from incumbents. If entry barriers are low and newcomers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profi t- ability is moderated. It is the threat of entry, not whether entry actually occurs, that holds down profi tability. Barriers to entry. Entry barriers are advantages that incum- bents have relative to new entrants. There are seven major sources: 1. Supply-side economies of scale. These economies arise when fi rms that produce at larger volumes enjoy lower costs per unit because they can spread fi xed costs over more units, employ more effi cient technology, or command better terms from suppliers. Supply-side scale economies deter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched com- petitors, or to accept a cost disadvantage. Scale economies can be found in virtually every activity in the value chain; which ones are most important varies by industry.1 In microprocessors, incumbents such as Intel are protected by scale economies in research, chip fabrica- tion, and consumer marketing. For lawn care companies like Scotts Miracle-Gro, the most important scale economies are found in the supply chain and media advertising. In small- package delivery, economies of scale arise in national logisti- cal systems and information technology. 2. Demand-side benefi ts of scale. These benefi ts, also known as network effects, arise in industries where a buyer’s willing- ness to pay for a company’s product increases with the num- ber of other buyers who also patronize the company. Buyers may trust larger companies more for a crucial product: Re- call the old adage that no one ever got fi red for buying from IBM (when it was the dominant computer maker). Buyers may also value being in a “network” with a larger number of fellow customers. For instance, online auction participants are attracted to eBay because it offers the most potential trading partners. Demand-side benefi ts of scale discourage entry by limiting the willingness of customers to buy from a newcomer and by reducing the price the newcomer can com- mand until it builds up a large base of customers. 3. Customer switching costs. Switching costs are fi xed costs that buyers face when they change suppliers. Such costs may arise because a buyer who switches vendors must, for ex- ample, alter product specifi cations, retrain employees to use a new product, or modify processes or information systems. The larger the switching costs, the harder it will be for an en- trant to gain customers. Enterprise resource planning (ERP) software is an example of a product with very high switching costs. Once a company has installed SAP’s ERP system