on (and profi tability) over time. Ahealthy industry structure should be as much a competitiveconcern to strategists as their company’s own position. Understandingindustry structure is also essential to effective
strategic positioning. As we will see, defending against thecompetitive forces and shaping them in a company’s favorare 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 bargaining
power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substitutes,
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 theprofi tability of an industry and become the most importantto strategy formulation. The most salient force, however, isnot always obvious.
For example, even though rivalry is often fi erce in commodityindustries, it may not be the factor limiting profi tability.Low returns in the photographic fi lm industry, for
instance, are the result of a superior substitute product – asKodak and Fuji, the world’s leading producers of photographicfi lm, learned with the advent of digital photography.In such a situation, coping with the substitute product becomesthe number one strategic priority.
Industry structure grows out of a set of economic andtechnical characteristics that determine the strength ofeach 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 analysiscan 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 necessary
to compete. Particularly when new entrants are
diversifying from other markets, they can leverage existing
capabilities and cash fl ows to shake up competition, as
Pepsi did when it entered the bottled water industry, Microsoft
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 Professor
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
hbr.org | January 2008 | Harvard Business Review 81
The threat of entry, therefore, puts a cap on the profi t potential
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 invest
aggressively in modernizing stores
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