22/03/2015

Porter'sFiveForces

QuickMBA/Strategy/Porter's5Forces

Porter'sFiveForces
AMODELFORINDUSTRYANALYSIS

Themodelofpurecompetitionimpliesthatriskadjustedratesofreturnshouldbe
constantacrossfirmsandindustries.However,numerouseconomicstudieshave
affirmedthatdifferentindustriescansustaindifferentlevelsofprofitabilitypartof
thisdifferenceisexplainedbyindustrystructure.
MichaelPorterprovidedaframeworkthatmodelsanindustryasbeinginfluencedby
fiveforces.Thestrategicbusinessmanagerseekingtodevelopanedgeoverrival
firmscanusethismodeltobetterunderstandtheindustrycontextinwhichthefirm
operates.
DiagramofPorter's5Forces
SUPPLIERPOWER

Supplierconcentration
Importanceofvolumetosupplier
Differentiationofinputs
Impactofinputsoncostordifferentiation
Switchingcostsoffirmsintheindustry
Presenceofsubstituteinputs
Threatofforwardintegration
Costrelativetototalpurchasesinindustry

THREATOF
NEWENTRANTS
BarrierstoEntry
Absolutecostadvantages
Proprietarylearningcurve
Accesstoinputs
Governmentpolicy
Economiesofscale
Capitalrequirements
Brandidentity
Switchingcosts
Accesstodistribution
Expectedretaliation
Proprietaryproducts

THREATOF
SUBSTITUTES
Switchingcosts
Buyerinclinationto
substitute
Priceperformance
tradeoffofsubstitutes

BUYERPOWER

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Bargainingleverage
Buyervolume
Buyerinformation
Brandidentity
Pricesensitivity
Threatofbackwardintegration
Productdifferentiation
Buyerconcentrationvs.industry
Substitutesavailable

DEGREEOFRIVALRY
Exitbarriers
Industryconcentration
Fixedcosts/Valueadded
Industrygrowth
Intermittentovercapacity
Productdifferences
Switchingcosts
Brandidentity
Diversityofrivals
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Buyers'incentives

Corporatestakes

I.Rivalry
Inthetraditionaleconomicmodel,competitionamongrivalfirmsdrivesprofitsto
zero.Butcompetitionisnotperfectandfirmsarenotunsophisticatedpassiveprice
takers.Rather,firmsstriveforacompetitiveadvantageovertheirrivals.The
intensityofrivalryamongfirmsvariesacrossindustries,andstrategicanalystsare
interestedinthesedifferences.
Economistsmeasurerivalrybyindicatorsofindustryconcentration.The
ConcentrationRatio(CR)isonesuchmeasure.TheBureauofCensusperiodically
reportstheCRformajorStandardIndustrialClassifications(SIC's).TheCR
indicatesthepercentofmarketshareheldbythefourlargestfirms(CR'sforthe
largest8,25,and50firmsinanindustryalsoareavailable).Ahighconcentration
ratioindicatesthatahighconcentrationofmarketshareisheldbythelargestfirms
theindustryisconcentrated.Withonlyafewfirmsholdingalargemarketshare,the
competitivelandscapeislesscompetitive(closertoamonopoly).Alow
concentrationratioindicatesthattheindustryischaracterizedbymanyrivals,none
ofwhichhasasignificantmarketshare.Thesefragmentedmarketsaresaidtobe
competitive.Theconcentrationratioisnottheonlyavailablemeasurethetrendis
todefineindustriesintermsthatconveymoreinformationthandistributionofmarket
share.
Ifrivalryamongfirmsinanindustryislow,theindustryisconsideredtobe
disciplined.Thisdisciplinemayresultfromtheindustry'shistoryofcompetition,the
roleofaleadingfirm,orinformalcompliancewithagenerallyunderstoodcodeof
conduct.Explicitcollusiongenerallyisillegalandnotanoptioninlowrivalry
industriescompetitivemovesmustbeconstrainedinformally.However,amaverick
firmseekingacompetitiveadvantagecandisplacetheotherwisedisciplinedmarket.
Whenarivalactsinawaythatelicitsacounterresponsebyotherfirms,rivalry
intensifies.Theintensityofrivalrycommonlyisreferredtoasbeingcutthroat,
intense,moderate,orweak,basedonthefirms'aggressivenessinattemptingto
gainanadvantage.
Inpursuinganadvantageoveritsrivals,afirmcanchoosefromseveralcompetitive
moves:
Changingpricesraisingorloweringpricestogainatemporaryadvantage.
Improvingproductdifferentiationimprovingfeatures,implementing
innovationsinthemanufacturingprocessandintheproductitself.
Creativelyusingchannelsofdistributionusingverticalintegrationorusinga
distributionchannelthatisnoveltotheindustry.Forexample,withhighend
jewelrystoresreluctanttocarryitswatches,Timexmovedintodrugstoresand
othernontraditionaloutletsandcorneredthelowtomidpricewatchmarket.
Exploitingrelationshipswithsuppliersforexample,fromthe1950'stothe
1970'sSears,RoebuckandCo.dominatedtheretailhouseholdappliance
market.Searssethighqualitystandardsandrequiredsupplierstomeetits
demandsforproductspecificationsandprice.
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Theintensityofrivalryisinfluencedbythefollowingindustrycharacteristics:
1. Alargernumberoffirmsincreasesrivalrybecausemorefirmsmust
competeforthesamecustomersandresources.Therivalryintensifiesifthe
firmshavesimilarmarketshare,leadingtoastruggleformarketleadership.
2. Slowmarketgrowthcausesfirmstofightformarketshare.Inagrowing
market,firmsareabletoimproverevenuessimplybecauseoftheexpanding
market.
3. Highfixedcostsresultinaneconomyofscaleeffectthatincreasesrivalry.
Whentotalcostsaremostlyfixedcosts,thefirmmustproducenearcapacity
toattainthelowestunitcosts.Sincethefirmmustsellthislargequantityof
product,highlevelsofproductionleadtoafightformarketshareandresultsin
increasedrivalry.
4. Highstoragecostsorhighlyperishableproductscauseaproducertosell
goodsassoonaspossible.Ifotherproducersareattemptingtounloadatthe
sametime,competitionforcustomersintensifies.
5. Lowswitchingcostsincreasesrivalry.Whenacustomercanfreelyswitch
fromoneproducttoanotherthereisagreaterstruggletocapturecustomers.
6. Lowlevelsofproductdifferentiationisassociatedwithhigherlevelsof
rivalry.Brandidentification,ontheotherhand,tendstoconstrainrivalry.
7. Strategicstakesarehighwhenafirmislosingmarketpositionorhas
potentialforgreatgains.Thisintensifiesrivalry.
8. Highexitbarriersplaceahighcostonabandoningtheproduct.Thefirm
mustcompete.Highexitbarrierscauseafirmtoremaininanindustry,even
whentheventureisnotprofitable.Acommonexitbarrierisassetspecificity.
Whentheplantandequipmentrequiredformanufacturingaproductishighly
specialized,theseassetscannoteasilybesoldtootherbuyersinanother
industry.LittonIndustries'acquisitionofIngallsShipbuildingfacilitiesillustrates
thisconcept.Littonwassuccessfulinthe1960'swithitscontractstobuild
Navyships.ButwhentheVietnamwarended,defensespendingdeclinedand
Littonsawasuddendeclineinitsearnings.Asthefirmrestructured,divesting
fromtheshipbuildingplantwasnotfeasiblesincesuchalargeandhighly
specializedinvestmentcouldnotbesoldeasily,andLittonwasforcedtostay
inadecliningshipbuildingmarket.
9. Adiversityofrivalswithdifferentcultures,histories,andphilosophiesmake
anindustryunstable.Thereisgreaterpossibilityformavericksandfor
misjudgingrival'smoves.Rivalryisvolatileandcanbeintense.Thehospital
industry,forexample,ispopulatedbyhospitalsthathistoricallyarecommunity
orcharitableinstitutions,byhospitalsthatareassociatedwithreligious
organizationsoruniversities,andbyhospitalsthatareforprofitenterprises.
Thismixofphilosophiesaboutmissionhasleadoccasionallytofiercelocal
strugglesbyhospitalsoverwhowillgetexpensivediagnosticandtherapeutic
services.Atothertimes,localhospitalsarehighlycooperativewithone
anotheronissuessuchascommunitydisasterplanning.
10. IndustryShakeout.Agrowingmarketandthepotentialforhighprofits
inducesnewfirmstoenteramarketandincumbentfirmstoincrease
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production.Apointisreachedwheretheindustrybecomescrowdedwith
competitors,anddemandcannotsupportthenewentrantsandtheresulting
increasedsupply.Theindustrymaybecomecrowdedifitsgrowthrateslows
andthemarketbecomessaturated,creatingasituationofexcesscapacity
withtoomanygoodschasingtoofewbuyers.Ashakeoutensues,withintense
competition,pricewars,andcompanyfailures.
BCGfounderBruceHendersongeneralizedthisobservationastheRuleof
ThreeandFour:astablemarketwillnothavemorethanthreesignificant
competitors,andthelargestcompetitorwillhavenomorethanfourtimesthe
marketshareofthesmallest.Ifthisruleistrue,itimpliesthat:
Ifthereisalargernumberofcompetitors,ashakeoutisinevitable
Survivingrivalswillhavetogrowfasterthanthemarket
Eventualloserswillhaveanegativecashflowiftheyattempttogrow
Allexceptthetwolargestrivalswillbelosers
Thedefinitionofwhatconstitutesthe"market"isstrategicallyimportant.
Whateverthemeritsofthisruleforstablemarkets,itisclearthatmarket
stabilityandchangesinsupplyanddemandaffectrivalry.Cyclicaldemand
tendstocreatecutthroatcompetition.Thisistrueinthedisposablediaper
industryinwhichdemandfluctuateswithbirthrates,andinthegreetingcard
industryinwhichtherearemorepredictablebusinesscycles.
II.ThreatOfSubstitutes
InPorter'smodel,substituteproductsrefertoproductsinotherindustries.Tothe
economist,athreatofsubstitutesexistswhenaproduct'sdemandisaffectedbythe
pricechangeofasubstituteproduct.Aproduct'spriceelasticityisaffectedby
substituteproductsasmoresubstitutesbecomeavailable,thedemandbecomes
moreelasticsincecustomershavemorealternatives.Aclosesubstituteproduct
constrainstheabilityoffirmsinanindustrytoraiseprices.
ThecompetitionengenderedbyaThreatofSubstitutecomesfromproductsoutside
theindustry.Thepriceofaluminumbeveragecansisconstrainedbythepriceof
glassbottles,steelcans,andplasticcontainers.Thesecontainersaresubstitutes,
yettheyarenotrivalsinthealuminumcanindustry.Tothemanufacturerof
automobiletires,tireretreadsareasubstitute.Today,newtiresarenotso
expensivethatcarownersgivemuchconsiderationtoretreadingoldtires.Butinthe
truckingindustrynewtiresareexpensiveandtiresmustbereplacedoften.Inthe
trucktiremarket,retreadingremainsaviablesubstituteindustry.Inthedisposable
diaperindustry,clothdiapersareasubstituteandtheirpricesconstrainthepriceof
disposables.
Whilethethreatofsubstitutestypicallyimpactsanindustrythroughprice
competition,therecanbeotherconcernsinassessingthethreatofsubstitutes.
ConsiderthesubstitutabilityofdifferenttypesofTVtransmission:localstation
transmissiontohomeTVantennasviatheairwaysversustransmissionviacable,
satellite,andtelephonelines.Thenewtechnologiesavailableandthechanging
structureoftheentertainmentmediaarecontributingtocompetitionamongthese
substitutemeansofconnectingthehometoentertainment.Exceptinremoteareas
itisunlikelythatcableTVcouldcompetewithfreeTVfromanaerialwithoutthe
greaterdiversityofentertainmentthatitaffordsthecustomer.
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III.BuyerPower
Thepowerofbuyersistheimpactthatcustomershaveonaproducingindustry.In
general,whenbuyerpowerisstrong,therelationshiptotheproducingindustryis
neartowhataneconomisttermsamonopsonyamarketinwhichtherearemany
suppliersandonebuyer.Undersuchmarketconditions,thebuyersetstheprice.In
realityfewpuremonopsoniesexist,butfrequentlythereissomeasymmetry
betweenaproducingindustryandbuyers.Thefollowingtablesoutlinesomefactors
thatdeterminebuyerpower.
BuyersarePowerfulif:

Example

Buyersareconcentratedthereareafewbuyers
DODpurchasesfromdefensecontractors
withsignificantmarketshare
Buyerspurchaseasignificantproportionof
outputdistributionofpurchasesorifthe
productisstandardized

CircuitCityandSears'largeretailmarket
providespoweroverappliancemanufacturers

Buyerspossessacrediblebackwardintegration
threatcanthreatentobuyproducingfirmor
rival

Largeautomanufacturers'purchasesoftires

BuyersareWeakif:

Example

Producersthreatenforwardintegrationproducer Movieproducingcompanieshaveintegrated
cantakeoverowndistribution/retailing
forwardtoacquiretheaters
Significantbuyerswitchingcostsproductsnot
standardizedandbuyercannoteasilyswitchto
anotherproduct

IBM's360systemstrategyinthe1960's

Buyersarefragmented(many,different)no
buyerhasanyparticularinfluenceonproductor
price

Mostconsumerproducts

Producerssupplycriticalportionsofbuyers'
inputdistributionofpurchases

Intel'srelationshipwithPCmanufacturers

IV.SupplierPower
Aproducingindustryrequiresrawmaterialslabor,components,andother
supplies.Thisrequirementleadstobuyersupplierrelationshipsbetweenthe
industryandthefirmsthatprovideittherawmaterialsusedtocreateproducts.
Suppliers,ifpowerful,canexertaninfluenceontheproducingindustry,suchas
sellingrawmaterialsatahighpricetocapturesomeoftheindustry'sprofits.The
followingtablesoutlinesomefactorsthatdeterminesupplierpower.

SuppliersarePowerfulif:

Example

Credibleforwardintegrationthreatbysuppliers

BaxterInternational,manufacturerofhospital
supplies,acquiredAmericanHospitalSupply,a
distributor

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Suppliersconcentrated

Drugindustry'srelationshiptohospitals

Significantcosttoswitchsuppliers

Microsoft'srelationshipwithPCmanufacturers

CustomersPowerful

Boycottofgrocerystoressellingnonunion
pickedgrapes

SuppliersareWeakif:

Example

Manycompetitivesuppliersproductis
standardized

Tireindustryrelationshiptoautomobile
manufacturers

Purchasecommodityproducts

Grocerystorebrandlabelproducts

Crediblebackwardintegrationthreatby
purchasers

Timberproducersrelationshiptopaper
companies

Concentratedpurchasers

Garmentindustryrelationshiptomajor
departmentstores

CustomersWeak

Travelagents'relationshiptoairlines

V.ThreatofNewEntrantsandEntryBarriers
Itisnotonlyincumbentrivalsthatposeathreattofirmsinanindustrythepossibility
thatnewfirmsmayentertheindustryalsoaffectscompetition.Intheory,anyfirm
shouldbeabletoenterandexitamarket,andiffreeentryandexitexists,then
profitsalwaysshouldbenominal.Inreality,however,industriespossess
characteristicsthatprotectthehighprofitlevelsoffirmsinthemarketandinhibit
additionalrivalsfromenteringthemarket.Thesearebarrierstoentry.
Barrierstoentryaremorethanthenormalequilibriumadjustmentsthatmarkets
typicallymake.Forexample,whenindustryprofitsincrease,wewouldexpect
additionalfirmstoenterthemarkettotakeadvantageofthehighprofitlevels,over
timedrivingdownprofitsforallfirmsintheindustry.Whenprofitsdecrease,we
wouldexpectsomefirmstoexitthemarketthusrestoringamarketequilibrium.
Fallingprices,ortheexpectationthatfuturepriceswillfall,detersrivalsfrom
enteringamarket.Firmsalsomaybereluctanttoentermarketsthatareextremely
uncertain,especiallyifenteringinvolvesexpensivestartupcosts.Thesearenormal
accommodationstomarketconditions.Butiffirmsindividually(collectiveaction
wouldbeillegalcollusion)keeppricesartificiallylowasastrategytoprevent
potentialentrantsfromenteringthemarket,suchentrydeterringpricing
establishesabarrier.
Barrierstoentryareuniqueindustrycharacteristicsthatdefinetheindustry.Barriers
reducetherateofentryofnewfirms,thusmaintainingalevelofprofitsforthose
alreadyintheindustry.Fromastrategicperspective,barrierscanbecreatedor
exploitedtoenhanceafirm'scompetitiveadvantage.Barrierstoentryarisefrom
severalsources:
1. Governmentcreatesbarriers.Althoughtheprincipalroleofthegovernment
inamarketistopreservecompetitionthroughantitrustactions,government
alsorestrictscompetitionthroughthegrantingofmonopoliesandthrough
regulation.Industriessuchasutilitiesareconsiderednaturalmonopolies
becauseithasbeenmoreefficienttohaveoneelectriccompanyprovide
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powertoalocalitythantopermitmanyelectriccompaniestocompeteina
localmarket.Torestrainutilitiesfromexploitingthisadvantage,government
permitsamonopoly,butregulatestheindustry.Illustrativeofthiskindof
barriertoentryisthelocalcablecompany.Thefranchisetoacableprovider
maybegrantedbycompetitivebidding,butoncethefranchiseisawardedby
acommunityamonopolyiscreated.Localgovernmentswerenoteffectivein
monitoringpricegougingbycableoperators,sothefederalgovernmenthas
enactedlegislationtoreviewandrestrictprices.
Theregulatoryauthorityofthegovernmentinrestrictingcompetitionis
historicallyevidentinthebankingindustry.Untilthe1970's,themarketsthat
bankscouldenterwerelimitedbystategovernments.Asaresult,mostbanks
werelocalcommercialandretailbankingfacilities.Bankscompetedthrough
strategiesthatemphasizedsimplemarketingdevicessuchasawarding
toasterstonewcustomersforopeningacheckingaccount.Whenbankswere
deregulated,bankswerepermittedtocrossstateboundariesandexpandtheir
markets.Deregulationofbanksintensifiedrivalryandcreateduncertaintyfor
banksastheyattemptedtomaintainmarketshare.Inthelate1970's,the
strategyofbanksshiftedfromsimplemarketingtacticstomergersand
geographicexpansionasrivalsattemptedtoexpandmarkets.
2. Patentsandproprietaryknowledgeservetorestrictentryintoan
industry.Ideasandknowledgethatprovidecompetitiveadvantagesare
treatedasprivatepropertywhenpatented,preventingothersfromusingthe
knowledgeandthuscreatingabarriertoentry.EdwinLandintroducedthe
Polaroidcamerain1947andheldamonopolyintheinstantphotography
industry.In1975,Kodakattemptedtoentertheinstantcameramarketand
soldacomparablecamera.Polaroidsuedforpatentinfringementandwon,
keepingKodakoutoftheinstantcameraindustry.
3. Assetspecificityinhibitsentryintoanindustry.Assetspecificityisthe
extenttowhichthefirm'sassetscanbeutilizedtoproduceadifferentproduct.
Whenanindustryrequireshighlyspecializedtechnologyorplantsand
equipment,potentialentrantsarereluctanttocommittoacquiringspecialized
assetsthatcannotbesoldorconvertedintootherusesiftheventurefails.
Assetspecificityprovidesabarriertoentryfortworeasons:First,whenfirms
alreadyholdspecializedassetstheyfiercelyresisteffortsbyothersfrom
takingtheirmarketshare.Newentrantscananticipateaggressiverivalry.For
example,Kodakhadmuchcapitalinvestedinitsphotographicequipment
businessandaggressivelyresistedeffortsbyFujitointrudeinitsmarket.
Theseassetsarebothlargeandindustryspecific.Thesecondreasonisthat
potentialentrantsarereluctanttomakeinvestmentsinhighlyspecialized
assets.
4. Organizational(Internal)EconomiesofScale.Themostcostefficientlevel
ofproductionistermedMinimumEfficientScale(MES).Thisisthepointat
whichunitcostsforproductionareatminimumi.e.,themostcostefficient
levelofproduction.IfMESforfirmsinanindustryisknown,thenwecan
determinetheamountofmarketsharenecessaryforlowcostentryorcost
paritywithrivals.Forexample,inlongdistancecommunicationsroughly10%
ofthemarketisnecessaryforMES.Ifsalesforalongdistanceoperatorfailto
reach10%ofthemarket,thefirmisnotcompetitive.
Theexistenceofsuchaneconomyofscalecreatesabarriertoentry.The
greaterthedifferencebetweenindustryMESandentryunitcosts,thegreater
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thebarriertoentry.SoindustrieswithhighMESdeterentryofsmall,startup
businesses.TooperateatlessthanMEStheremustbeaconsiderationthat
permitsthefirmtosellatapremiumpricesuchasproductdifferentiationor
localmonopoly.

Barrierstoexitworksimilarlytobarrierstoentry.Exitbarrierslimittheabilityofa
firmtoleavethemarketandcanexacerbaterivalryunabletoleavetheindustry,a
firmmustcompete.Someofanindustry'sentryandexitbarrierscanbe
summarizedasfollows:

EasytoEnterifthereis:

DifficulttoEnterifthereis:

Commontechnology

Patentedorproprietaryknowhow

Littlebrandfranchise

Difficultyinbrandswitching

Accesstodistributionchannels

Restricteddistributionchannels

Lowscalethreshold

Highscalethreshold

EasytoExitifthereare:

DifficulttoExitifthereare:

Salableassets

Specializedassets

Lowexitcosts

Highexitcosts

Independentbusinesses

Interrelatedbusinesses

DYNAMICNATUREOFINDUSTRYRIVALRY
Ourdescriptiveandanalyticmodelsofindustrytendtoexaminetheindustryata
givenstate.Thenatureandfascinationofbusinessisthatitisnotstatic.Whilewe
arepronetogeneralize,forexample,listGM,Ford,andChryslerasthe"Big3"and
assumetheirdominance,wealsohaveseentheautomobileindustrychange.
Currently,theentertainmentandcommunicationsindustriesareinflux.Phone
companies,computerfirms,andentertainmentaremergingandformingstrategic
alliancesthatremaptheinformationterrain.Schumpeterand,morerecently,Porter
haveattemptedtomovetheunderstandingofindustrycompetitionfromastatic
economicorindustryorganizationmodeltoanemphasisontheinterdependenceof
forcesasdynamic,orpunctuatedequilibrium,asPortertermsit.
InSchumpeter'sandPorter'sviewthedynamismofmarketsisdrivenbyinnovation.
Wecanenvisiontheseforcesatworkasweexaminethefollowingchanges:
Top10USIndustrialFirmsbySales19171988

1917

1945

USSteel
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1966
GeneralMotors

1983
Exxon

1988
General
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GeneralMotors

2 Swift

USSteel

Ford

GeneralMotors

Ford

3 Armour

StandardOil
NJ

StandardOilNJ
(Exxon)

Mobil

Exxon

USSteel

GeneralElectric

Texaco

IBM

Chrysler

Ford

General
Electric

Mobil

IBM

Mobil

Socal(Oil)

Chrysler

DuPont

Texaco

GulfOil

DuPont

StandardOilof
Indiana

PhilipMorris

American

4 Smelting

Bethlehem
5 StandardOilNJ Steel
6 BethlehemSteel Swift

Motors

Armour
Texaco
7 Ford
CurtissWright USSteel
8 DuPont
IBM
9 AmericanSugar Chrysler

10 GeneralElectric Ford

GulfOil

10LargestUSFirmsbyAssets,1909and1987

1909

1987

1 USSTEEL

GM(Notlistedin
1909)

2 STANDARDOIL,NJ(Now,EXXON#3)

SEARS(1909=45)

3 AMERICANTOBACCO(Now,AmericanBrands#52)

EXXON(StandardOil
trustbrokenupin
1911)

AMERICANMERCANTILEMARINE(RenamedUSLinesacquiredby IBM(Ranked68,
1948)

4 Kidde,Inc.,1969soldtoMcLeanIndustries,1978bankruptcy,1986
5 INTERNATIONALHARVESTER(RenamedNavistar#182)divested
farmequipment

FORD(Listedin1919)

6 ANACONDACOPPER(acquiredbyARCOin1977)

MOBILOIL

7 USLEATHER(Liquidatedin1935)

GENERALELECTRIC
(1909=16)

8 ARMOUR(Mergedin1968withGeneralHostin1969byGreyhound
1983soldtoConAgra)

CHEVRON(Notlisted
in1909)

AMERICANSUGARREFINING(RenamedAMSTAR.In1967=320)

9 Leveragedbuyoutandsoldinpieces)

PULLMAN,INC(AcquiredbyWheelabratorFrye,1980spunoffas

10 PullmanPeabody,19811984soldtoTrinityIndustries)

TEXACO(1909=91)
DUPONT(1909=29)

GENERICSTRATEGIESTOCOUNTERTHEFIVEFORCES
Strategycanbeformulatedonthreelevels:
corporatelevel
businessunitlevel
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functionalordepartmentallevel.
Thebusinessunitlevelistheprimarycontextofindustryrivalry.MichaelPorter
identifiedthreegenericstrategies(costleadership,differentiation,andfocus)that
canbeimplementedatthebusinessunitleveltocreateacompetitiveadvantage.
Thepropergenericstrategywillpositionthefirmtoleverageitsstrengthsand
defendagainsttheadverseeffectsofthefiveforces.

RecommendedReading
Porter,MichaelE.,CompetitiveStrategy:TechniquesforAnalyzingIndustriesandCompetitors
CompetitiveStrategyisthebasisformuchofmodernbusinessstrategy.Inthisclassicwork,Michael
Porterpresentshisfiveforcesandgenericstrategies,thendiscusseshowtorecognizeandacton
marketsignalsandhowtoforecasttheevolutionofindustrystructure.Hethendiscussescompetitive
strategyforemerging,mature,declining,andfragmentedindustries.Thelastpartofthebookcovers
strategicdecisionsrelatedtoverticalintegration,capacityexpansion,andentryintoanindustry.The
bookconcludeswithanappendixonhowtoconductanindustryanalysis.
QuickMBA/Strategy/Porters5Forces
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