Answer these questions for chapter 3 (2 pages) and chapter 4 (2 pages)1. Find a key concept in the chapter lecture readings. Briefly explain it.2. Why have you picked this concept among others?3. Find a real company example related to the concept you explained in question 1 and share it with me. You can share the link if available, or copy-paste the content by providing the full citation.4. Apply the key concept you have chosen to this company example. In what ways does this example explain the concept well?
R0801E_pdf.fm www.hbrreprints.org The Five Competitive Forces That Shape Strategy by Michael E. Porter Included with this full-text Harvard Business Review article: The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 1 Article Summary 2 The Five Competitive Forces That Shape Strategy A list of related materials, with annotations to guide further exploration of the article’s ideas and applications 18 Further Reading 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. Reprint R0801E For the exclusive use of V. Zisi, 2022. This document is authorized for use only by Vasil Zisi in GR604 Spring 22 taught by IPEK KOPARAN, Kent State University from Jan 2022 to May 2022. http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0801E http://www.hbrreprints.org The Five Competitive Forces That Shape Strategy page 1 The Idea in Brief The Idea in Practice C O P YR IG H T © 2 00 8 H A R V A R D B U SI N E SS S C H O O L P U B LI SH IN G C O R P O R A T IO N . A LL R IG H T S R E SE R V E D . You know that to sustain long-term profit- ability you must respond strategically to competition. And you naturally keep tabs on your established rivals . But as you scan the competitive arena, are you also looking beyond your direct competitors? As Porter explains in this update of his revolutionary 1979 HBR article, four additional competi- tive forces can hurt your prospective profits: • Savvy customers can force down prices by playing you and your rivals against one another. • Powerful suppliers may constrain your profits if they charge higher prices. • Aspiring entrants , armed with new ca- pacity and hungry for market share, can ratchet up the investment required for you to stay in the game. • Substitute offerings can lure customers away. Consider commercial aviation: It’s one of the least profitable industries because all five forces are strong. Established rivals compete intensely on price. Customers are fickle, searching for the best deal regardless of carrier. Suppliers —plane and engine manufacturers, along with unionized labor forces—bargain away the lion’s share of air- lines’ profits. New players enter the indus- try in a constant stream. And substitutes are readily available—such as train or car travel. By analyzing all five competitive forces, you gain a complete picture of what’s influenc- ing profitability in your industry. You iden- tify game-changing trends early, so you can swiftly exploit them. And you spot ways to work around constraints on profitability— or even reshape the forces in your favor. By understanding how the five competitive forces influence profitability in your industry, you can develop a strategy for enhancing your company’s long-term profits. Porter suggests the following: POSITION YOUR COMPANY W HERE THE FORCES ARE WEAKEST Example: In the heavy-truck industry, many buyers operate large fleets and are highly moti- vated to drive down truck prices. Trucks are built to regulated standards and offer simi- lar features, so price competition is stiff; unions exercise considerable supplier power; and buyers can use substitutes such as cargo delivery by rail. To create and sustain long-term profitability within this industry, heavy-truck maker Pac- car chose to focus on one customer group where competitive forces are weakest: indi- vidual drivers who own their trucks and contract directly with suppliers. These oper- ators have limited clout as buyers and are less price sensitive because of their emo- tional ties to and economic dependence on their own trucks. For these customers, Paccar has developed such features as luxurious sleeper cabins, plush leather seats, and sleek exterior styl- ing. Buyers can select from thousands of options to put their personal signature on these built-to-order trucks. Customers pay Paccar a 10% premium, and the company has been profitable for 68 straight years and earned a long-run return on equity above 20%. EXPLOIT CHANGES IN THE FORCES Example: With the advent of the Internet and digital distribution of music, unauthorized down- loading created an illegal but potent substi- tute for record companies’ services. The record companies tried to develop technical platforms for digital distribution themselves, but major labels didn’t want to sell their music through a platform owned by a rival. Into this vacuum stepped Apple, with its iTunes music store supporting its iPod music player. The birth of this powerful new gate- keeper has whittled down the number of major labels from six in 1997 to four today. RESHAPE THE FORCES IN YOUR FAVOR Use tactics designed specifically to reduce the share of profits leaking to other players. For example: • To neutralize supplier power , standardize specifications for parts so your company can switch more easily among vendors. • To counter customer power , expand your services so it’s harder for customers to leave you for a rival. • To temper price wars initiated by estab- lished rivals , invest more heavily in prod- ucts that differ significantly from competi- tors’ offerings. • To scare off new entrants , elevate the fixed costs of competing; for instance, by escalat- ing your R&D expenditures. • To limit the threat of substitutes , offer bet- ter value through wider product accessibil- ity. Soft-drink producers did this by intro- ducing vending machines and convenience store channels, which dramat- ically improved the availability of soft drinks relative to other beverages. For the exclusive use of V. Zisi, 2022. This document is authorized for use only by Vasil Zisi in GR604 Spring 22 taught by IPEK KOPARAN, Kent State University from Jan 2022 to May 2022. The Five Competitive Forces That Shape Strategy by Michael E. Porter harvard business review • january 2008 page 2 C O P YR IG H T © 2 00 7 H A R V A R D B U SI N E SS S C H O O L P U B LI SH IN G C O R P O R A T IO N . A LL R IG H T S R E SE R V E D . 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. Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strat- egy” by a young economist and associate profes- sor, 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 sig- nature economic rigor to the study of competi- tive 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 col- league Joan Magretta, Porter here reaffirms, up- dates, and extends the classic work. He also ad- dresses 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 under- stand and cope with competition. Often, how- ever, managers define competition too nar- rowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to in- clude 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 competi- tive 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 glo- bal auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Eu- rope. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”) If the forces are intense, as they are in such industries as airlines, textiles, and hotels, al- most no company earns attractive returns on For the exclusive use of V. Zisi, 2022. This document is authorized for use only by Vasil Zisi in GR604 Spring 22 taught by IPEK KOPARAN, Kent State University from Jan 2022 to May 2022. The Five Competitive Forces That Shape Strategy harvard business review • january 2008 page 3 investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. In- dustry structure drives competition and profit- ability, 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 in the short run—including the weather and the business cycle—industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in In- dustry Profitability.”) Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their com- pany’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see,