Understanding the forces that shape industry competition is the starting point for developing strategy. Every company should already know
what the average profitability of its industry is and how that has been changing over time. The five forces reveal why industry profitability is
what it is. Only then can a company incorporate industry conditions into strategy.
The forces reveal the most significant aspects of the competitive environment. They also provide a baseline for sizing up a company’s
strengths and weaknesses: Where does the company stand versus buyers, suppliers, entrants, rivals, and substitutes? Most importantly, an
understanding of industry structure guides managers toward fruitful possibilities for strategic action, which may include any or all of the
following: positioning the company to better cope with the current competitive forces; anticipating and exploiting shifts in the forces; and
shaping the balance of forces to create a new industry structure that is more favorable to the company. The best strategies exploit more than
one of these possibilities
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Once having assessed the forces affecting competition in an industry and their underlying causes, the corporate strategist can identify the company’s strengths and weaknesses. The crucial strengths and weaknesses from a strategic standpoint are the company’s posture vis-à-vis the underlying causes of each force. Where does it stand against substitutes? Against the sources of entry barriers?
Then the strategist can devise a plan of action that may include (l) positioning the company so that its capabilities provide the best defense against the competitive force; and/or (2) influencing the balance of the forces through strategic moves, thereby improving the company’s position; and/or (3) anticipating shifts in the factors underlying the forces and responding to them, with the hope of exploiting change by choosing a strategy appropriate for the new competitive balance before opponents recognize it. I shall consider each strategic approach in turn.