In essence, the job of the strategist is to under-
stand and cope with competition. Often, however, managers define competition too narrowly, 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
rfrom 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 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, defending against
the competitive forces and shaping them in a
company’s favor are crucial to strategy.
In essence, the job of the strategist is to under-stand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profitsgoes beyond established industry rivals to in-clude four other competitive forces as well:customers, suppliers, potential entrants, andsubstitute products. The extended rivalry thatrfrom all five forces defines an industry’sstructure and shapes the nature of competi-tive interaction within an industry.As different from one another as industriesmight appear on the surface, the underlyingdrivers of profitability are the same. The glo-bal auto industry, for instance, appears tohave nothing in common with the worldwidemarket for art masterpieces or the heavilyregulated health-care delivery industry in Eu-rope. But to understand industry competitionand profitability in each of those three cases,one must analyze the industry’s underlyingstructure in terms of the five forces. (See theexhibit “The Five Forces That Shape IndustryCompetition.”)If the forces are intense, as they are in suchindustries as airlines, textiles, and hotels, al-most no company earns attractive returns on investment. If the forces are benign, as they arein industries such as software, soft drinks, andtoiletries, many companies are profitable. In-dustry structure drives competition and profit-ability, not whether an industry produces aproduct or service, is emerging or mature, hightech or low tech, regulated or unregulated.While a myriad of factors can affect industryprofitability in the short run—including theweather and the business cycle—industrystructure, manifested in the competitive forces,sets industry profitability in the medium andlong run. (See the exhibit “Differences in In-dustry Profitability.”)Understanding the competitive forces, andtheir underlying causes, reveals the roots of anindustry’s current profitability while providinga framework for anticipating and influencingcompetition (and profitability) over time. Ahealthy industry structure should be as much acompetitive concern to strategists as their com-pany’s own position. Understanding industrystructure is also essential to effective strategicpositioning. As we will see, defending againstthe competitive forces and shaping them in acompany’s favor are crucial to strategy.
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