Industry Analysis a la Michael Porter

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Five Forces Affecting Competitive Strategy

Harvard Business School Professor Michael Porter is the undisputed guru of competitive strategy. In his book of that name Porter identifies five forces that drive competition within an industry:

The threat of entry by new competitors.
The intensity of rivalry among existing competitors.
Pressure from substitute products.
The bargaining power of buyers.
The bargaining power of suppliers.

One obvious application of all this is to would-be entrants and the problem of entering new markets. Another is to the current competitors and the ongoing task of staying competitive in markets where they already operate.

Perhaps the most important thing to keep in mind is the inverse relationship between profit margins or returns and the intensity of competition: as the intensity of competition goes up, margins and returns are driven down. This can require changes in competitive strategy to remain in an industry and, under some circumstances, it can occasion the decision to exit a business or an industry.

The diagram below is a handy way of depicting the five forces Porter identifies and providing some elaborating detail. The diagram is no substitute for reading what Porter has to say.

Figure 1 - The Five Factors or Forces Affecting Competition in an Industry

Based on a diagram appearing on page 4 of Competitive Strategy by Michael Porter. Free Press (1980).

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This page last updated on July 18, 2011