Competitive strategy: Techniques for analyzing industries and competitors
Citation: Michael Porter (1980) Competitive strategy: Techniques for analyzing industries and competitors.
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In this book, Michael Porter lays out his five forces which have become the cornerstone of corporate strategy and a major part of almost any MBA education. Porters five forces are:
- Entry of competitors: Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards zero under a condition of perfect competition.
- Threat of substitutes: The existence of products outside of the realm of the common product boundaries increases the propensity]of customers to switch to alternatives.
- Bargaining power of buyers: The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.
- Bargaining power of suppliers: The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.
- Rivalry among the existing players: For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
In many ways, the five forces can be reduced a question of who will be powerful in a particular exchange. The very short version of what is strategy is boils down to adopting a position that is going to be hard for someone else to copy.
Theoretical and Practical Relevance
Before becoming involved in corporate strategy, Porter was an Industrial organization economist. Basically, IO economics had been studying monopolies mostly from the perspectives of governments who wanted to create policies to keep them from happening. Porter and other early strategy pioneers effectively turned IO economics on its head by considering things from the perspective of the firms who wanted to create monopolies. For example, Porter looks to things like barriers to entry which states might want to prevent but that a strategic company might want to foster in order to create monopolies or monopoly-like situations.
- Wikipedia page on Porter five forces analysis