The Five Competitive Forces That Shape Strategy - amazonia.fiocruz.br

The Five Competitive Forces That Shape Strategy Video

More than: The Five Competitive Forces That Shape Strategy

Formulation of Strategy

Awareness of these forces can help a company stake out a position in its industry that is less vulnerable to attack. The essence of strategy formulation is coping with competition.

Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck. Moreover, in the fight for market share, competition is not manifested only in the other players.

Confessional

Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry. The state of competition in an industry depends on five basic forces, which are diagrammed in the Exhibit.

The collective strength of these forces determines the ultimate profit potential of an industry. It ranges from intense in industries like tires, metal cans, and steel, where no company earns spectacular returns on investment, to mild in industries like oil field services and equipment, soft drinks, and toiletries, where there is room for quite high returns.

Trend watch: Production on pause (again)

This kind of industry structure, of course, offers the worst prospect for long-run profitability. The weaker the forces collectively, however, the greater the opportunity for superior performance.

The collective strength of the forces may be painfully apparent to all the antagonists; but to cope with them, the strategist must delve below the surface and analyze the sources of each. For example, what makes the industry vulnerable to entry, What determines the bargaining power of suppliers? Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action.

Contending Forces

They highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats. Understanding these sources also proves to be of help in considering areas for diversification. The strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation. For example, even a company with a strong position in an industry unthreatened by potential entrants will earn low returns if it faces a superior or a lower-cost substitute product—as the leading manufacturers of vacuum tubes and coffee percolators have learned to their sorrow.

In such a situation, coping with the substitute product becomes the number one strategic priority. Different forces take on prominence, of course, in shaping competition in each industry.]