{"sourceUrl":null,"sourceType":"file","contentType":"Explainer","apex":{"id":"n1","type":"APEX","label":"Five Competitive Forces Shape Strategy","text":"Awareness of the five competitive forces helps companies understand industry structure, enabling them to stake out a profitable position less vulnerable to attack.","children":[{"id":"n2","type":"CONC","label":"Article Summary: The Idea in Brief","text":"To sustain long-term profitability, companies must respond strategically to competition, extending beyond direct rivals to include five competitive forces.","parentId":"n1","children":[{"id":"n3","type":"CONC","label":"Savvy Customers Force Prices Down","text":"Savvy customers can force down prices by playing rivals against one another.","parentId":"n2","children":[]},{"id":"n4","type":"CONC","label":"Powerful Suppliers Constrain Profits","text":"Powerful suppliers may constrain profits if they charge higher prices.","parentId":"n2","children":[]},{"id":"n5","type":"CONC","label":"Aspiring Entrants Ratchet Up Investment","text":"Aspiring entrants with new capacity and hunger for market share can ratchet up the investment required to stay in the game.","parentId":"n2","children":[]},{"id":"n6","type":"CONC","label":"Substitute Offerings Lure Customers","text":"Substitute offerings can lure customers away from existing products.","parentId":"n2","children":[]},{"id":"n7","type":"CONC","label":"Established Rivals Intensify Competition","text":"Established rivals compete intensely on price and other dimensions.","parentId":"n2","children":[]},{"id":"n8","type":"EXMP","label":"Commercial Aviation Profitability","text":"Commercial aviation is one of the least profitable industries due to strong competitive forces.","parentId":"n2","children":[]},{"id":"n9","type":"INSG","label":"Analyzing Forces for Profitability","text":"Analyzing all five competitive forces provides a complete picture of industry profitability and helps identify game-changing trends early.","parentId":"n2","children":[]}]},{"id":"n10","type":"CONC","label":"The Idea in Practice","text":"Understanding how the five competitive forces influence industry profitability enables strategy development to enhance long-term profits.","parentId":"n1","children":[{"id":"n11","type":"DCSN","label":"Position Company Where Forces Weakest","text":"Strategists should position their company where the competitive forces are weakest.","parentId":"n10","children":[{"id":"n12","type":"EXMP","label":"Heavy-Truck Industry Overview","text":"In the heavy-truck industry, large buyers, regulated standards, and union power contribute to stiff price competition and high supplier power.","parentId":"n11","children":[]},{"id":"n13","type":"EXMP","label":"Paccar's Strategy for Weak Forces","text":"Paccar focused on individual owner-operators, a customer group with limited clout and less price sensitivity, to create sustained long-term profitability.","parentId":"n11","children":[{"id":"n14","type":"DETL","label":"Paccar Product Customization","text":"Paccar developed features like luxurious sleeper cabins and plush leather seats, offering thousands of options for built-to-order trucks.","parentId":"n13","children":[]},{"id":"n15","type":"STAT","label":"Paccar Profitability Statistics","text":"Customers pay Paccar a 10% premium, and the company has been profitable for 68 straight years, earning a long-run return on equity above 20%.","parentId":"n13","children":[]}]}]},{"id":"n16","type":"DCSN","label":"Exploit Changes in Forces","text":"Companies should exploit changes within the competitive forces.","parentId":"n10","children":[{"id":"n17","type":"EXMP","label":"Music Industry Digital Substitution","text":"The Internet and digital distribution created unauthorized downloading, a potent substitute for record companies' services.","parentId":"n16","children":[{"id":"n18","type":"DETL","label":"Record Companies' Response","text":"Record companies tried to develop digital distribution platforms but major labels hesitated to sell music through a rival's platform.","parentId":"n17","children":[]},{"id":"n19","type":"DETL","label":"Apple iTunes Entry","text":"Apple stepped into this vacuum with iTunes, supporting its iPod, and becoming a powerful new gatekeeper.","parentId":"n17","children":[]},{"id":"n20","type":"STAT","label":"Major Label Consolidation","text":"The number of major labels was whittled down from six in 1997 to four today.","parentId":"n17","children":[]}]}]},{"id":"n21","type":"DCSN","label":"Reshape Forces in Favor","text":"Companies should use tactics to reduce the share of profits leaking to other players, thereby reshaping the forces.","parentId":"n10","children":[{"id":"n22","type":"DETL","label":"Neutralize Supplier Power","text":"Standardize part specifications to switch vendors easily, neutralizing supplier power.","parentId":"n21","children":[]},{"id":"n23","type":"DETL","label":"Counter Customer Power","text":"Expand services to increase customer switching costs, countering customer power.","parentId":"n21","children":[]},{"id":"n24","type":"DETL","label":"Temper Price Wars","text":"Invest more heavily in differentiated products to temper price wars initiated by established rivals.","parentId":"n21","children":[]},{"id":"n25","type":"DETL","label":"Scare Off New Entrants","text":"Elevate fixed costs of competing, like R&D expenditures, to scare off new entrants.","parentId":"n21","children":[]},{"id":"n26","type":"DETL","label":"Limit Threat of Substitutes","text":"Offer better value through wider product accessibility to limit the threat of substitutes.","parentId":"n21","children":[{"id":"n27","type":"EXMP","label":"Soft Drink Accessibility Example","text":"Soft-drink producers introduced vending machines and convenience store channels, improving availability relative to other beverages.","parentId":"n26","children":[]}]}]}]},{"id":"n28","type":"DETL","label":"Editor's Note: Article History","text":"Michael E. Porter's 1979 HBR article 'How Competitive Forces Shape Strategy' revolutionized the strategy field and is updated here.","parentId":"n1","children":[]},{"id":"n29","type":"CONC","label":"Strategist's Job: Understand Competition","text":"The strategist's job is to understand and cope with competition, which often extends beyond today's direct rivals.","parentId":"n1","children":[{"id":"n30","type":"DETL","label":"Competition Beyond Rivals","text":"Competition for profits extends beyond established industry rivals to include customers, suppliers, potential entrants, and substitute products.","parentId":"n29","children":[]},{"id":"n31","type":"DETL","label":"Five Forces Define Industry Structure","text":"The extended rivalry from all five forces defines an industry's structure, shaping competitive interaction.","parentId":"n29","children":[]}]},{"id":"n32","type":"INSG","label":"Industry Structure Drives Profitability","text":"Industry structure drives competition and profitability, not whether an industry is emerging or mature, high-tech or low-tech, regulated or unregulated.","parentId":"n1","children":[{"id":"n33","type":"DETL","label":"Intense Forces Lead to Low Returns","text":"If the five forces are intense, as in industries like airlines, textiles, and hotels, almost no company earns attractive returns on investment.","parentId":"n32","children":[]},{"id":"n34","type":"DETL","label":"Benign Forces Lead to Profitability","text":"If the five forces are benign, as in software, soft drinks, and toiletries, many companies are profitable.","parentId":"n32","children":[]},{"id":"n35","type":"JUST","label":"Short-Run vs Long-Run Profitability","text":"While myriad factors affect short-run profitability, industry structure, manifested in competitive forces, sets profitability in the medium and long run.","parentId":"n32","children":[]},{"id":"n36","type":"INSG","label":"Framework for Anticipating Competition","text":"Understanding competitive forces and their causes reveals roots of current profitability and provides a framework for anticipating and influencing competition.","parentId":"n32","children":[]}]},{"id":"n37","type":"CONC","label":"Forces That Shape Competition","text":"The configuration of the five competitive forces differs by industry.","parentId":"n1","children":[{"id":"n38","type":"EXMP","label":"Commercial Aircraft Industry Forces","text":"In commercial aircraft, fierce rivalry and buyer power are strong, while threat of entry, substitutes, and supplier power are more benign.","parentId":"n37","children":[]},{"id":"n39","type":"EXMP","label":"Movie Theater Industry Forces","text":"In the movie theater industry, the proliferation of substitutes and power of movie producers/distributors are important forces.","parentId":"n37","children":[]},{"id":"n40","type":"DETL","label":"Strongest Force Determines Profitability","text":"The strongest competitive force or forces determine an industry's profitability and become most important for strategy formulation.","parentId":"n37","children":[]},{"id":"n41","type":"EXMP","label":"Photographic Film Industry Example","text":"Low returns in photographic film, despite fierce rivalry, resulted from a superior substitute product: digital photography.","parentId":"n37","children":[]},{"id":"n42","type":"CONC","label":"Threat of Entry","text":"New entrants bring new capacity and a desire for market share, pressuring prices, costs, and investment.","parentId":"n37","children":[{"id":"n43","type":"DETL","label":"Threat of Entry Impact on Profits","text":"The threat of entry puts a cap on an industry's profit potential; high threat forces incumbents to deter new competitors.","parentId":"n42","children":[]},{"id":"n44","type":"DETL","label":"Threat of Entry Dependence","text":"The threat of entry depends on the height of entry barriers and expected retaliation from incumbents.","parentId":"n42","children":[]},{"id":"n45","type":"EXMP","label":"Specialty Coffee Retailing Investment","text":"Low entry barriers in specialty coffee mean Starbucks must invest aggressively in modernizing stores and menus.","parentId":"n42","children":[]},{"id":"n46","type":"SUBC","label":"Barriers to Entry","text":"Entry barriers are advantages incumbents have relative to new entrants.","parentId":"n42","children":[{"id":"n47","type":"DETL","label":"Supply-Side Economies of Scale","text":"Firms producing at larger volumes enjoy lower per-unit costs, deterring entrants by forcing large scale or cost disadvantage.","parentId":"n46","children":[{"id":"n48","type":"EXMP","label":"Microprocessor Scale Economies","text":"Intel is protected by scale economies in research, chip fabrication, and consumer marketing.","parentId":"n47","children":[]},{"id":"n49","type":"EXMP","label":"Lawn Care Scale Economies","text":"Scotts Miracle-Gro finds scale economies most important in supply chain and media advertising.","parentId":"n47","children":[]}]},{"id":"n50","type":"DETL","label":"Demand-Side Benefits of Scale","text":"Buyer willingness to pay increases with the number of other buyers patronizing the company, also known as network effects.","parentId":"n46","children":[{"id":"n51","type":"EXMP","label":"IBM Buyer Trust Example","text":"Buyers trusted larger companies like IBM, reducing entry willingness for newcomers.","parentId":"n50","children":[]},{"id":"n52","type":"EXMP","label":"eBay Network Effects Example","text":"Online auction participants are attracted to eBay due to its large number of potential trading partners.","parentId":"n50","children":[]}]},{"id":"n53","type":"DETL","label":"Customer Switching Costs","text":"Fixed costs buyers face when changing suppliers make it harder for entrants to gain customers.","parentId":"n46","children":[{"id":"n54","type":"EXMP","label":"ERP Software Switching Costs","text":"Enterprise resource planning (ERP) software like SAP has very high switching costs due to embedded data and process adaptations.","parentId":"n53","children":[]}]},{"id":"n55","type":"DETL","label":"Capital Requirements as Barrier","text":"Large financial resource investment deters new entrants, especially for unrecoverable expenditures like upfront advertising or R&D.","parentId":"n46","children":[{"id":"n56","type":"JUST","label":"Capital Requirements Alone Not Sufficient","text":"Capital requirements alone may not deter entry if industry returns are attractive and capital markets are efficient.","parentId":"n55","children":[]},{"id":"n57","type":"EXMP","label":"Air Carrier Financing Example","text":"Financing for expensive aircraft is available due to high resale value, leading to numerous new airlines.","parentId":"n55","children":[]}]},{"id":"n58","type":"DETL","label":"Incumbency Advantages Independent of Size","text":"Incumbents may have cost or quality advantages unavailable to potential rivals, regardless of size.","parentId":"n46","children":[{"id":"n59","type":"DETL","label":"Sources of Incumbency Advantages","text":"Advantages stem from proprietary technology, preferential raw material access, favorable geographic locations, established brands, or cumulative experience.","parentId":"n58","children":[]},{"id":"n60","type":"EXMP","label":"Discount Retailer Bypass Strategy","text":"Upstart discounters like Target and Walmart bypass established department stores by locating in freestanding sites.","parentId":"n58","children":[]}]},{"id":"n61","type":"DETL","label":"Unequal Access to Distribution Channels","text":"New entrants must secure product distribution, which can be tough if wholesale/retail channels are limited or tied up by competitors.","parentId":"n46","children":[{"id":"n62","type":"EXMP","label":"Low-Cost Airlines Distribution","text":"Upstart low-cost airlines avoid travel agents and encourage online booking to bypass distribution channels.","parentId":"n61","children":[]}]},{"id":"n63","type":"DETL","label":"Restrictive Government Policy","text":"Government policy can directly hinder or aid new entry, or amplify/nullify other entry barriers.","parentId":"n46","children":[{"id":"n64","type":"EXMP","label":"Government Licensing Requirements","text":"Licensing requirements and restrictions on foreign investment directly limit entry into industries like liquor retailing and taxi services.","parentId":"n63","children":[]},{"id":"n65","type":"DETL","label":"Government Policies Heighten Barriers","text":"Patent rules protecting technology or environmental/safety regulations raising scale economies can heighten entry barriers.","parentId":"n63","children":[]}]}]},{"id":"n66","type":"SUBC","label":"Expected Retaliation","text":"Potential entrants' perception of incumbent reaction influences their decision to enter an industry.","parentId":"n42","children":[{"id":"n67","type":"DETL","label":"Vigorous Incumbent Response","text":"Newcomers fear retaliation if incumbents have previously responded vigorously to new entrants.","parentId":"n66","children":[]},{"id":"n68","type":"DETL","label":"Incumbents' Substantial Resources","text":"Newcomers fear retaliation if incumbents possess substantial resources to fight back, including excess cash, borrowing power, and productive capacity.","parentId":"n66","children":[]},{"id":"n69","type":"DETL","label":"Price Cutting Likelihood","text":"Newcomers fear retaliation if incumbents are likely to cut prices due to commitment to market share or high fixed costs.","parentId":"n66","children":[]},{"id":"n70","type":"DETL","label":"Slow Industry Growth","text":"Newcomers fear retaliation if industry growth is slow, meaning volume must be taken from incumbents.","parentId":"n66","children":[]}]}]},{"id":"n71","type":"CONC","label":"The Power of Suppliers","text":"Powerful suppliers capture more value by charging higher prices, limiting quality, or shifting costs to industry participants.","parentId":"n37","children":[{"id":"n72","type":"EXMP","label":"Microsoft Supplier Power Example","text":"Microsoft's operating system price increases eroded PC makers' profitability, who could not raise their prices due to fierce customer competition.","parentId":"n71","children":[]},{"id":"n73","type":"DETL","label":"Supplier Group Concentration","text":"A supplier group is powerful if it is more concentrated than the industry it sells to.","parentId":"n71","children":[]},{"id":"n74","type":"DETL","label":"Supplier Group Revenue Dependence","text":"A supplier group is powerful if it does not depend heavily on the industry for its revenues.","parentId":"n71","children":[]},{"id":"n75","type":"DETL","label":"Industry Switching Costs for Suppliers","text":"Industry participants face switching costs in changing suppliers, making it hard to play them off against one another.","parentId":"n71","children":[]},{"id":"n76","type":"DETL","label":"Differentiated Supplier Products","text":"A supplier group is powerful if it offers differentiated products.","parentId":"n71","children":[]},{"id":"n77","type":"EXMP","label":"Patented Drugs Supplier Power","text":"Pharmaceutical companies offering patented drugs have more power over hospitals and other drug buyers.","parentId":"n71","children":[]},{"id":"n78","type":"DETL","label":"No Substitute for Supplier Group","text":"A supplier group is powerful if there is no substitute for what it provides.","parentId":"n71","children":[]},{"id":"n79","type":"EXMP","label":"Pilots' Unions Supplier Power","text":"Pilots' unions exercise considerable power over airlines because well-trained pilots have no good alternative.","parentId":"n71","children":[]},{"id":"n80","type":"DETL","label":"Supplier Threat of Forward Integration","text":"A supplier group is powerful if it can credibly threaten to integrate forward into the industry.","parentId":"n71","children":[]}]},{"id":"n81","type":"CONC","label":"The Power of Buyers","text":"Powerful customers capture more value by forcing down prices, demanding better quality/service, or playing industry participants against one another.","parentId":"n37","children":[{"id":"n82","type":"DETL","label":"Buyer Group Negotiating Leverage","text":"Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive.","parentId":"n81","children":[]},{"id":"n83","type":"DETL","label":"Few Buyers, Large Volumes","text":"A customer group has negotiating leverage if there are few buyers, or each purchases large volumes relative to a single vendor.","parentId":"n81","children":[]},{"id":"n84","type":"DETL","label":"Standardized Products","text":"A customer group has negotiating leverage if the industry's products are standardized or undifferentiated.","parentId":"n81","children":[]},{"id":"n85","type":"DETL","label":"Few Switching Costs for Buyers","text":"A customer group has negotiating leverage if buyers face few switching costs in changing vendors.","parentId":"n81","children":[]},{"id":"n86","type":"DETL","label":"Buyer Threat of Backward Integration","text":"Buyers can credibly threaten to integrate backward and produce the industry's product themselves if vendors are too profitable.","parentId":"n81","children":[]},{"id":"n87","type":"EXMP","label":"Soft Drink Producer Packaging","text":"Producers of soft drinks controlled packaging manufacturers by threatening to make materials themselves.","parentId":"n81","children":[]},{"id":"n88","type":"SUBC","label":"Buyer Group Price Sensitivity","text":"A buyer group is price sensitive under several conditions.","parentId":"n81","children":[{"id":"n89","type":"DETL","label":"Product Cost Fraction","text":"A buyer group is price sensitive if the product represents a significant fraction of its cost structure or procurement budget.","parentId":"n88","children":[]},{"id":"n90","type":"DETL","label":"Buyer Group Low Profits","text":"A buyer group is price sensitive if it earns low profits, is strapped for cash, or is under pressure to trim purchasing costs.","parentId":"n88","children":[]},{"id":"n91","type":"DETL","label":"Product Quality Impact","text":"A buyer group is price sensitive if the quality of its products or services is little affected by the industry's product.","parentId":"n88","children":[]},{"id":"n92","type":"DETL","label":"Product Effect on Other Costs","text":"A buyer group is price sensitive if the industry's product has little effect on the buyer's other costs.","parentId":"n88","children":[]}]},{"id":"n93","type":"DETL","label":"Consumer vs Business Buyers","text":"Most buyer power sources apply equally to consumers and business-to-business customers, with consumers often more price sensitive for undifferentiated, expensive products.","parentId":"n81","children":[]},{"id":"n94","type":"DETL","label":"Intermediate Customer Bargaining Power","text":"Intermediate customers gain significant bargaining power when they can influence downstream purchasing decisions.","parentId":"n81","children":[{"id":"n95","type":"EXMP","label":"Consumer Electronics Retailers Example","text":"Consumer electronics retailers exert strong influence on end customers.","parentId":"n94","children":[]},{"id":"n96","type":"DETL","label":"Producers Diminish Channel Clout","text":"Producers diminish channel clout through exclusive arrangements, direct marketing, or creating downstream customer preferences for components.","parentId":"n94","children":[]},{"id":"n97","type":"EXMP","label":"DuPont Stainmaster Branding","text":"DuPont created clout by advertising its Stainmaster brand to both carpet manufacturers and downstream consumers, who then request the carpet.","parentId":"n94","children":[]}]}]},{"id":"n98","type":"CONC","label":"The Threat of Substitutes","text":"A substitute performs the same or similar function by different means, limiting industry profit potential by placing a price ceiling.","parentId":"n37","children":[{"id":"n99","type":"EXMP","label":"Videoconferencing as Travel Substitute","text":"Videoconferencing is a substitute for travel.","parentId":"n98","children":[]},{"id":"n100","type":"DETL","label":"Downstream/Indirect Substitution Threat","text":"Substitution threat can be downstream or indirect, replacing a buyer industry's product.","parentId":"n98","children":[]},{"id":"n101","type":"EXMP","label":"Multi-Family Homes Substitution","text":"Lawn-care products are threatened when multi-family homes substitute for single-family homes in urban areas.","parentId":"n98","children":[]},{"id":"n102","type":"EXMP","label":"Airline Websites Substitute for Agents","text":"Airline and travel websites substitute for travel agents.","parentId":"n98","children":[]},{"id":"n103","type":"DETL","label":"Overlooked Substitutes","text":"Substitutes are always present but easy to overlook because they may appear very different from the industry's product.","parentId":"n98","children":[]},{"id":"n104","type":"SUBC","label":"High Substitute Threat Conditions","text":"The threat of a substitute is high if it offers an attractive price-performance trade-off or buyer switching costs are low.","parentId":"n98","children":[{"id":"n105","type":"DETL","label":"Attractive Price-Performance Trade-off","text":"The threat of a substitute is high if it offers an attractive price-performance trade-off to the industry's product.","parentId":"n104","children":[]},{"id":"n106","type":"EXMP","label":"Internet-Based Phone Services","text":"Conventional long-distance phone service suffered from inexpensive internet-based services like Vonage and Skype.","parentId":"n104","children":[]},{"id":"n107","type":"EXMP","label":"Video Rental Service Competition","text":"Video rental outlets struggle against video-on-demand services, online rentals like Netflix, and internet video sites like YouTube.","parentId":"n104","children":[]},{"id":"n108","type":"DETL","label":"Low Buyer Switching Costs","text":"The threat of a substitute is high if the buyer's cost of switching to the substitute is low.","parentId":"n104","children":[]},{"id":"n109","type":"EXMP","label":"Generic Drug Switching Costs","text":"Switching from branded to generic drugs involves minimal costs, leading to rapid shifts and price falls.","parentId":"n104","children":[]}]},{"id":"n110","type":"INSG","label":"Alertness to Substitute Changes","text":"Strategists should be alert to changes in other industries that make them attractive substitutes.","parentId":"n98","children":[]},{"id":"n111","type":"EXMP","label":"Plastic Substituting Steel Example","text":"Improvements in plastic allowed it to substitute for steel in many automobile components.","parentId":"n98","children":[]}]},{"id":"n112","type":"CONC","label":"Rivalry Among Existing Competitors","text":"Rivalry includes price discounting, new product introductions, advertising campaigns, and service improvements, limiting industry profitability.","parentId":"n37","children":[{"id":"n113","type":"DETL","label":"Rivalry's Impact on Profit Potential","text":"The degree rivalry drives down profit potential depends on its intensity and basis.","parentId":"n112","children":[]},{"id":"n114","type":"SUBC","label":"Intensity of Rivalry","text":"The intensity of rivalry is greatest under several conditions.","parentId":"n112","children":[{"id":"n115","type":"DETL","label":"Numerous or Equal Competitors","text":"Rivalry is greatest if competitors are numerous or roughly equal in size and power, making poaching business hard to avoid.","parentId":"n114","children":[]},{"id":"n116","type":"DETL","label":"Slow Industry Growth","text":"Rivalry is greatest if industry growth is slow, precipitating fights for market share.","parentId":"n114","children":[]},{"id":"n117","type":"DETL","label":"High Exit Barriers","text":"Rivalry is greatest if exit barriers are high, keeping companies in the market despite low or negative returns and leading to excess capacity.","parentId":"n114","children":[]},{"id":"n118","type":"DETL","label":"High Business Commitment","text":"Rivalry is greatest if rivals are highly committed to the business with leadership aspirations, often due to non-economic goals.","parentId":"n114","children":[]},{"id":"n119","type":"DETL","label":"Poor Signal Reading","text":"Rivalry is greatest if firms cannot read each other's signals well due to unfamiliarity, diverse approaches, or differing goals.","parentId":"n114","children":[]}]},{"id":"n120","type":"SUBC","label":"Basis of Competition","text":"The strength of rivalry reflects not just intensity but also the basis of competition, influencing profitability.","parentId":"n112","children":[{"id":"n121","type":"INSG","label":"Price Competition Destructive to Profitability","text":"Rivalry gravitating solely to price is especially destructive to profitability because it transfers profits directly from the industry to customers.","parentId":"n120","children":[{"id":"n122","type":"DETL","label":"Price Competition Visibility","text":"Price cuts are easy for competitors to see and match, leading to successive rounds of retaliation.","parentId":"n121","children":[]},{"id":"n123","type":"DETL","label":"Price Competition Trains Customers","text":"Sustained price competition trains customers to pay less attention to product features and service.","parentId":"n121","children":[]}]},{"id":"n124","type":"SUBC","label":"Price Competition Likelihood","text":"Price competition is most liable to occur under several conditions.","parentId":"n120","children":[{"id":"n125","type":"DETL","label":"Identical Products, Few Switching Costs","text":"Price competition occurs if rivals' products are nearly identical and buyers have few switching costs.","parentId":"n124","children":[]},{"id":"n126","type":"EXMP","label":"Airline Price Wars Example","text":"Years of airline price wars reflect identical products and low switching costs.","parentId":"n124","children":[]},{"id":"n127","type":"DETL","label":"High Fixed Costs, Low Marginal Costs","text":"Price competition occurs if fixed costs are high and marginal costs are low, creating pressure to cut prices to fill excess capacity.","parentId":"n124","children":[]},{"id":"n128","type":"EXMP","label":"Basic Materials Price Competition","text":"Many basic-materials businesses, like paper and aluminum, suffer from price competition due to high fixed costs and slow demand.","parentId":"n124","children":[]},{"id":"n129","type":"DETL","label":"Large Capacity Expansion Needs","text":"Price competition occurs if capacity must be expanded in large, efficient increments, disrupting supply-demand balance and leading to overcapacity.","parentId":"n124","children":[]},{"id":"n130","type":"DETL","label":"Perishable Products","text":"Price competition occurs if the product is perishable, creating a strong temptation to cut prices before value is lost.","parentId":"n124","children":[]}]},{"id":"n131","type":"DETL","label":"Non-Price Competition Benefits","text":"Competition on non-price dimensions, such as product features or brand image, is less likely to erode profitability.","parentId":"n120","children":[]},{"id":"n132","type":"DETL","label":"Positive-Sum Rivalry","text":"Rivalry can be positive sum when competitors serve different customer segments with varied offerings, increasing average industry profitability and expanding the industry.","parentId":"n120","children":[]}]}]}]},{"id":"n133","type":"CONC","label":"Differences in Industry Profitability","text":"The average return on invested capital varies markedly across U.S. industries, ranging from zero to over 50% between 1992 and 2006.","parentId":"n1","children":[{"id":"n134","type":"DETL","label":"ROIC Variation Example","text":"Soft drinks and prepackaged software were almost six times more profitable than the airline industry over 1992-2006.","parentId":"n133","children":[]},{"id":"n135","type":"CMPR","label":"Profitability of Selected U.S. Industries","text":"The table compares the average Return on Invested Capital (ROIC) for selected U.S. industries between 1992-2006, highlighting significant variations.","table":{"cols":["Industry","Average ROIC (1992-2006)"],"rows":[{"label":"Security Brokers and Dealers","cells":["40.9%"]},{"label":"Soft Drinks","cells":["37.6%"]},{"label":"Prepackaged Software","cells":["37.6%"]},{"label":"Pharmaceuticals","cells":["31.7%"]},{"label":"Perfume, Cosmetics, Toiletries","cells":["28.6%"]},{"label":"Advertising Agencies","cells":["27.3%"]},{"label":"Distilled Spirits","cells":["26.4%"]},{"label":"Semiconductors","cells":["21.3%"]},{"label":"Medical Instruments","cells":["21.0%"]},{"label":"Men's and Boys' Clothing","cells":["19.5%"]},{"label":"Tires","cells":["19.5%"]},{"label":"Household Appliances","cells":["19.2%"]},{"label":"Malt Beverages","cells":["19.0%"]},{"label":"Child Day Care Services","cells":["17.6%"]},{"label":"Household Furniture","cells":["17.0%"]},{"label":"Drug Stores","cells":["16.5%"]},{"label":"Grocery Stores","cells":["16.0%"]},{"label":"Iron and Steel Foundries","cells":["15.6%"]},{"label":"Cookies and Crackers","cells":["15.4%"]},{"label":"Mobile Homes","cells":["15.0%"]},{"label":"Wine and Brandy","cells":["13.9%"]},{"label":"Bakery Products","cells":["13.8%"]},{"label":"Engines and Turbines","cells":["13.7%"]},{"label":"Book Publishing","cells":["13.4%"]},{"label":"Laboratory Equipment","cells":["13.4%"]},{"label":"Oil and Gas Machinery","cells":["12.6%"]},{"label":"Soft Drink Bottling","cells":["11.7%"]},{"label":"Knitting Mills","cells":["10.5%"]},{"label":"Hotels","cells":["10.4%"]},{"label":"Catalog, Mail-Order Houses","cells":["5.9%"]},{"label":"Airlines","cells":["5.9%"]},{"label":"Average Industry ROIC in the U.S.","cells":["14.9%"]}]},"parentId":"n133","children":[]},{"id":"n136","type":"DETL","label":"ROIC Definition for Strategy","text":"Return on invested capital (ROIC) is the appropriate measure of profitability for strategy formulation, accounting for required capital.","parentId":"n133","children":[]}]},{"id":"n137","type":"CONC","label":"Factors, Not Forces","text":"Industry structure determines long-run profit potential, not fleeting factors like growth rate or technology.","parentId":"n1","children":[{"id":"n138","type":"SUBC","label":"Industry Growth Rate Misconception","text":"It is a common mistake to assume fast-growing industries are always attractive.","parentId":"n137","children":[{"id":"n139","type":"JUST","label":"Growth Rate Affects Forces","text":"Growth can mute rivalry, but high growth with low entry barriers can empower suppliers and draw in entrants, not guaranteeing profitability.","parentId":"n138","children":[]},{"id":"n140","type":"EXMP","label":"Personal Computers Growth Example","text":"Some fast-growth businesses, like personal computers, have been among the least profitable industries.","parentId":"n138","children":[]}]},{"id":"n141","type":"SUBC","label":"Technology and Innovation Misconception","text":"Advanced technology or innovations alone do not make an industry structurally attractive or unattractive.","parentId":"n137","children":[{"id":"n142","type":"JUST","label":"Low-Tech vs High-Tech Profitability","text":"Mundane, low-technology industries with price-insensitive buyers, high switching costs, or high entry barriers are often more profitable than sexy high-tech industries.","parentId":"n141","children":[]}]},{"id":"n143","type":"SUBC","label":"Government Influence on Forces","text":"Government is not a sixth force; its influence on competition is best understood by analyzing how specific policies affect the five competitive forces.","parentId":"n137","children":[{"id":"n144","type":"EXMP","label":"Government Patent Policies","text":"Patents raise barriers to entry, boosting industry profit potential.","parentId":"n143","children":[]},{"id":"n145","type":"EXMP","label":"Government Union Policies","text":"Policies favoring unions may raise supplier power and diminish profit potential.","parentId":"n143","children":[]},{"id":"n146","type":"EXMP","label":"Government Bankruptcy Rules","text":"Bankruptcy rules allowing failing companies to reorganize can lead to excess capacity and intense rivalry.","parentId":"n143","children":[]}]},{"id":"n147","type":"SUBC","label":"Complementary Products and Services","text":"Complements are products or services used together, where the combined customer benefit exceeds the sum of individual values.","parentId":"n137","children":[{"id":"n148","type":"EXMP","label":"Hardware and Software Complements","text":"Computer hardware and software are valuable together and worthless when separated.","parentId":"n147","children":[]},{"id":"n149","type":"JUST","label":"Complements Affect Five Forces","text":"Complements are not a sixth force but affect profitability by influencing the five forces, impacting demand for an industry's product.","parentId":"n147","children":[]},{"id":"n150","type":"DETL","label":"Strategist's Role with Complements","text":"Strategists must trace the positive or negative influence of complements on all five forces to ascertain their impact on profitability.","parentId":"n147","children":[]},{"id":"n151","type":"EXMP","label":"Operating System Complements","text":"Producers of complementary operating system software, like Microsoft, lowered application software entry barriers by providing tool sets.","parentId":"n147","children":[]},{"id":"n152","type":"EXMP","label":"Alternative Fuels Complements","text":"The need for appropriate fueling stations makes it difficult for alternative fuel cars to substitute for conventional vehicles.","parentId":"n147","children":[]},{"id":"n153","type":"EXMP","label":"iTunes Digital Music Substitution","text":"Apple's iTunes hastened the substitution from CDs to digital music.","parentId":"n147","children":[]},{"id":"n154","type":"EXMP","label":"JVC VCR Standard Influence","text":"JVC persuaded movie studios to favor its VCR standard, influencing complementary industry conditions.","parentId":"n147","children":[]}]}]},{"id":"n155","type":"CONC","label":"Changes in Industry Structure","text":"Industry structure is constantly undergoing modest adjustment and can occasionally change abruptly, emanating from inside or outside an industry.","parentId":"n1","children":[{"id":"n156","type":"SUBC","label":"Shifting Threat of New Entry","text":"Changes to any of the seven barriers can raise or lower the threat of new entry.","parentId":"n155","children":[{"id":"n157","type":"EXMP","label":"Patent Expiration Entry","text":"Expiration of a patent, like Merck's Zocor, can unleash new entrants, as three pharmaceutical makers entered that market.","parentId":"n156","children":[]},{"id":"n158","type":"EXMP","label":"Ice Cream Distribution Access","text":"Proliferation of ice cream products filled grocery freezer space, making new makers' distribution access harder.","parentId":"n156","children":[]},{"id":"n159","type":"DETL","label":"Strategic Decisions Impact Entry","text":"Strategic decisions of leading competitors often significantly impact the threat of entry.","parentId":"n156","children":[]},{"id":"n160","type":"EXMP","label":"Retailer Technology Investments","text":"Retailers like Wal-Mart adopted new procurement/distribution technologies, increasing economies of scale and making entry difficult for small retailers.","parentId":"n156","children":[]}]},{"id":"n161","type":"SUBC","label":"Changing Supplier or Buyer Power","text":"The factors underlying supplier and buyer power change over time, causing their clout to rise or decline.","parentId":"n155","children":[{"id":"n162","type":"EXMP","label":"Global Appliance Industry Consolidation","text":"Competitors like Electrolux were squeezed by retail channel consolidation, with the rise of big-box retailers.","parentId":"n161","children":[]},{"id":"n163","type":"EXMP","label":"Travel Agents Bargaining Power Decline","text":"The internet allowed airlines to sell tickets directly, significantly increasing their power to bargain down travel agents' commissions.","parentId":"n161","children":[]}]},{"id":"n164","type":"SUBC","label":"Shifting Threat of Substitution","text":"Substitutes become more or less threatening due to technological advances creating new substitutes or shifting price-performance comparisons.","parentId":"n155","children":[{"id":"n165","type":"EXMP","label":"Microwave Ovens Substitution","text":"Early microwave ovens were expensive, but technological advances made them serious substitutes for conventional ovens.","parentId":"n164","children":[]},{"id":"n166","type":"EXMP","label":"Flash Memory vs Hard-Disk Drives","text":"Flash computer memory improved enough to become a meaningful substitute for low-capacity hard-disk drives.","parentId":"n164","children":[]}]},{"id":"n167","type":"SUBC","label":"New Bases of Rivalry","text":"Rivalry often intensifies as an industry matures, growth slows, and competitors become more alike.","parentId":"n155","children":[{"id":"n168","type":"JUST","label":"Intensifying Price Competition Not Inevitable","text":"A trend toward intensifying price competition is not inevitable; rivalry can be positive-sum.","parentId":"n167","children":[]},{"id":"n169","type":"EXMP","label":"U.S. Casino Industry Rivalry","text":"The U.S. casino industry saw enormous positive-sum competitive activity focused on new niches and geographic segments.","parentId":"n167","children":[]},{"id":"n170","type":"DETL","label":"Mergers and Acquisitions Alter Rivalry","text":"Mergers and acquisitions can alter industry rivalry by introducing new capabilities and ways of competing.","parentId":"n167","children":[]},{"id":"n171","type":"EXMP","label":"Retail Brokerage Internet Impact","text":"The internet lowered marginal costs and reduced differentiation in retail brokerage, triggering intense competition on commissions and fees.","parentId":"n167","children":[]},{"id":"n172","type":"INSG","label":"Eliminating Rivals Risky Strategy","text":"Eliminating rivals is a risky strategy because profit windfalls attract new competitors and backlash from customers and suppliers.","parentId":"n167","children":[]},{"id":"n173","type":"EXMP","label":"New York Banking Consolidation","text":"Escalating bank consolidations in New York in the 1980s-1990s did not prevent new entrants from diversifying the retail-banking landscape.","parentId":"n167","children":[]}]}]},{"id":"n174","type":"CONC","label":"Implications for Strategy","text":"Understanding competitive forces is the starting point for strategy development, revealing industry profitability and guiding strategic action.","parentId":"n1","children":[{"id":"n175","type":"DETL","label":"Strategic Action Possibilities","text":"Strategic action includes positioning to cope with forces, anticipating shifts, and shaping the balance of forces.","parentId":"n174","children":[]},{"id":"n176","type":"SUBC","label":"Positioning the Company","text":"Strategy can involve building defenses against competitive forces or finding a position where forces are weakest.","parentId":"n174","children":[{"id":"n177","type":"EXMP","label":"Paccar's Positioning in Heavy Trucks","text":"Paccar positioned itself in the heavy-truck market by focusing on owner-operators, a segment with weaker competitive forces.","parentId":"n176","children":[]},{"id":"n178","type":"DETL","label":"Five Forces for Entry and Exit","text":"The five forces framework allows rigorous analysis of entry and exit, identifying industries with good future potential or poor structure.","parentId":"n176","children":[]}]},{"id":"n179","type":"SUBC","label":"Exploiting Industry Change","text":"Industry changes offer opportunities to spot and claim promising new strategic positions if strategists understand competitive forces.","parentId":"n174","children":[{"id":"n180","type":"EXMP","label":"Music Industry Evolution","text":"Despite predictions of many new music labels with digital distribution, physical distribution was not the crucial entry barrier.","parentId":"n179","children":[]},{"id":"n181","type":"JUST","label":"Entry Barriers in Music Industry","text":"Large labels' advantages in pooling risks, cushioning failures, and breaking through clutter barred new entrants, not physical distribution.","parentId":"n180","children":[]},{"id":"n182","type":"DETL","label":"Digital Distribution Impact on Music","text":"Digital distribution created an illegal substitute, and major labels allowing Apple to create iTunes shifted industry structure against them.","parentId":"n180","children":[]},{"id":"n183","type":"STAT","label":"Major Record Company Decline","text":"The number of major record companies declined from six in 1997 to four today.","parentId":"n180","children":[]}]},{"id":"n184","type":"SUBC","label":"Shaping Industry Structure","text":"Companies can shape industry structure by leading new ways of competing that alter the five forces for the better.","parentId":"n174","children":[{"id":"n185","type":"DETL","label":"Industry Transformation Goal","text":"In reshaping structure, a company wants competitors to follow, transforming the entire industry, with the innovator benefiting most.","parentId":"n184","children":[]},{"id":"n186","type":"DETL","label":"Ways to Reshape Structure","text":"Structure can be reshaped by redividing profitability in favor of incumbents or by expanding the overall profit pool.","parentId":"n184","children":[]},{"id":"n187","type":"DETL","label":"Redividing Profitability","text":"Redividing profitability aims to increase the share of profits for industry competitors instead of suppliers, buyers, and substitutes.","parentId":"n184","children":[{"id":"n188","type":"EXMP","label":"Sysco Industry Structure Change","text":"Sysco, a food-service distributor, moderated supplier power by introducing private-label brands and shifted competition away from price.","parentId":"n187","children":[]},{"id":"n189","type":"DETL","label":"Sysco's Investment and Barriers","text":"Sysco's investments in IT and regional distribution centers raised entry barriers and made substitutes less attractive.","parentId":"n187","children":[]},{"id":"n190","type":"INSG","label":"Industry Leaders' Responsibility","text":"Industry leaders have a special responsibility for improving industry structure, as their resources and potential benefit are greatest.","parentId":"n187","children":[]}]},{"id":"n191","type":"DETL","label":"Expanding the Profit Pool","text":"Expanding the profit pool involves increasing the overall economic value created by the industry.","parentId":"n184","children":[{"id":"n192","type":"EXMP","label":"Soft Drink Bottler Network Rationalization","text":"Soft-drink producers rationalized bottler networks, benefiting both companies and bottlers by making them more efficient.","parentId":"n191","children":[]},{"id":"n193","type":"DETL","label":"Benefits of Expanding Profit Pool","text":"Expanding the profit pool creates win-win opportunities for multiple participants and reduces destructive rivalry risks.","parentId":"n191","children":[]}]}]}]},{"id":"n194","type":"CONC","label":"Defining the Relevant Industry","text":"Defining the industry where competition actually takes place is crucial for good industry analysis, strategy development, and business unit boundaries.","parentId":"n1","children":[{"id":"n195","type":"DETL","label":"Industry Definition Errors","text":"Mistaking the relevant industry by defining it too broadly or too narrowly leads to strategy errors and obscures important differences.","parentId":"n194","children":[]},{"id":"n196","type":"DETL","label":"Industry Boundaries Dimensions","text":"Industry boundaries consist of product/service scope and geographic scope.","parentId":"n194","children":[]},{"id":"n197","type":"JUST","label":"Five Forces for Industry Definition","text":"The five forces are the basic tool to resolve questions about industry boundaries.","parentId":"n194","children":[]},{"id":"n198","type":"EXMP","label":"Lubricants Industry Definition","text":"Automotive motor oil is a distinct industry from truck and stationary engine oils due to different buyers, channels, and structures.","parentId":"n194","children":[]},{"id":"n199","type":"DETL","label":"Geographic Scope with Five Forces","text":"If an industry has similar structure globally, competition is global; if structures differ across regions, each region may be a distinct industry.","parentId":"n194","children":[]},{"id":"n200","type":"DETL","label":"Rule of Thumb for Distinct Industries","text":"A rule of thumb suggests distinct industries may be present if differences in any one force are large, or if multiple forces differ.","parentId":"n194","children":[]},{"id":"n201","type":"INSG","label":"Benefits of Careful Five Forces Analysis","text":"Careful five forces analysis reveals competitive threats and major differences even with incorrectly drawn industry boundaries.","parentId":"n194","children":[]}]},{"id":"n202","type":"DETL","label":"Typical Steps in Industry Analysis","text":"Good industry analysis involves defining the industry, identifying participants, assessing competitive forces, and determining overall structure.","parentId":"n1","children":[{"id":"n203","type":"DETL","label":"Define Relevant Industry","text":"Define the relevant industry by identifying its products and geographic scope of competition.","parentId":"n202","children":[]},{"id":"n204","type":"DETL","label":"Identify Participants and Groups","text":"Identify buyers, suppliers, competitors, substitutes, and potential entrants, segmenting them into groups where appropriate.","parentId":"n202","children":[]},{"id":"n205","type":"DETL","label":"Assess Underlying Drivers","text":"Assess the underlying drivers of each competitive force to determine which forces are strong, weak, and why.","parentId":"n202","children":[]},{"id":"n206","type":"DETL","label":"Determine Overall Industry Structure","text":"Determine overall industry structure and test for consistency by analyzing profitability, controlling forces, and positioning of profitable players.","parentId":"n202","children":[]},{"id":"n207","type":"DETL","label":"Analyze Recent and Future Changes","text":"Analyze recent and likely future changes in each force, both positive and negative.","parentId":"n202","children":[]},{"id":"n208","type":"DETL","label":"Identify Influencable Aspects","text":"Identify aspects of industry structure that might be influenced by competitors, new entrants, or your company.","parentId":"n202","children":[]}]},{"id":"n209","type":"CONC","label":"Common Pitfalls in Industry Analysis","text":"Avoid common mistakes to ensure rigorous and accurate industry analysis.","parentId":"n1","children":[{"id":"n210","type":"DETL","label":"Pitfall: Defining Industry Incorrectly","text":"Avoid defining the industry too broadly or too narrowly.","parentId":"n209","children":[]},{"id":"n211","type":"DETL","label":"Pitfall: Listing Instead of Analyzing","text":"Avoid making lists instead of engaging in rigorous analysis.","parentId":"n209","children":[]},{"id":"n212","type":"DETL","label":"Pitfall: Unequal Attention to Forces","text":"Avoid paying equal attention to all forces rather than digging deeply into the most important ones.","parentId":"n209","children":[]},{"id":"n213","type":"DETL","label":"Pitfall: Confusing Effect with Cause","text":"Avoid confusing effect, such as price sensitivity, with cause, such as buyer economics.","parentId":"n209","children":[]},{"id":"n214","type":"DETL","label":"Pitfall: Using Static Analysis","text":"Avoid using static analysis that ignores industry trends.","parentId":"n209","children":[]},{"id":"n215","type":"DETL","label":"Pitfall: Confusing Cyclical Changes","text":"Avoid confusing cyclical or transient changes with true structural changes.","parentId":"n209","children":[]},{"id":"n216","type":"DETL","label":"Pitfall: Declaring Industry Attractive","text":"Avoid using the framework to declare an industry attractive or unattractive rather than to guide strategic choices.","parentId":"n209","children":[]}]},{"id":"n217","type":"INSG","label":"Competition and Value Insight","text":"Understanding industry structure and comprehensive competition reveals drivers, uncovers opportunities, and is crucial for managers and investors alike.","parentId":"n1","children":[]}]},"slug":"the-five-competitive-forces-that-shape-s-fd433a","sharedAt":{"_seconds":1780940132,"_nanoseconds":848000000},"title":"Five Competitive Forces Shape Strategy"}