The Idea in Brief
You know that
to sustain long-term profitability you must respond strategically to competition.
And you naturally keep tabs on your established rivals
But as you
scan the competitive arena, are you also looking beyond your direct
competitors? As Porter explains in this update of his revolutionary 1979 HBR
article, four additional competitive forces can hurt your prospective profits:
Savvy customers
can force down prices by playing you and your rivals against
one another.
Powerful suppliers
may constrain your profits if they charge higher prices.
Aspiring entrants,
armed with new capacity and hungry for market share, can
ratchet up
the investment required for you to stay in the game.
Substitute
offerings can lure customers away.
Consider
commercial aviation: It’s one of the least profitable industries because all five
forces are strong.
Established
rivals compete intensely on price.
Customers are
fickle, searching for the best deal regardless of carrier.
Suppliers —plane
and engine manufacturers, along with unionized labor forces—bargain away the
lion’s share of airlines’ profits.
New players enter
the industry in a constant stream. And substitutes are readily available—such
as train or car travel.
By analyzing
all five competitive forces, you gain a complete picture of what’s influencing profitability
in your industry. You identify game-changing trends early, so you can swiftly
exploit them. And you spot ways to work around constraints on profitability— or
even reshape the forces in your favor.
The Idea in Practice
By
understanding how the five competitive forces influence profitability in your
industry (including start-ups), you can develop a strategy for enhancing your
company’s long-term profits.
Porter
suggests the following:
POSITION YOUR COMPANY WHERE THE FORCES ARE WEAKEST
Example:
In the
heavy-truck industry, many buyers operate large fleets and are highly motivated
to drive down truck prices. Trucks are built to regulated standards and offer
similar features, so price competition is stiff; unions exercise considerable
supplier power; and buyers can use substitutes such as cargo delivery by rail.
To create and
sustain long-term profitability within this industry, heavy-truck maker Paccar chose
to focus on one customer group where competitive forces are weakest: individual
drivers who own their trucks and contract directly with suppliers. These
operators have limited clout as buyers and are less price sensitive because of
their emotional ties to and economic dependence on their own trucks.
For these
customers, Paccar has developed such features as luxurious sleeper cabins, plush
leather seats, and sleek exterior styling.
Buyers can
select from thousands of options to put their personal signature on these
built-to-order trucks.
Customers pay
Paccar a 10% premium, and the company has been profitable for 68 straight years
and earned a long-run return on equity above 20%.
EXPLOIT CHANGES IN THE FORCES
Example:
With the
advent of the Internet and digital distribution of music, unauthorized
downloading created an illegal but potent substitute for record companies’
services. The record companies tried to develop technical platforms for digital
distribution themselves, but major labels didn’t want to sell their music
through a platform owned by a rival.
Into this
vacuum stepped Apple, with its iTunes music store supporting its iPod music player.
The birth of this powerful new gatekeeper has whittled down the number of major
labels from six in 1997 to four today.
RESHAPE THE FORCES IN YOUR FAVOR
Use tactics
designed specifically to reduce the share of profits leaking to other players.
For example:
To neutralize
supplier power, standardize specifications for parts so
your company can switch more easily among vendors.
To counter customer
power, expand your services so it’s harder for customers to leave you
for a rival.
To temper
price wars initiated by established rivals,
invest more heavily in products that differ significantly from competitors’ offerings.
To scare off new
entrants, elevate the fixed costs of competing; for instance, by
escalating your R&D expenditures.
To limit the
threat of substitutes,
offer better value through wider product accessibility.
Soft-drink
producers did this by introducing vending machines and convenience store
channels, which dramatically improved the availability of soft drinks relative
to other beverages.