Porter's 5 Forces

The Five Competitive Forces That Shape Strategy

Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more

profitable and less vulnerable to attack.

by Michael E. Porter

Harvard Business Review (HBR), January 2008.

Editor's Note: In 1979, Harvard Business Review published "How Competitive Forces Shape Strategy" by a young economist

and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In

subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations,

regions, nations, and, more recently, health care and philanthropy. "Porter's five forces" have shaped a generation of academic

research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and

longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common

misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for

strategy today.

In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition

too narrowly, as if it occurred only among today's direct competitors. Yet competition for profits goes beyond established

industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute

products. The extended rivalry that results from all five forces defines an industry's structure and shapes the nature of

competitive interaction within an industry.

As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same.

The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or

the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each

of those three cases, one must analyze the industry's underlying structure in terms of the five forces. (See the exhibit "The Five

Forces That Shape Industry Competition.")

If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive

returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many

companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or

service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry

profitability in the short run--including the weather and the business cycle--industry structure, manifested in the competitive

forces, sets industry profitability in the medium and long run. (See the exhibit "Differences in Industry Profitability.")

Exhibit: Differences in Industry Profitability

The average return on invested capital varies markedly from industry to industry. Between 1992 and 2006, for example,

average return on invested capital in U.S. industries ranged as low as zero or even negative to more than 50%. At the high end

are industries like soft drinks and prepackaged software, which have been almost six times more profitable than the airline

industry over the period.

Understanding the competitive forces, and their underlying causes, reveals the roots of an industry's current profitability while

providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure

should be as much a competitive concern to strategists as their company's own position. Understanding industry structure is

also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a

company's favor are crucial to strategy.

Forces That Shape Competition

The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant

producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the

threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the

proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies,

the critical input, are important.

The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy

formulation. The most salient force, however, is not always obvious.

For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low

returns in the photographic film industry, for instance, are the result of a superior substitute product--as Kodak and Fuji, the

world's leading producers of photographic film,