Summary of “How competitive forces shape strategy” by Porter, M

The strongest competitive force or forces determine the profitability of an industry and so are of the greatest importance in strategy formulation.
Force 1: Threat of entry – New competition, new ideas, shakes up the industry. Six major barriers to entry reduce the threat.
· Economies of scale
· Product differentiation
· Capital requirements
· Cost disadvantages independent of size (learning curves)
· Access to distribution channels
· Government policy
Force 2: Bargaining power of suppliers – Suppliers ability to raise prices without losing business.
· Dominated by few companies and concentrated more than market selling to
· Lack of substitutes
· Unique product, high switching costs
· Industry of low importance to supplier group
Force 3: Bargaining power of buyers – Buyers can choose whom to buy from so Industry must compete for the business.
· Buyer buys large volumes
· Buys a standard product
· Product forms significant fraction of buyers selling costs
· Buyer has low profit
· Industry product quality not important to buyer
· Industry product does not save buyer money
· Buyer can integrate backwards to make the industry product
Force 4: Substitute products – Buyers could move to another product and not by from this industry.
Finally Force 5: Jockeying for position – Competition within the industry, price competition, product introduction and advertising wars.
· Numerous competitors
· Slow industry growth
· Similar product and little switching cost
· High fixed costs or perishable product
· Capacity is normally augmented in large increments
· Exit barriers high
· Rivals have diverse strategies