The Business Book

(Joyce) #1


See also: Study the competition 24–27 ■ Gaining an edge 32–39 ■ Leading the market 166–69 ■ Porter’s generic
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17

and unionized labor forces—take the
lion’s share of profits. New players
enter the industry on a regular
basis. Substitutes are available
in other forms of transportation,
such as trains, buses, and cars.
Where the forces are much
weaker—for example in the
software, soft drinks, and toiletries
industries—companies can make
a bigger profit. In all industries,
profit can be affected by weather
or cyclical change in the short term,
but in the medium and long term,
it is the structure of the industry
that drives competition and
profitability. Porter is adamant that
other factors—such as the type of
product or service, the maturity of
the market, regulation, or level of
technical complexity—are not
defining factors for profitability.

The force of “rivalry”
Of the five forces, rivalry among
existing competitors is the major
determinant of competitiveness
and profitability within an industry.
In a very competitive industry,

market share is tough to win and so
profits are harder to make. Intense
competitor rivalry occurs when
there are many competitors, growth
in the industry is slow, products are
not differentiated and can be easily
substituted, competitors are of
equal size, customer loyalty is low,
and it is difficult and costly to exit
the industry.
The hotel business is just such
an industry. In a city such as New
York, there are many hotels. Guest
numbers are relatively static, so ❯❯


The strongest competitive force—which varies according to the
industry—determines the overall profitability of the industry.

industry and develop a position
that is more profitable and less
vulnerable to attack. According
to Porter, there are five competitive
forces that collectively define an
industry’s structure, shape the
nature of competitive interaction
within an industry, and ultimately
determine profitability. Now
referred to as Porter’s Five Forces,
this model places existing
competitors at the center,
surrounded by four other forces:
customers, suppliers, potential
entrants, and substitute products.

Using Porter’s model
Porter used commercial aviation
as an example to explain the model
in action, because the strength
of all five forces makes the airline
business one of the least profitable
industries of all. At the center are
established rivals (such as Qatar
Airways, Virgin, and Qantas),
who all compete intensely on price.
Customers can search easily for the
best deal. Suppliers—in this case
aircraft and engine manufacturers

The first one gets
the oyster, the second
gets the shell.
Andrew Carnegie
US industrialist (1835–1919)

...the bargaining
of suppliers.

...the bargaining
of buyers.

...rivalry among

...the threat of
new entrants.

...the threat of
products or

The profitability of an industry is shaped by five competitive forces...
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