4-RelativeResourceManager - 137 How competitive forces...

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137 How competitive forces shape strategy Awareness of these forees can help a company stake out a position in its industry that is less vulnerable to attack Michael E. Porter The nature and degree of competition in an in- dustry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of sup- pliers, the threat of sub- stitute products or services [where applieahle), and the jockeying among current contestants. To estahlish a strategic agenda for dealing with these contending currents and to grow despite them, a company must under- stand how they work in its industry and how they affect the company in its particular situation. The author details how these forees operate and sug- gests ways of adjusting to them, and, where possible, of taking advantage of them. Mr. Porter is a spcciahst in industrial economics and business strategy. An associate professor of husi- ness administration at the Harvard Business School, he has created a course there entitled "Industry and Competitive Analy- sis." He sits on the hoards of three companies and consults on strategy mat- ters, and he has written many articles for econom- ics journals and published two books. One of them, Interbrand Choice, Strat- egy and Bilateral Market Power (Harvard Univer- sity Press, 1976) is an out- growth of his doctoral thesis, for which he won the coveted Wells prize awarded by the Harvard economics department. He has recently completed two book manuscripts, one on competitive analysis in industry and the other [written with Michael Spence and Richard Caves) on compe- tition in the Dpen economy. The essence of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one some- times hears executives complaining to the contrary, intense eompetition in an industry is neither coin- cidence nor bad luck. Moreover, in the fight for market share, compe- tition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, poten- tial entrants, and substitute products are all com- petitors that may be more or less prominent or ac- tive depending on tbe industry. The state of competition in an industry depends on five basic forces, wbich are diagrammed in tbe Exhibit on page 141. The collective strength of these forces determines the ultimate profit potential of an industry. It ranges from intense in industries like tires, metal cans, and steel, where no company earns spectacular returns on investment, to mild in industries like oil field services and equipment, soft drinks, and toiletries, where there is room for quite high returns.
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4-RelativeResourceManager - 137 How competitive forces...

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