How Competitive Forces Shape Strategy

"The essence of strategy formulation is coping with competition. ... intense competition in an industry is neother coincidence nor bad luck." The state of competition in an industry depends on five basic forces: (1) jockeying among current competitors, (2) threat of new entrants, (3) bargaining power of suppliers, (4), bargaining power of customers, and (5) threat of substitute products or services. The author describes each force in detail and its consequence on competition. The collective strength of these forces determines the ultimate profit potential of an industry, and it is the goal to find a position in the industry where the company can best defend itself against these forces or can influence them in its favor. The company needs to identify its strengths and weaknesses, and compare these against the underlying causes of each force. Then the company can devise a plan of action that may include (1) positioning the company, and/or (2) influencing the balance of the forces through strategic moves, and/or (3) exploiting industry change before opponents recognize it.

This article was awarded with the McKinsey Award (= best article in Harvard Business Review that year) and no reader will be surprised. It is a truly great article, and I must admit one of my all-time favorites. It will be remembered most for its introduction of the five competitive forces. Some people have criticized Michael Porter's framework(s) for being too static, but he has responded to those critics in his 1996-article 'What is Strategy?'. I would recommend this article to anybody in management and certainly all MBA-students. This is the first article you should read on strategic management! And to be followed up with Michael Porter's 1980-classic 'Competitive Strategy'. The article is written in simple US-English.