Porter's five competitive forces and industry structure analysis

¶ … industry, the drivers of competition are largely revealed by competitive forces. Hence the ability to detect and address a wide range of competitive threats is largely founded on the fact that competition is not in any way limited to existing rivals. After a comprehensive study of various corporations' competitive strategies, the author of "The Five Competitive Forces that Shape Strategy" attempts to demonstrate how a company can enhance its profitability while at the same time ensuring that it significantly decreases its vulnerability to attack by way of understanding its industry's structure using the five forces.

The Article's Key Concepts

From the onset, Porter states that understanding competition and formulating strategies to deal with it remains every strategist's main objective. However, it should be noted that in most cases, strategists define competition in chronically narrow terms by limiting their scope to industry rivals only. With that in mind, Porter's insistence on the relevance of the four other competitive forces is timely. The other competitive forces in this case apart from rivals include substitute products, entrants (potential), suppliers and finally; customers.

Another key assertion of Porter's discussion is that profitability and competition are chiefly driven by industry structure. This effectively means that the other alleged drivers of competition like regulation, maturity of the industry or even technical competencies do not count as much when it comes to profitability and competition as the industry structure does. Further, Porter points out in the discussion that the profitability of an entire industry can be adversely affected by rivalry. This in my opinion is especially the case where price becomes the primary weapon competitors wield. As the author notes, the main beneficiaries of price wars are customers and in such a case, the industry becomes the looser in terms of profitability. Still on rivalry, porter notes that a strategy aimed at eliminating rivals ends up being counterproductive in the long run especially due to the possibility of a backlash from suppliers and clients. Further, such a strategy leads to a profit windfall which cannot be sustained in the long run.

Porter also points out that with a sound understanding of the competitive forces, a strategist can easily spot the various opportunities brought about by industry changes and promptly craft effective strategic positions that could end up benefiting the enterprise. To illustrate this, the author cites how the music industry has evolved over the last ten years. Initially, it was widely held that the internet would inspire the entry of numerous record companies into the music industry. This view was founded on the assumption that with the advent of the internet, distribution was no longer an entry barrier and hence new players could now make forays into a market that was previously a preserve of a few well established players. However, this was not the case. According to Porter, a higher level understanding of the competitive forces would have pointed out that established record companies enjoyed other key benefits which acted as the actual entry barriers other that distribution. Hence even with the growing popularity of the internet, new record companies remain a rarity in the music industry.

It can be noted that though utilizing the five forces framework has quite a number of advantages, one of the key benefits of embracing the same remains its applicability when it comes to identifying the future performance of industries. Hence in that regard, the relevance of the five forces framework to both investors and strategists cannot be overstated.

Recommendations

Based on the relevance of the article to strategic management today, I would recommend it to not only strategists but also to business managers keen on either maintaining or enhancing the profitability of their firms in the face of increased competition due to globalization. Today, the need to understand the industry structure cannot be overemphasized. Being aware of the various competitive forces as outlined by Porter helps investors and strategists alike to determine the attractiveness of a given industry while at the same time revealing shifts (positive or negative) in the structure of an industry before it is too late.