Competition

Force 1: Industry Rivalry

How intensely do existing competitors compete?

High rivalry when:

• Many competitors of similar size
• Slow industry growth (fighting for share)
• High fixed costs (pressure to fill capacity)
• Low differentiation (commodity competition)
• High exit barriers (trapped competitors)

Force 2: Threat of New Entrants

How easy is it for new players to enter?

Barriers to entry:

• Economies of scale
• Capital requirements
• Switching costs
• Access to distribution
• Regulatory barriers
• Brand loyalty

Low barriers = profits attract entrants = margins compress.

Force 3: Bargaining Power of Suppliers

Can suppliers squeeze you?

Suppliers have power when:

• Few suppliers, many buyers
• No substitutes for their input
• High switching costs
• Credible threat of forward integration

Force 4: Bargaining Power of Buyers

Can customers squeeze you?

Buyers have power when:

• Few buyers, many sellers
• Purchases are large percentage of seller's revenue
• Products are undifferentiated
• Low switching costs
• Credible threat of backward integration

Force 5: Threat of Substitutes

Can customers solve their problem differently?

Substitutes are threatening when:

• Price-performance is attractive
• Switching costs are low
• Buyers are prone to switch

Using Five Forces

For industry analysis:

1. Assess each force (strong/moderate/weak)
2. Strong forces = lower industry profitability
3. Identify which forces most affect your position

For strategy:

1. Position where forces are weakest
2. Exploit changes in forces
3. Reshape forces in your favor

Generic Strategies

Porter's three sustainable competitive positions:

                     COMPETITIVE ADVANTAGE
                  ┌─────────────┬─────────────┐
                  │  Lower Cost │ Differentiation
      ┌───────────┼─────────────┼─────────────┤
      │  Broad    │   COST      │  DIFFEREN-  │
SCOPE │  Target   │   LEADERSHIP│  TIATION    │
      ├───────────┼─────────────┼─────────────┤
      │  Narrow   │   COST      │  FOCUSED    │
      │  Target   │   FOCUS     │  DIFFEREN-  │
      │           │             │  TIATION    │
      └───────────┴─────────────┴─────────────┘

Cost Leadership

Be the lowest-cost producer in the industry.

How:

• Economies of scale
• Proprietary technology
• Preferential access to inputs
• Ruthless cost control

Examples: Walmart, Southwest Airlines, IKEA

Risk: Someone finds lower cost, or you cut too much and kill quality.

Differentiation

Offer something unique that buyers value and pay premium for.

How:

• Product features
• Brand image
• Technology
• Customer service
• Dealer network

Examples: Apple, BMW, Starbucks

Risk: Premium becomes too high, or difference stops mattering.

Focus

Concentrate on a narrow segment and serve it better than broad competitors.

Cost Focus: Be lowest cost in your segment Differentiation Focus: Be most differentiated in your segment

Examples: Rolls-Royce (luxury segment), Spirit Airlines (ultra-low-cost segment)

Stuck in the Middle

"The firm stuck in the middle is almost guaranteed low profitability."

If you're not clearly lowest cost, clearly differentiated, or clearly focused—you're stuck in the middle. You'll be outcompeted by those who made clear choices.

Warning signs:

• "We're premium AND affordable"
• "We serve everyone"
• No clear trade-offs

The Value Chain

Where is value created? Where is cost incurred?

┌─────────────────────────────────────────────────────────────────┐
│                         MARGIN                                  │
├─────────────────────────────────────────────────────────────────┤
│                    SUPPORT ACTIVITIES                           │
│  ┌──────────────────────────────────────────────────────────┐  │
│  │ Firm Infrastructure (finance, legal, general management) │  │
│  ├──────────────────────────────────────────────────────────┤  │
│  │ Human Resource Management                                 │  │
│  ├──────────────────────────────────────────────────────────┤  │
│  │ Technology Development                                    │  │
│  ├──────────────────────────────────────────────────────────┤  │
│  │ Procurement                                               │  │
│  └──────────────────────────────────────────────────────────┘  │
├────────────┬──────────┬────────────┬────────────┬──────────────┤
│  PRIMARY ACTIVITIES                                             │
│  ┌─────────┬─────────┬────────────┬────────────┬─────────────┐ │
│  │Inbound  │Operations│ Outbound  │ Marketing  │  Service    │ │
│  │Logistics│         │ Logistics │ & Sales    │             │ │
│  └─────────┴─────────┴────────────┴────────────┴─────────────┘ │
└─────────────────────────────────────────────────────────────────┘

Using the Value Chain

For cost leadership: Find which activities cost most. Reduce them.

For differentiation: Find which activities most affect buyer perception. Enhance them.

Key questions:

• Which activities are we better at than competitors?
• Which activities could be outsourced?
• Where are the linkages between activities that create advantage?

Operational Effectiveness Is Not Strategy

"Operational effectiveness means performing similar activities better than rivals. Strategic positioning means performing different activities from rivals or performing similar activities in different ways."

Operational effectiveness:

• Best practices
• Total quality management
• Benchmarking

These are important but NOT strategy. Competitors will match them. They become table stakes.

Strategy:

• Choosing which activities to perform
• Choosing HOW to perform them differently
• Making trade-offs others won't make

The Porter Test

When evaluating strategy, ask:

1. Which generic strategy? Cost leadership, differentiation, or focus? Is it clear?
2. What trade-offs are we making? What are we choosing NOT to do?
3. Are we stuck in the middle? Trying to be both low-cost and differentiated?
4. How do the five forces affect us? Which forces are strongest?
5. Where's our value chain advantage? Which activities are we better at?
6. Is this strategy or just operational effectiveness? Are we doing different things or just same things better?

When Reviewing Strategy

Apply these checks:

• Generic strategy clearly chosen (cost, differentiation, or focus)
• Trade-offs explicit (what are we NOT doing?)
• Not stuck in the middle
• Five forces understood for the industry
• Positioning against weakest forces
• Value chain analyzed (where is advantage created?)
• Not confusing operational effectiveness with strategy
• Activities reinforce each other (fit)

Common Mistakes

"We'll be better at everything" - That's not strategy. That's wishful thinking.

"Our strategy is growth" - Growth is not strategy. Growth is an outcome.

"We'll be best in class" - Best practices are operational effectiveness, not strategy.

"We'll serve all segments" - Serving everyone means trade-offs weren't made.

"We'll be low-cost AND differentiated" - Possible rarely, for brief moments. Usually means stuck in middle.

When NOT to Use This Skill

Use a different skill when:

• Analyzing moat durability → Use moats (7 Powers, barrier analysis)
• Evaluating strategy coherence → Use strategy (diagnosis-policy-action)
• Navigating crisis → Use leadership (wartime leadership)
• Managing team operations → Use management (OKRs, leverage)

Porter is the industry analysis skill—use it for Five Forces, generic strategies (cost/differentiation/focus), and value chain mapping.

Sources

• Porter, "Competitive Strategy" (1980)
• Porter, "Competitive Advantage" (1985)
• Porter, "What Is Strategy?" (HBR, 1996)
• Porter, various Harvard Business School lectures

"The essence of strategy is choosing what not to do." — Michael Porter