The document presents Michael Porter's Five Forces framework that shapes industry competition. The five competitive forces are: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitute products or services, and the rivalry among existing competitors. The strongest of these forces determine an industry's profitability and become the most important aspects to understand industry structure and profitability potential. Co-opetition and industry clusters are also discussed.

1. Competition and Collaboration:
A Mind Map Presentation
Five Competitive
Clusters Co-opetition
Forces
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2. Five Competitive
Co-opetition
Forces
Clusters

3. Five Competitive
Co-opetition
Forces
Clusters

4. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

5. High if:
urope. But to under-
- Supply
ition and profitabil- sid
The Five Forces That Shape Deman e e Competition
- Industryconomies
d o
ree cases, Five must
one Competitive - Custo -side benefits f scale
m o
s underlying struc- - Capita er switching c f scale
Forces l os
- Incum requierements ts
e forces. (See the ex- ba
Threat - unequ ncy advantage
al s
That Shape Industry of New- restric access to dist independent o
tive gov ri f
Entrants ernmen bution channe size
t policy ls
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

6. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

7. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargainingou
Gr p is
es, many companies po
Power of Existing - p chas werful if:
Power of ur
ry structure drives Suppliers Buyers st es large v
Competitors - andardise olum e
ability, not whether - few swit d produc s
ching cos ts
product or service, is - threat o ts
f backwar
ds integra
gh tech or low tech, tion
also impo
ed. While a myriad rtant: pric
e senstivi
ty
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

8. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

9. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services ff
petitive forces, sets -o
c e trade
n the medium and eat if: erfo rman
h thr e price-p s
Hig ctiv Co-opetition
ibit “Differences in ost
- attra itching c
sw
- low
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

10. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

11. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
Gro
ability, not whetherp is pu
- mo
re co owerful
product or service, is nce
sells ntra if:
- n tech,
gh tech or low ot de to ted t
pend han
- hig indu
ed. While a- myriadit ent on
h sw stry
diffe c it
rent hing cos one indu
ndustry profitabilityiate
- no
subs d pr ts stry Threat of
uding the tweatherutes oducts
- hr
eat o it
t Substitute
f fo
– industry structure,rward Products or
integ Services
petitive forces, sets ratio
n
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

12. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

13. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex- sity if:
High inten tition
That Shape Industry to perfect compe Threat
ustry close
- ind of New
th
- slow grow low entry barriers Entrants
and ther
ense, as they are in - high exit rity w ith one ano
ck of familia e wars
nes, textiles, and ho- - la
entiat ion and pric
y earns attractive re- - low differ
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

14. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex- sity if:
High inten tition
That Shape Industry to perfect compe Threat
ustry close
- ind of New
th
- slow grow low entry barriers Entrants
and ther
ense, as they are in - high exit rity w ith one ano
ck of familia e wars
nes, textiles, and ho- - la
entiat ion and pric
y earns attractive re- - low differ
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

15. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

16. urope. But to under-
ition and profitabil-
The Five Forces That Shape Industry Competition
ree cases, Five must
one Competitive
s underlying struc-
Forces
e forces. (See the ex-
Threat
That Shape Industry of New
Entrants
ense, as they are in
nes, textiles, and ho-
y earns attractive re-
he forces are benign,
Rivalry
es such as software,
Bargaining Among Bargaining
es, many companies Power of Existing Power of
ry structure drives Suppliers Competitors Buyers
ability, not whether
product or service, is
gh tech or low tech,
ed. While a myriad
ndustry profitability Threat of
uding the weather Substitute
– industry structure, Products or
Services
petitive forces, sets
n the medium and
ibit “Differences in Co-opetition
ompetitive forces, and their under- The strongest competitive force or forces determine the
main
roots of an industry’s current profit- Clusters
profitability of an industry and become the most important

17. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.
In such a situation, coping with the substitute product be-
Forces That Shape Competition comes the number one strategic priority.
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between technical characteristics that determine the strength of
dominant producers Airbus and Boeing and the bargain- each competitive force. We will examine these drivers in the
ing power of the airlines that place huge orders for aircraft pages that follow, taking the perspective of an incumbent,
are strong, while the threat of entry, the threat of substi- or a company already present in the industry. The analysis
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms a potential entrant.
of entertainment and the power of the movie producers THREAT OF ENTRY. New entrants to an industry bring
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
fessor at Harvard University, based at Harvard Business School in ing capabilities and cash flows to shake up competition, as
Boston. He is a six-time McKinsey Award winner, including for his Pepsi did when it entered the bottled water industry, Micro-
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
Mark R. Kramer (December 2006). did when it entered the music distribution business.
Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 80 12/5/07 5:34:13 PM
main Clusters

18. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.
industry growth rate
In such a situation, coping with the substitute product be-
Forces That Shape Competition comes the number one strategic priority.
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between
dominant producers Airbus and Boeing and the bargain-
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the but: also technology and innovation
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis affected by other factors government
(not forces)
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
complementary products
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
fessor at Harvard University, based at Harvard Business School in ing capabilities and cash flows to shake up competition, as
Boston. He is a six-time McKinsey Award winner, including for his Pepsi did when it entered the bottled water industry, Micro-
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
Mark R. Kramer (December 2006). did when it entered the music distribution business.
Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 80 12/5/07 5:34:13 PM
main Clusters

19. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.
industry growth rate
In such a situation, coping with the substitute product be-
Forces That Shape Competition comes the number one strategic priority.
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between
dominant producers Airbus and Boeing and the bargain-
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the but: also technology and innovation
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis affected by other factors government
(not forces)
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
complementary products
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
fessor at Harvard University, based at Harvard Business School in ing capabilities and cash flows to shake up competition, as
Boston. He is a six-time McKinsey Award winner, including for his Pepsi did when it entered the bottled water industry, Micro-
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
Mark R. Kramer (December 2006). did when it entered the music distribution business.
Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 80 12/5/07 5:34:13 PM
main Clusters

20. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
are crucial to strategy.
also important:
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
graphic film, learned with the advent of digital photography.
dynamism and change of
Forces That Shape Competition
In such a situation, coping with the substitute product be-
comes the number one strategic priority. industry growth rate
forces
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between
dominant producers Airbus and Boeing and the bargain-
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the but: also technology and innovation
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis affected by other factors government
(not forces)
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
complementary products
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
fessor at Harvard University, based at Harvard Business School in ing capabilities and cash flows to shake up competition, as
Boston. He is a six-time McKinsey Award winner, including for his Pepsi did when it entered the bottled water industry, Micro-
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
Mark R. Kramer (December 2006). did when it entered the music distribution business.
Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 80 12/5/07 5:34:13 PM
main Clusters

21. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
are crucial to strategy.
also important:
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
graphic film, learned with the advent of digital photography.
dynamism and change of
Forces That Shape Competition
In such a situation, coping with the substitute product be-
comes the number one strategic priority. industry growth rate
forces
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between
dominant producers Airbus and Boeing and the bargain-
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the but: also technology and innovation
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis affected by other factors government
(not forces)
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
complementary products
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
fessor at Harvard University, based at Harvard Business School in ing capabilities and cash flows to shake up competition, as
Boston. He is a six-time McKinsey Award winner, including for his Pepsi did when it entered the bottled water industry, Micro-
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
Mark R. Kramer (December 2006). did when it entered the music distribution business.
Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 80 12/5/07 5:34:13 PM
main Clusters

22. LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
Five Competitive
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
hibit “The Five Forces That Shape Industry
Threat
Forces
of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
Bargaining
Power of
Rivalry
Among
Existing
Bargaining
Power of
determines industry‘s
long-run profit potential
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
long run. (See the exhibit “Differences in
Industry Profitability.”)
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
are crucial to strategy.
also important:
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
graphic film, learned with the advent of digital photography.
dynamism and change of
Forces That Shape Competition
In such a situation, coping with the substitute product be-
comes the number one strategic priority. industry growth rate
forces
The configuration of the five forces differs by industry. In Industry structure grows out of a set of economic and
the market for commercial aircraft, fierce rivalry between
dominant producers Airbus and Boeing and the bargain-
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the but: also technology and innovation
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis affected by other factors government
(not forces)
tutes, and the power of suppliers are more benign. In the can be readily extended to understand the challenges facing
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
complementary products
and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts
important. pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
Michael E. Porter is the Bishop William Lawrence University Pro- diversifying from other markets, they can leverage exist-
Implications positio
fessor at Harvard University, based at Harvard Business School in
Boston. He is a six-time McKinsey Award winner, including for his
ing capabilities and cash flows to shake up competition, as
Pepsi did when it entered the bottled water industry, Micro-
ning o
most recent HBR article, “Strategy and Society,” coauthored with soft did when it began to offer internet browsers, and Apple
for strategy explo f
iting in company
Mark R. Kramer (December 2006). did when it entered the music distribution business.
dustry Co-opetition
80 Harvard Business Review | January 2008 | hbr.org
shapin c
definin g industry hange
1808 Porter.indd 80
g indu struct 12/5/07 5:34:13 PM
stry ure
main Clusters

23. Five Competitive
Co-opetition
Forces
Clusters

24. Five Competitive
Co-opetition
Forces
Clusters

25. Co-opetition
Clusters
Five Competitive
main Forces

26. Co-opetition
LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
Threat
hibit “The Five Forces That Shape Industry of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
Rivalry
as they are in industries such as software,
Bargaining Among Bargaining
Clusters
soft drinks, and toiletries, many companies Power of Existing Power of
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
Competition
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
Five Competitive
long run. (See the exhibit “Differences in
Industry Profitability.”)
main
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
Forces
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.

27. Co-opetition
LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
Threat
hibit “The Five Forces That Shape Industry of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
Rivalry
as they are in industries such as software,
Bargaining Among Bargaining
Clusters
soft drinks, and toiletries, many companies Power of Existing Power of
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
Cooperation Competition
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
Five Competitive
long run. (See the exhibit “Differences in
Industry Profitability.”)
main
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
Forces
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.

28. Co-opetition
es is?
Synth
LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to under-
stand industry competition and profitabil-
The Five Forces That Shape Industry Competition
ity in each of those three cases, one must
analyze the industry’s underlying struc-
ture in terms of the five forces. (See the ex-
Threat
hibit “The Five Forces That Shape Industry of New
Competition.”) Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
Rivalry
as they are in industries such as software,
Bargaining Among Bargaining
Clusters
soft drinks, and toiletries, many companies Power of Existing Power of
are profitable. Industry structure drives Suppliers Competitors Buyers
competition and profitability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
Cooperation Competition
regulated or unregulated. While a myriad
of factors can affect industry profitability Threat of
in the short run – including the weather Substitute
and the business cycle – industry structure, Products or
Services
manifested in the competitive forces, sets
industry profitability in the medium and
Five Competitive
long run. (See the exhibit “Differences in
Industry Profitability.”)
main
Understanding the competitive forces, and their under- The strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current profit- profitability of an industry and become the most important
ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is
Forces
influencing competition (and profitability) over time. A not always obvious.
healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in com-
concern to strategists as their company’s own position. Un- modity industries, it may not be the factor limiting profit-
derstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for
strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photo-
are crucial to strategy. graphic film, learned with the advent of digital photography.