In 1979 a young Harvard professor with an engineering degree asked why some industries make plenty of money and others hardly any. His answer — five forces — became one of the best-known ideas in business.
Ten items. Say your answer out loud before you reveal it.
Read the sentence, guess the meaning of the word in bold, then reveal.
The three words are: profitability · supplier · margin. Read each meaning, say the word, then reveal.
One missing word fits every phrase in the group. Say it, then reveal.
Read each part. After it, answer the quick check from memory, then discuss one question.
Michael Porter was born in 1947 in Ann Arbor, Michigan. He studied aerospace and mechanical engineering at Princeton, where he also played in the university golf squad, and then went to Harvard Business School for an MBA, followed by a PhD in business economics.
At Harvard he was influenced by a branch of economics called industrial organisation, which studies how industries are structured. Business strategy at the time often relied on simple tools such as SWOT analysis. Porter wanted something more rigorous.
In 1979, as a young associate professor, he published his first article in the Harvard Business Review: “How Competitive Forces Shape Strategy”. Years later he summed up the starting point: “In essence, the job of the strategist is to understand and cope with competition.” But competition, he argued, is much wider than your direct rivals.
1. What did Porter study at Princeton?
2. Why did he want a new tool?
3. What was his first HBR article called?
1. Aerospace and mechanical engineering.
2. Because simple tools like SWOT weren't rigorous enough.
3. “How Competitive Forces Shape Strategy” (1979).
Porter argued that the profits of an industry are shaped by five forces. The first is the obvious one: rivalry between existing competitors. The other four are easy to forget: the threat of new entrants, the threat of substitutes, the bargaining power of buyers, and the bargaining power of suppliers.
When the forces are strong, profits are low. The airline industry is a classic example. Think of the pressures: many rival airlines, a few powerful aircraft makers, passengers who will switch for a cheaper fare, and alternatives such as trains. Even when planes are full, little profit is left over.
When the forces are weak, a business can do very well. The lesson for managers is not only to beat their rivals, but to find a position where the forces are weaker — or to change the forces themselves.
1. Name the five forces.
2. Why are airlines a useful example?
3. What should managers try to do, according to Porter?
1. Rivalry, new entrants, substitutes, the power of buyers, the power of suppliers.
2. Because the forces are strong, so profitability is low.
3. Find a position where the forces are weaker — or change them.
In 1983 Porter co-founded a consulting firm, Monitor Group, to put his ideas into practice. Decades later Monitor filed for bankruptcy, and in January 2013 its sale to Deloitte was approved. It is hard to miss the irony: a firm built on competitive strategy had struggled to compete.
Other thinkers added to the model. In the mid-1990s, Adam Brandenburger and Barry Nalebuff pointed out that some companies are not rivals but complementors — businesses whose products make yours more valuable. Some people call them a sixth force.
The forces also change. When Netflix was still a small company, its founders offered to sell it to Blockbuster — and, as one of them later recalled, were “laughed out of the room”. Blockbuster didn't see a substitute coming. A five forces analysis is only as good as the imagination of the person doing it.
1. What happened to Monitor Group?
2. What are complementors?
3. What does the Blockbuster story show?
1. It went bankrupt, and its sale to Deloitte was approved in January 2013.
2. Businesses whose products make yours more valuable — sometimes called a sixth force.
3. That the forces change — a new substitute can appear — and an analysis depends on imagination.
Five pressures on an industry's profits. Rivalry sits in the middle; the other four push in from outside. The stronger the forces, the lower the profits.
A small independent bookshop is analysing its industry. Which force does each point describe?
1. Substitutes — a different product that does the same job.
2. Rivalry — existing competitors fighting for the same customers.
3. Supplier power — a few powerful suppliers can set the terms.
4. Buyer power — customers using information to push prices down.
5. New entrants — a newcomer coming into the market.
6. Substitutes — other ways to meet the same need — entertainment.
A snapshot, not a film. Forces change — new technology can create a substitute very quickly.
Competition isn't everything. Companies also cooperate; the original model leaves out complementors.
Where does the industry end? Is a bookshop competing with other bookshops, with websites, or with streaming?
The five forces are all about causes and effects: because buyers are strong, prices fall; as a result, profits shrink. English has many ways of linking a cause to its effect — and they fit into sentences differently.
Complete with because, because of, as a result, led to or which means.
1. The airline cut its prices a new low-cost competitor.
2. Customers can switch easily, companies must keep them happy.
3. Fuel prices rose sharply. , many flights were cancelled.
4. The arrival of online shopping the closure of many high-street shops.
5. Prices went up there was only one supplier.
1. because of
2. which means
3. As a result
4. led to
5. because
Rewrite each pair as one sentence, using the words in brackets.
1. There are hundreds of cafés in the city. Prices are low. (which means) →
2. Profits fell. The cause was strong competition. (due to) →
3. A new rival entered the market. Prices dropped. (led to) →
4. Suppliers raised their prices. The bakery closed. (because) →
1. There are hundreds of cafés in the city, which means prices are low.
2. Profits fell due to strong competition.
3. The arrival of a new rival led to a drop in prices.
4. The bakery closed because its suppliers raised their prices.
Now explain to your teacher why a business you know is doing well — or badly — using at least four cause-and-effect linkers.
Find out where the profit goes. Choose a task, start the timer, and talk.
Analyse the industry you work in, or one you know well, with the five forces. Which force is strongest?
Think of a business that seems to make easy profits. Which forces are weak in its industry?
Describe a product or service that replaced something older. What happened to the companies that didn't see it coming?