Page 215 - (DK) The Business Book

WORKING WITH A VISION 213

See also: Study the competition 24–27 ■ Gaining an edge 32–39 ■ Leading the market 166–69 ■ Porter’s generic
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17

The profitability of an industry is shaped by five competitive forces...

...the threat of
...the bargaining ...the bargaining ...rivalry among substitute
power power existing ...the threat of
of suppliers. of buyers. competitors. new entrants. products or
services.

The strongest competitive force—which varies according to the
industry—determines the overall profitability of the industry.

industry and develop a position and unionized labor forces—take the market share is tough to win and so
that is more profitable and less lion’s share of profits. New players profits are harder to make. Intense
vulnerable to attack. According enter the industry on a regular competitor rivalry occurs when
to Porter, there are five competitive basis. Substitutes are available there are many competitors, growth
forces that collectively define an in other forms of transportation, in the industry is slow, products are
industry’s structure, shape the such as trains, buses, and cars. not differentiated and can be easily
nature of competitive interaction Where the forces are much substituted, competitors are of
within an industry, and ultimately weaker—for example in the equal size, customer loyalty is low,
determine profitability. Now software, soft drinks, and toiletries and it is difficult and costly to exit
referred to as Porter’s Five Forces, industries—companies can make the industry.
this model places existing a bigger profit. In all industries, The hotel business is just such
competitors at the center, profit can be affected by weather an industry. In a city such as New
surrounded by four other forces: or cyclical change in the short term, York, there are many hotels. Guest
customers, suppliers, potential but in the medium and long term, numbers are relatively static, so ❯❯
entrants, and substitute products. it is the structure of the industry
that drives competition and
Using Porter’s model profitability. Porter is adamant that
Porter used commercial aviation other factors—such as the type of
as an example to explain the model product or service, the maturity of
in action, because the strength the market, regulation, or level of The first one gets
of all five forces makes the airline technical complexity—are not the oyster, the second
business one of the least profitable defining factors for profitability. gets the shell.
industries of all. At the center are Andrew Carnegie
established rivals (such as Qatar The force of “rivalry”
US industrialist (1835–1919)
Airways, Virgin, and Qantas), Of the five forces, rivalry among
who all compete intensely on price. existing competitors is the major
Customers can search easily for the determinant of competitiveness
best deal. Suppliers—in this case and profitability within an industry.
aircraft and engine manufacturers In a very competitive industry,