Click through to the good bits.

00:00 Introductions.

04:50 What the five competitive forces are?

08:42 The five forces.

11:46 Low barriers to entry.

20:54 Industry analysis.

24:16 Competition is not zero-sum.

26:44 Conclusion.

 

Martin Henley: [00:00:14] Hello there. My name is Martin Henley. This is The Effective Marketing content extravaganza and if you’re new here, you won’t yet know that I’m on a mission to give you everything you need to be successful in your business. Providing of course, what you need to be successful in your business is to know more about and be implementing more enthusiastically, efficiently and effectively sales and marketing in your business, which is of course what you need. If you’re going to be more successful, you need more customers, you need more profit, you need to have nicer holidays, nicer cars, happier staff, a better retirement. All of those good things will come to you. If you are more successful in your business, you will be more successful in your business if you implement sales and marketing more effectively in your business. Have I made my point? I think I have.

Martin Henley: [00:01:03] What goes on here is that I am giving you everything I know about sales and marketing as part of the Talk marketing series, Melanie Farmer and I review the news every two weeks and speculate wildly about what that might mean for you and your business and your marketing life. We bring in anyone we can find with experience to share that will be useful for you if you are looking to be more successful in your business as part of talk marketing and I am looking at the very best reacting to the very best and the very worst of marketing content on the internet, which is what today is about. So if that sounds like it might be interesting or useful, I really hope it does, because that’s why we’re here to be interesting and useful. Then why not take a second to like share, subscribe, comment, get involved, because that will give us the motivation to continue on this epic, epic journey to give you everything you need just to be successful in your business.

Martin Henley: [00:02:00] Today is Reaction Time. There is an element of jeopardy to this. I have absolutely no idea what I will be reacting to today. What happens is that Clay has put together The Claylist and so what we do is there are six items on The Claylist. The first thing we do is we go to random.org and we roll the dice and that will give us a number and that number is number five and then what we do is we go to The Claylist and we look for number five. We copy that, we go back to the Internet, we put this into the search bar and we see what it is that can play has selected for us. Oh, okay. So this is interesting. Harvard Business Publishing. Okay, so Harvard, you know who Harvard are, this is business publishing and they’ve come up with a thing called The Five Competitive Forces That Shape Strategy. Okay, Do I know these five competitive forces? I think I might do. I think it might. But my mind, my mind’s not working with me today. So this is 13 minutes and 11 seconds along. This video has had 2.77 million views. The channel has had 15 million views, almost 16 million views. So let’s see exactly what is going on here today with the five competitive forces that shape strategy.

Tom Stewart: [00:03:45] I’m Tom Stewart, editor and managing director of the Harvard Business Review. Our guest today is Michael Porter, professor at Harvard University and head of the Institute for Strategy and Competitiveness. He’s the author of the forthcoming HBR article, The Five Competitive Forces That Shape Strategy, A Reaffirmation, update and Extension of his groundbreaking 1979 article, How Competitive Forces Shape Strategy. Mike, thanks for joining the program. To start, let’s.

Martin Henley: [00:04:13] This is going to be weird if he’s going to continue looking at the camera, not looking at the guy. Why is the guy behind him? Okay. So when did this come about? 14 years ago. Okay. So maybe we can forgive them a little bit. The Harvard guys, this looks awful. He’s actually behind him. He’s looking at him. He’s looking at the camera. Okay, so let’s see. So this is who is this? He said, I feel like this guy might be famous. I feel like this might be one of the things. Okay, let’s just say again, Harvard Business Publishing, and it is Michael Porter. So let’s not look at that very embarrassing introduction game.

Tom Stewart: [00:04:50] Groundbreaking 1979 article. How Competitive Forces Shape Strategy. Mike, thanks for joining the program. To start, let’s remind our viewers of what the five competitive forces are.

Michael Porter: [00:05:04] Well, Tom, the basic idea of the competitive forces starts with the notion that competition is often looked at too narrowly by managers. And the five forces say that, yes, you’re competing with your direct competitors, but you’re also in a fight for profits with a broad.

Martin Henley: [00:05:25] Oh, dear. How is my mind? I do this for a living. I do this for a living. This, of course, is Porter’s five Forces. Of course it is. So this is what we are looking at. Porter’s five forces, OK good, and this is how the competitive forces shape strategy. Let’s go.

Michael Porter: [00:05:46] Other extended set of competitors, customers who have bargaining power, suppliers who can have bargaining power, new entrants who might come in and kind of grab a piece of the action and substitute products or services that essentially place a constraint or a cap on your profitability and growth. So the five forces is kind of a holistic way of looking at any industry and understanding the structural underlying drivers of profitability and competition.

Tom Stewart: [00:06:09] So I use these to think about my rival makes it difficult for me. The threat of substitutes means I can’t overcharge. The threat of new entrants means I can’t overcharge. Right. And at the same thing, the same thing with the suppliers.

Michael Porter: [00:06:23] And and there’s underlying drivers of each of those forces that that the that the model really sort of unveils and then you can actually apply this. Every industry is different every industry will have a different set of economic fundamentals. But the five forces help you home in on. First of all, what’s really causing profitability in the industry? What are the trends that are the most likely to be significant in changing the game in the industry? Where are the constraints which which, if you can relax and might allow you to find a really strong competitive position.

Tom Stewart: [00:06:55] So how would you apply this analysis to an industry airlines, for example?

Michael Porter: [00:07:00] Well, airlines is a great industry.

Martin Henley: [00:07:02] Okay, So am I qualified to explain this? I don’t really know if I am well, because I’m clearly not qualified when Michael J. Porter is sitting here talking about it. But I feel like they have explained it. People don’t think about competition in a broad enough sense. That’s exactly what they’ve just said. So the five, the five forces are, where is it here? So the five forces are rivalry among existing competitors. So this is what everyone thinks about. Everyone thinks that competition only comes from your direct competitors, but of course it doesn’t. It might come from people who are thinking about entering your market. It might come from your the power lying with your buyers where they are well placed to negotiate the prices or the terms of the deal. It might be about if you have too few suppliers, then they will have too much power and they will be determining your costs. So the cost of producing the goods and services that you offer and then the threat of substitutes, maybe I don’t need this microphone, I can have a lapel microphone, I can speak louder, I could do lots of things. So Porter’s Five Forces really is about broadening our understanding of competition, to think about all of the things that could represent a competitive risk to you in your business. And that, of course, will shape the way that you drive this strategy. I’m a little bit worried that this is going to be too dry because it’s just two quiet old men talking. They’re not really explaining themselves, but let’s say we’ll give them another go and see how they get on.

Michael Porter: [00:08:42] The action and substitute products or services that essentially place a constraint or a cap on your profitability and growth. So the five forces is kind of a holistic way of.

Martin Henley: [00:08:51] I see. So what they’re saying is that the freer you are of these forces, the more control you will have over what you charge. If you’ve spent any idea, any time here at all, you’ll know that I’ve got my own views on why people pay what they pay. It’s not necessarily due. I suppose these things will influence.

Michael Porter: [00:09:09] Looking at any industry and understanding the structural underlying drivers of profitability and competition.

Tom Stewart: [00:09:15] So I use these.

Martin Henley: [00:09:17] And I think that the way you would consider the Porter’s five forces is when you’re looking at the attractiveness of an industry. If you’re looking to get into an industry, then you will say, okay, how much power do the buyers have? How much power do the suppliers have? What is the likelihood that there might be new entrants? So what are the barriers to entry necessarily? And the bottom one was what was the bottom one substitutes like, how easily could people give up this phone and start using something else and getting the same kind of result? So I think about it in terms of the desirability. And I think what they’re talking about here is, is how much control you have, how much power you have in the market, which maybe means the same thing.

Tom Stewart: [00:10:05] They used to think about. My rival makes it difficult for me. The threat of substitutes means I can’t overcharge. The threat of new entrants means I can’t overcharge. Right. And at the same thing, the same thing with the suppliers.

Martin Henley: [00:10:18] I don’t know why this guy is talking about overcharging. Don’t overcharge. That’s ridiculous. Overcharging by definition is not a good thing. Like maybe talk about increasing your prices. That might be what he means.

Michael Porter: [00:10:28] And and there’s underlying drivers of each of those forces that that that the model really sort of unveils and then you can actually apply this every industry is different every industry will have a different set of economic fundamentals. But the five forces help you. Home in on. First of all, what’s really causing profitability in the industry? What are the trends that are the most likely to be significant in changing the game in the industry? Where are the constraints which which, if you can relax and might allow you to find a really strong competitive position?

Tom Stewart: [00:11:01] So how would you apply this analysis to an industry airlines, for example?

Michael Porter: [00:11:06] Well, airlines is a great industry. It’s actually you’ll see in the article you’ve seen in the article that that there’s a chart that compares profitability of industries and airlines, I think has been on the bottom of that list for decades. It’s one of the least profitable industries known to man. And and the five forces really allows you very quickly to understand why. I mean, let’s just let’s just go around the go around the chart. That nature of rivalry is incredibly intense and it’s almost exclusively on price. It’s been very hard to differentiate, to get the customer to wait even an extra two or 3 minutes for another flight if they can get on the fly to the cheaper price. So there’s there’s been a very intense price competition, low barriers to entry, a constant stream of new airlines coming into the industry. Despite the fact that the profitability is low. It’s always puzzled me.

Tom Stewart: [00:11:55] The low barriers to entry because you can rent a plane.

Michael Porter: [00:11:59] You can rent a plane, you can lease a gate. You know, it’s all generic technology. You can you can start with one flight between two city pairs. You don’t have to there’s no real need to have a whole network in the beginning. And yet people keep coming in. I think it’s just one of those sexy industries. It’s a great example of how sexiness or coolness or hotness or cheapness has nothing to do with industry profitability. It’s the underlying structure is what drives profitability. You know, the the customer is very fickle and price sensitive suppliers of of aircraft and aircraft engines and even aircraft gates at airports now have a lot of clout. They can bargain away mart most of the profits GE and Rolls-Royce and and Airbus and Boeing make a lot more money than airlines. They get most of the profit. And then of course, there’s always a substitute of getting on the train or driving your car or shipping your goods by by by air. And that’s that’s kind of kept a concern.

Tom Stewart: [00:12:54] And you have powerful suppliers of labor, too.

Martin Henley: [00:12:56] That’s okay. So that’s a brilliant example and counterintuitive, maybe because I would have said that probably the airlines were a good market like good opportunity for profitability because the barrier of entry is high. You have to buy a plane. But counter-intuitively, this is exactly the opposite to that. You can rent the plane, you don’t have to buy it, you can rent the gate, you don’t have to buy it. The suppliers have all the power because they are supplying the aircraft. Customers have dozens of different airlines to choose from. So it’s kind of interesting because it goes counter to what I’m saying about pricing always, which is you should be able to decide your your pricing. So maybe this is a consideration that I haven’t paid enough attention to is that there are competitive forces at play that will drive it. But I don’t want it to be and probably if you’re a small business looking to be more successful in your business, you’re not in the airline business. I mean, if you are here and you’re in an airline business and you’re looking for marketing advice, maybe go engage a marketing company who can help you with that, because I don’t think you should be here. I think you should know how to do your marketing already. Okay, good. So let’s continue.

Michael Porter: [00:14:12] Right? Exactly. There’s a great case where you have where you have unionized labor. And unlike other industries in this in this industry, particularly with the pilots, the labor can literally.

Martin Henley: [00:14:22] You know, I wonder why staffing doesn’t appear on Porter’s five forces. Like labor is a huge cost, isn’t it? Maybe that comes into suppliers.

Michael Porter: [00:14:30] Are you down and there’s no way around them. So it’s an industry where there are spurts of of what you might call mediocre profitability punctuated by long periods of terrible profitability.

Tom Stewart: [00:14:42] So every one of the five forces is very strong in that industry. And you could take another industry where the five forces are relatively benign.

Michael Porter: [00:14:50] And all like soft drinks. I mean soft drinks has been a license to to mint money. And again, it’s the opposite kind of analysis. When I talk with students, we kind of joke around there’s there’s five star industries where all the forces are attractive, like soft drinks there, zero star industries where all the forces are unfavorable like airlines. And and we’re always trying to understand what’s the configuration.

Martin Henley: [00:15:13] You can imagine how much fun they have in their lecture rooms trying to work out which are the most attractive industries. Soft drinks, I wouldn’t have guessed soft drinks.

Michael Porter: [00:15:23] Underlying economic drivers. That’s going to really shape the profit potential of this industry. And then armed with that insight, what do I do about it? How do I try to relax the constraint that’s holding back industry profitability? How can I position myself to kind of insulate from some of the the gales, gale winds of those forces and those implications? Nations of the five forces are something that this new article has developed in much more detail.

Tom Stewart: [00:15:50] You conceive this framework nearly three decades ago, and it has been the most extensively used both in management, scholarship and management practice of any of any strategy framework. And it really is it changed the definition of strategy in a lot of ways in these three decades. What have you learned? What have you learned about the application of these ideas in the real world of business?

Michael Porter: [00:16:14] Well, the wonderful thing, of course, we learned is that that these these concepts can be applied to literally any any industry, to product, to service, high tech, low tech, emerging economies, developed economies. Indeed, what what one of the powers of the framework is that it helps you get avoid getting trapped or tricked by the latest trend or the latest technological sensation, and really allows you to focus on the underlying fundamentals. The Internet is a good example. We got very, very confused by the Internet because people saw the Internet as a force as opposed to really enabling technology that that might, might or might not impact the underlying structure of the industry. So so I think one thing I’ve learned is is is the framework is is very, very robust. But I’ve also learned that there’s a lot of confusion and complexity and actually applying the framework in actual practice. And we’ve tried to clear as many of those areas up as we could in this new article, for example, How to Think about rivalry. What’s the really how do we understand when rivalry is really positive, some which allows companies to many companies to do well, and when does rivalry become really zero? Some where where, where everybody is kind of dragged down into kind of a destructive battle that you can’t win? That’s I can.

Tom Stewart: [00:17:29] Understand zero sum. I mean, if we get in a price war, the only one who wins is the consumer, which is nice if you’re a consumer, but what do you mean?

Martin Henley: [00:17:37] We’re all consumers? But price wars are you don’t want to be in an industry, which is the way I think about this is industries having become commoditized where there is no discernible difference in the value that’s being delivered. That’s what I would say. Yeah. Interesting. So when does rivalry become a price war? When the product becomes commoditized? A little bit like an airline. So what is an airline offer that’s very different from the next airline? I mean, they invest enormously in brand. They invest in having the best routes, maybe. But I think when I’m flying somewhere, I’m looking for a flight that’s available and then I’m probably looking at the price because there is no real difference. I mean, there is difference, but it’s going to be whatever it is, four or five, six, seven, 8 hours on a plane. You know, there are nicer carriers. But does that really influence my decision? I just want to get there as cost effectively as possible.

Tom Stewart: [00:18:36] I mean, by positive some competition.

Michael Porter: [00:18:38] Well, you know, the trouble with the zero sum competition is then the consumer gets a low price. But they they they really get no choice. And in a positive sum, competitions where companies can compete on different attributes, services, features, customer support, that’s actually relevant to particular groups of customers. And and the most really positive some competition is where companies are really competing on different things in order to meet the needs of different.

Tom Stewart: [00:19:02] And growing pie. And there’s a piece for each of us.

Michael Porter: [00:19:04] There’s a piece of us. In fact, one of the things we talk about in the new article, one of the things I did in the new article that that we really probably didn’t have the experience to do so so many years ago was really talk a lot about the implications. If this is the way competition works, what do you do about it? And one of them is might be in some industries, rather than go for market share against your rivals, you might be much better off just really expanding the pie, expanding the whole profit pool of the industry. That may be the best way for a market leader to actually improve their circumstances rather than to trigger a destructive battle with their head to head rival.

Tom Stewart: [00:19:39] How should a company use?

Martin Henley: [00:19:41] Okay, so that’s interesting because, I mean, I’m always thinking choice, like don’t be in that market. Like if it’s usually horribly competitive, if you’re going to be a slave to customers and a slave to suppliers, and there’s going to be new people turning up all the time and they can easily drop you for a new piece of technology or a different piece of technology. Don’t be in that market. But I suppose what he’s talking about here is he’s talking about you’re in the market. How do you how do you react? Is this does this have relevance to small businesses? I don’t know. Is this like a corporate thing? I don’t know.

Tom Stewart: [00:20:18] Get started using the Five Forces framework. You’re working your strategy up. You decide, this really works for me. How do you how do you how do you begin?

Michael Porter: [00:20:25] Well, I think industry analysis and looking at the competitive environment is, of course, probably the starting basic discipline of any strategy formulation process. If you don’t know.

Martin Henley: [00:20:35] It is people don’t do it. So they’re now they’re talking about situational analysis. Do your situation analysis and know your situation.

Michael Porter: [00:20:43] What you’re your. Street looks like if you don’t know how it’s changing, if you don’t know what the drivers of competition are, you might as well. Strategy is going to be marginally useful, if not destructive. So so we got to start with industry analysis, you know, figuring out what your industry is and drawing the right boundaries.

Tom Stewart: [00:21:00] And that’s not always.

Michael Porter: [00:21:01] It’s not always easy. We’ve added a box in this new article which really addresses that question because I, I encountered so many companies that struggled with industry definition, you know, identifying really what the industry structure is in your particular industry. And then there’s another thing that a lot of managers do. They kind of go through the industry analysis and they say, okay, this is good, this is bad, this is good, this is bad. So this is an attractive industry or an unattractive industry. But of course, the real question is how is that industry changing? Some have believe taken the five forces as really a static snapshot. But of course, the five forces give you the tools for understanding the dynamics. And where is that industry structure changing? How are buyers and suppliers and substitutes and potential entry evolving? And then what implications does that hold for your strategy? How do you position yourself to find that spot within the industry that you’re where you can command a really good profit? Given the five forces, how can you maybe reshape the nature of the industry structure? And we’ve got some great new examples that are very, very contemporary in this article that I think will help the manager community and the investor community really understand the application of this.

Tom Stewart: [00:22:17] Sometimes when people think about strategy, they think about a group of people, maybe from a management consulting firm or maybe on the 33rd floor of the building, whatever it is. But but this sort of elite strategy priesthood that goes and does this and they’re almost divorced from from the rest of the management of of the of the company, the 99% of the other people working in the company. How can how can a strategy become part of the day to day life of of of of a working stiff manager in a company. How do you apply this framework, this thinking? How do you use it?

Michael Porter: [00:22:50] Well, we we think that this way of looking at an industry needs to be very, very broadly understood in the organization. I mean, and the thing about it is, is that that managers even rank and file employees, it’s intuitive. People understand we have these customers, we have these suppliers, we’re struggling with them every day trying to they’re trying to get a better deal. We’re trying to get a better deal. So intuitively, I think this is a way of helping people sort of step back from all the excuses, writing little details that characterize any business and say what’s really important here. And then and then, of course, we’ve learned that strategy is completely useless again, unless the results of the strategy process, the position that you choose to occupy, the way you’re going to drive your company is well understood quite broadly, because the number one purpose of strategy is alignment. It’s really to get all the people in the organization making good choices, reinforcing each other’s choices, because everybody’s pursuing a common value proposition, a common way of gaining competitive advantage. So, you know, I remember when I wrote this article, there were many people who believe that strategy documents should be locked in the safe at night and should not be made available to the rank and file. And there was a concern that some competitor would find some secret. Well, we’ve actually learned now that it’s the opposite. You know, you’ve got your employees got to know your strategy, your channels have to know your strategy, your suppliers have to know your strategy.

Tom Stewart: [00:24:14] And your competitors probably knew it already.

Michael Porter: [00:24:16] Well, and frankly, if you know, again, there’s the competition is not zero sum. If every company finds a unique need that it can set out to meet if if it tries to deliver something different than its rivals, multiple rivals can be successful. And if your competitors kind of understand what you stand for.

Martin Henley: [00:24:36] Yeah. So this goes to sorry, I’m not reacting much. I’m kind of interested because I do teach this stuff and it’s probably a long time since I’ve thought about it this much. But it does go to like the basic of free market economics, you know, I mean that you should have lots of lots of competition is good. And I think in 2022 you’re going to be hard pushed to come up with something truly original, truly innovative. Truly, yeah, original. And then if you do, you have to educate the entire world as to why they would need or want this thing. So this is interesting strategy for 100% is small businesses famously don’t enjoy strategy because they get that sense that this is a highfalutin thing that seniors do and they just sit around talking about things forever. But actually there is, of course, especially if you’ve distributed it well in your business and your staff understand and your management understand and your suppliers understand and your customers understand, and you’re all marching in the same direction. That’s first price. So yeah, it’s interesting. Strategy 100%. Everyone should be involved in producing it. Everyone should be involved in implementing it. That’s the way strategies work. And there really is, I think, like that one little secret that your competitors will steal and then and then beat you with it. I don’t think that happens.

Michael Porter: [00:26:07] Or what you’re committed to. Maybe they’ll make a different choice rather than get dragged into these kind of mindless price wars that we see in so many industries.

Tom Stewart: [00:26:15] The five forces that shape strategy have been around for 30 years. They’re going to be around for well, they’ve been around. They’ve been around for long. They were around long before you wrote about it. That’s right. They’ve been around as long as business has been around. They’re going to be around as long as business is around. The new articles, just fabulous. And thank you so much.

Michael Porter: [00:26:33] Well, I’m looking forward to kind of getting another surge of of feedback from the practitioners and we’ll keep learning.

Tom Stewart: [00:26:42] Thanks. Thanks, Tom.

Martin Henley: [00:26:44] Lovely. Well, a lovely, lovely, lovely conversation. A little bit. I’m sorry you weren’t looking at it there at the end. You’re looking at me. You’re lucky sausages. So it’s interesting. It must be interesting to be that person who has developed a framework, you know, because it’s absolutely correct. 100% is correct. And I do think if you are doing strategy and if you are thinking about your situation, then you should have a look at Porter’s five forces and really have an assessment of your industry and give yourself the very best chance. You know, give yourself the very best chance thinking about, you know, who boss is this industry? Is it customers? Is it suppliers, Is it new entrants? Is it you know, and this is where we are in 2022, where we have these disruptors like banking’s disrupted, insurance is disrupted, hospitality is disrupted because the technology is bringing in more and more and more reducing the barrier to entry and increasing the number of new entrants. So that’s what goes on. Okay. So let’s have a little look and see what they are saying in the comments. I was a 12 year old boy when Michael was interviewed in this video, and now I’m in B school in a B school trying to better understand business through this video. Thanks, Michael, for your timeless sharing of knowledge. Yep. Good. A great video which explains the basics of this model quite comprehensively.

Martin Henley: [00:28:10] Although this framework is really robust in many cases, it does fail when a disruptive innovation comes into play. When applying this model, a consultant or marketing manager should not only take the current substitutions of the market, but should also be aware of disruptive innovations coming from new markets. This mistake has led to many minis repelling a certain business area because that gets quite complicated. I have his two books, Competitive Strategies and Competitive Advantage, very useful in my life in business. Unfortunately, my senior managers and company owners don’t read these types of books, so there goes the business that they manage. Okay, I’m going to add those books to my reading list. I love that I don’t have to pay Harvard prices to get such great instruction. Yeah, 100%. Good. Yeah. I think Harvard are not really invested very much in it. The article being mentioned here is actually the three assigned reading in my strategy course for the executive MBA program ten years after it was published. I think Porter knows his staff 100%. He seems to know his stuff. Okay, good. So people really like this. What do I think? I think yeah, I think do strategy is a really good idea if you’re running a business. I think 80% of the strategy is understanding where you are. So that is about understanding which industry and that is about understanding these five forces and how they are going to affect your ability to drive your success and drive your profitability.

Martin Henley: [00:29:35] So 100%, check that out. What else do I think? I think, you know, I’m here, I’m doing this because I should be thinking about these ideas more and more, and I am thinking about them because I do this. And I’m glad you’re here and I’m hoping that you benefit from this also. So if you found this interesting, useful. Motivating any of those things. Please take a second to like share, subscribe and comment, because that will encourage us to continue on this epic journey to provide you with everything you need to be more successful in your business. What you need from today’s chat to be more successful in your business is to be thinking about your competition, to be thinking about these five forces and to be thinking if you have enough control in your business and your industry to generate the kind of success that you deserve. And I hope that you find out that you do. And I hope that if you discover that you don’t, that you transition very quickly to something that will serve you better. Thank you so much for being here. Again. We will look forward to having you back here sometime soon.

 

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