Competitive Strategy

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Figure 3-2 Porter’s Five Forces Model of Industry Structure

Source: Based on Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (The Free Press, a Division of

Simon & Schuster Adult Publishing Group). Copyright © 1985, 1998 by Michael E. Porter.

Q2 What Five Forces Determine Industry Structure?

Organizational strategy begins with an assessment of the fundamental characteristics and structure of an industry. One model used to assess an industry structure is Porter’s five forces model,1 summarized in Figure 3-2. According to this model, five competitive forces determine industry profitability: bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants, and rivalry among existing firms. The intensity of each of the five forces determines the characteristics of the industry, how profitable it is, and how sustainable that profitability will be.

To understand this model, consider the strong and weak examples for each of the forces in Figure 3-3. A good check on your understanding is to see if you can think of different forces of each category in Figure 3-3. Also, take a particular industry—say, auto repair—and consider how these five forces determine the competitive landscape of that industry.

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Figure 3-3 Examples of Five Forces

1Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).

Jason is concerned that 3D printing may place AllRoad Parts at a competitive disadvantage. Figure 3-4 shows the team’s analysis of the new competitive landscape. The larger customers from whom the company receives two-thirds of its revenue (major bike shops, motorcycle dealers, Jeep and other customization shops) will gain considerable force power if they can make parts themselves using 3D printing. The threat of new entrants from existing, local manufacturers is also strong. The other forces are not as worrisome to AllRoad. In most cases, there aren’t any substitute repair parts, and, given the reality of 3D printing, AllRoad Parts’ suppliers are