The Explainer: The 5 Forces That Enable Companies to Succeed

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0:58Most people think of business competition as a tug of war between rivals. with each competing for more sales or market share. But according to Harvard Business School professor Michael Porter, competition is more complex than that. It's not about who's the biggest. It's about who is the most profitable. And profitability is defined by five competitive forces. Let's start with your buyers or customers, who would always be happier to pay less and get more. In the airline industry, price competition is fierce because so many travelers just want the cheapest flight. Then, there are your suppliers, who'd ideally like to be paid more and deliver less.

1:40Powerful suppliers will use their clout to raise prices or insist on other more favorable terms. A third source of competition comes from substitute products or services that meet the same basic need you do. These aren't always obvious rivals. The toughest competitors may come from different industries. new entrants can also create tension for instance Southwest Airlines challenged the industry by flying just one kind of airplane reducing costs and allowing it to offer better ticket deals this pushed other carriers to spend more to retain their customers finally you still have to fight your existing rivals and intense competition reduces everyone's profitability the major airlines have been in this position for years forcing them to defend increasingly narrow profit margins with fees for exit row upgrades, checked bags, even snacks.

2:34These five forces define every industry structure and shape your company's future. Once you understand them, you can make better predictions, create more competitive strategies, and increase your profits.

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