Artical summary - Essay Example

The article, ‘The five competitive forces that shape strategy’ by Michael Porter talks about critical components of business strategy that help meet industry competition and maintain profitability. Porter asserts that industry competition is multi-faceted and needs to be perceived from the broader framework of various stakeholders that have significant impact on its performance. He emphasizes that apart from profit, suppliers, threat from new entrants, customers and substitute products are powerful forces that influence a company’s performance within the industry.

The advancing technology has considerably reduced knowledge frontier amongst the businesses. Thus, to gain leverage in the industry, innovative approach needs to be introduced to provide their products with differentiating elements. Irrespective of the type of industry, article shows how using five forces analysis helps to identify the best options to gain leverage. The industry structure is often a result of economy of scale and technology that determine the strength of these market driven forces.

Threat of new entrants has serious impact on price, cost and investment of existing industry. The company therefore needs to hold down their prices and boost investment as deterrent measure. Entry barriers are strong sources of advantages for incumbents which they can exploit against potential entrants. They are: supply side economy of scale; demand side benefits; capital needs; incumbency advantage; unequal access to distribution channel; and restrictive government policies. Power of suppliers is critical issue when they have the monopoly of products including labor as in the case of pilots’ union which have expert pilots.

They can cut profitability and increase cost dramatically. The buyers, especially bulk buyers can considerably influence price and may also play one supplier against another in order to get best prices. The threat of substitute is also major force as it can corrode market with relatively cheaper goods. The threat is high if it offers quality at low cost and therefore, company that is able to anticipate the various dimensions of competitions, is better equipped to maintain its profits. The rivalry amongst existing competitors is destructive if it solely impacts pricing as profits get diverted to customers directly.

In such cases, companies must be creative and offer value additions services to compete. The business strategy should therefore use five forces to identify industry structure and exploits its differentiating elements or evolve strategic inputs that help to create niche market position. Mergers, acquisitions and business partnerships often enhance one’s capabilities to compete. Sysco, large food distributor had redefined its competitive advantage by introducing private label distribution brand and giving value added services to buyers.

Thus, Porter’s five force analysis of industry becomes key factor for developing strategies to compete from multidimensional front rather from the narrow boundaries of industrial rivalry. The companies can exploit structural changes and evolve new way of competing through product innovation or defining new ways of service delivery. But, whatever the industry’s creative input, identification and analysis of five forces become powerful elements that help the companies to maintain their competitive advantage in the industry.

(words: 497) Reference Porter, Michael, E. (January, 2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review.