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Awareness of the ﬁve forces can help a company understand the structure of its
industry and stake out a position that is more proﬁtable and less vulnerable to attack.
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THE FIVE
COMPETITIVE
FORCES THAT
SHAPE
STRATEGY
STRATEGY
Peter Crowther
by Michael E. Porter
Editor’s Note: In 1979, Harvard Business Review
published “How Competitive Forces Shape Strategy” by a young economist and associate professor,
Michael E. Porter. It was his ﬁrst HBR article, and it
started a revolution in the strategy ﬁeld. In subsequent
decades, Porter has brought his signature economic
rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care
and philanthropy. “Porter’s ﬁve forces” have shaped a
generation of academic research and business practice.
With prodding and assistance from Harvard Business
School Professor Jan Rivkin and longtime colleague
Joan Magretta, Porter here reafﬁrms, updates, and
extends the classic work. He also addresses common
misunderstandings, provides practical guidance for
users of the framework, and offers a deeper view of
its implications for strategy today.
IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however,
managers deﬁne competition too narrowly, as if
it occurred only among today’s direct competitors. Yet competition for proﬁts goes beyond established industry rivals to include four other
competitive forces as well: customers, suppliers,
potential entrants, and substitute products. The
extended rivalry that results from all ﬁve forces
deﬁnes an industry’s structure and shapes the
nature of competitive interaction within an
industry.
As different from one another as industries
might appear on the surface, the underlying drivers of proﬁtability are the same. The global auto
industry, for instance, appears to have nothing
in common with the worldwide market for art
masterpieces or the heavily regulated health-care
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
delivery industry in Europe. But to understand industry competition and proﬁtabilThe Five Forces That Shape Industry Competition
ity in each of those three cases, one must
analyze the industry’s underlying structure in terms of the ﬁve forces. (See the exThreat
hibit “The Five Forces That Shape Industry
of New
Competition.”)
Entrants
If the forces are intense, as they are in
such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign,
Rivalry
as they are in industries such as software,
Among
Bargaining
Bargaining
soft drinks, and toiletries, many companies
Power of
Power of
Existing
Suppliers
are proﬁtable. Industry structure drives
Buyers
Competitors
competition and proﬁtability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry proﬁtability
Threat of
in the short run – including the weather
Substitute
Products or
and the business cycle – industry structure,
Services
manifested in the competitive forces, sets
industry proﬁtability in the medium and
long run. (See the exhibit “Differences in
Industry Proﬁtability.”)
Understanding the competitive forces, and their underThe strongest competitive force or forces determine the
lying causes, reveals the roots of an industry’s current proﬁtproﬁtability of an industry and become the most important
ability while providing a framework for anticipating and
to strategy formulation. The most salient force, however, is
inﬂuencing competition (and proﬁtability) over time. A
not always obvious.
healthy industry structure should be as much a competitive
For example, even though rivalry is often ﬁerce in comconcern to strategists as their company’s own position. Unmodity industries, it may not be the factor limiting proﬁtderstanding industry structure is also essential to effective
ability. Low returns in the photographic ﬁlm industry, for
strategic positioning. As we will see, defending against the
instance, are the result of a superior substitute product – as
competitive forces and shaping them in a company’s favor
Kodak and Fuji, the world’s leading producers of photoare crucial to strategy.
graphic ﬁlm, learned with the advent of digital photography.
In such a situation, coping with the substitute product becomes the number one strategic priority.
Forces That Shape Competition
Industry structure grows out of a set of economic and
The conﬁguration of the ﬁve forces differs by industry. In
technical characteristics that determine the strength of
the market for commercial aircraft, ﬁerce rivalry between
each competitive force. We will examine these drivers in the
dominant producers Airbus and Boeing and the bargainpages that follow, taking the perspective of an incumbent,
ing power of the airlines that place huge orders for aircraft
or a company already present in the industry. The analysis
are strong, while the threat of entry, the threat of substican be readily extended to understand the challenges facing
tutes, and the power of suppliers are more benign. In the
a potential entrant.
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
THREAT OF ENTRY. New entrants to an industry bring
and distributors who supply movies, the critical input, are
new capacity and a desire to gain market share that puts
important.
pressure on prices, costs, and the rate of investment necessary to compete. Particularly when new entrants are
diversifying from other markets, they can leverage existMichael E. Porter is the Bishop William Lawrence University Proing
capabilities and cash ﬂows to shake up competition, as
fessor at Harvard University, based at Harvard Business School in
Pepsi
did when it entered the bottled water industry, MicroBoston. He is a six-time McKinsey Award winner, including for his
soft
did
when it began to offer internet browsers, and Apple
most recent HBR article, “Strategy and Society,” coauthored with
did
when
it entered the music distribution business.
Mark R. Kramer (December 2006).
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The threat of entry, therefore, puts a cap on the proﬁt potential of an industry. When the threat is high, incumbents
must hold down their prices or boost investment to deter
new competitors. In specialty coffee retailing, for example,
relatively low entry barriers mean that Starbucks must invest aggressively in modernizing stores and menus.
The threat of entry in an industry depends on the height
of entry barriers that are present and on the reaction entrants can expect from incumbents. If entry barriers are low
and newcomers expect little retaliation from the entrenched
competitors, the threat of entry is high and industry proﬁtability is moderated. It is the threat of entry, not whether
entry actually occurs, that holds down proﬁtability.
entry by limiting the willingness of customers to buy from a
newcomer and by reducing the price the newcomer can command until it builds up a large base of customers.
3. Customer switching costs. Switching costs are ﬁxed costs
that buyers face when they change suppliers. Such costs may
arise because a buyer who switches vendors must, for example, alter product speciﬁcations, retrain employees to use
a new product, or modify processes or information systems.
The larger the switching costs, the harder it will be for an entrant to gain customers. Enterprise resource planning (ERP)
software is an example of a product with very high switching
costs. Once a company has installed SAP’s ERP system, for example, the costs of moving to a new vendor are astronomical
Industry structure drives competition and proﬁtability,
not whether an industry is emerging or mature, high tech or
low tech, regulated or unregulated.
Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major
sources:
1. Supply-side economies of scale. These economies arise
when ﬁrms that produce at larger volumes enjoy lower costs
per unit because they can spread ﬁxed costs over more units,
employ more efﬁcient technology, or command better terms
from suppliers. Supply-side scale economies deter entry by
forcing the aspiring entrant either to come into the industry
on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage.
Scale economies can be found in virtually every activity
in the value chain; which ones are most important varies
by industry.1 In microprocessors, incumbents such as Intel
are protected by scale economies in research, chip fabrication, and consumer marketing. For lawn care companies like
Scotts Miracle-Gro, the most important scale economies are
found in the supply chain and media advertising. In smallpackage delivery, economies of scale arise in national logistical systems and information technology.
2. Demand-side beneﬁts of scale. These beneﬁts, also known
as network effects, arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company. Buyers
may trust larger companies more for a crucial product: Recall the old adage that no one ever got ﬁred for buying from
IBM (when it was the dominant computer maker). Buyers
may also value being in a “network” with a larger number of
fellow customers. For instance, online auction participants
are attracted to eBay because it offers the most potential
trading partners. Demand-side beneﬁts of scale discourage
because of embedded data, the fact that internal processes
have been adapted to SAP, major retraining needs, and the
mission-critical nature of the applications.
4. Capital requirements. The need to invest large ﬁnancial resources in order to compete can deter new entrants.
Capital may be necessary not only for ﬁxed facilities but also
to extend customer credit, build inventories, and fund startup losses. The barrier is particularly great if the capital is
required for unrecoverable and therefore harder-to-ﬁnance
expenditures, such as up-front advertising or research and
development. While major corporations have the ﬁnancial
resources to invade almost any industry, the huge capital
requirements in certain ﬁelds limit the pool of likely entrants. Conversely, in such ﬁelds as tax preparation services
or short-haul trucking, capital requirements are minimal
and potential entrants plentiful.
It is important not to overstate the degree to which capital
requirements alone deter entry. If industry returns are attractive and are expected to remain so, and if capital markets
are efﬁcient, investors will provide entrants with the funds
they need. For aspiring air carriers, for instance, ﬁnancing
is available to purchase expensive aircraft because of their
high resale value, one reason why there have been numerous new airlines in almost every region.
5. Incumbency advantages independent of size. No matter
what their size, incumbents may have cost or quality advantages not available to potential rivals. These advantages can
stem from such sources as proprietary technology, preferential access to the best raw material sources, preemption of
the most favorable geographic locations, established brand
identities, or cumulative experience that has allowed incum-
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
bents to learn how to produce more efﬁciently. Entrants try
to bypass such advantages. Upstart discounters such as Target and Wal-Mart, for example, have located stores in freestanding sites rather than regional shopping centers where
established department stores were well entrenched.
6. Unequal access to distribution channels. The new entrant must, of course, secure distribution of its product or
service. A new food item, for example, must displace others
from the supermarket shelf via price breaks, promotions,
intense selling efforts, or some other means. The more limited the wholesale or retail channels are and the more that
existing competitors have tied them up, the tougher entry
into an industry will be. Sometimes access to distribution
is so high a barrier that new entrants must bypass distribution channels altogether or create their own. Thus, upstart
low-cost airlines have avoided distribution through travel
agents (who tend to favor established higher-fare carriers)
and have encouraged passengers to book their own ﬂights
on the internet.
7. Restrictive government policy. Government policy can
hinder or aid new entry directly, as well as amplify (or nullify) the other entry barriers. Government directly limits or
even forecloses entry into industries through, for instance,
licensing requirements and restrictions on foreign investment. Regulated industries like liquor retailing, taxi services,
and airlines are visible examples. Government policy can
heighten other entry barriers through such means as expansive patenting rules that protect proprietary technology from imitation or environmental or safety regulations
that raise scale economies facing newcomers. Of course,
government policies may also make entry easier – directly
through subsidies, for instance, or indirectly by funding basic research and making it available to all ﬁrms, new and old,
reducing scale economies.
Entry barriers should be assessed relative to the capabilities of potential entrants, which may be start-ups, foreign
ﬁrms, or companies in related industries. And, as some of
our examples illustrate, the strategist must be mindful of the
creative ways newcomers might ﬁnd to circumvent apparent barriers.
Expected retaliation. How potential entrants believe incumbents may react will also inﬂuence their decision to
enter or stay out of an industry. If reaction is vigorous and
protracted enough, the proﬁt potential of participating in
the industry can fall below the cost of capital. Incumbents
often use public statements and responses to one entrant
to send a message to other prospective entrants about their
commitment to defending market share.
Newcomers are likely to fear expected retaliation if:
• Incumbents have previously responded vigorously to
new entrants.
• Incumbents possess substantial resources to ﬁght back,
including excess cash and unused borrowing power, avail-
Differences in Industry Proﬁtability
The average return on invested capital varies markedly from
industry to industry. Between 1992 and 2006, for example,
average return on invested capital in U.S. industries ranged as
low as zero or even negative to more than 50%. At the high
end are industries like soft drinks and prepackaged software,
which have been almost six times more proﬁtable than the
airline industry over the period.
able productive capacity, or clout with distribution channels
and customers.
• Incumbents seem likely to cut prices because they are
committed to retaining market share at all costs or because
the industry has high ﬁxed costs, which create a strong motivation to drop prices to ﬁll excess capacity.
• Industry growth is slow so newcomers can gain volume
only by taking it from incumbents.
An analysis of barriers to entry and expected retaliation is
obviously crucial for any company contemplating entry into
a new industry. The challenge is to ﬁnd ways to surmount
the entry barriers without nullifying, through heavy investment, the proﬁtability of participating in the industry.
THE POWER OF SUPPLIERS. Powerful suppliers capture
more of the value for themselves by charging higher prices,
limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor,
can squeeze proﬁtability out of an industry that is unable
to pass on cost increases in its own prices. Microsoft, for instance, has contributed to the erosion of proﬁtability among
personal computer makers by raising prices on operating
systems. PC makers, competing ﬁercely for customers who
can easily switch among them, have limited freedom to raise
their prices accordingly.
Companies depend on a wide range of different supplier
groups for inputs. A supplier group is powerful if:
• It is more concentrated than the industry it sells to.
Microsoft’s near monopoly in operating systems, coupled
with the fragmentation of PC assemblers, exempliﬁes this
situation.
• The supplier group does not depend heavily on the industry for its revenues. Suppliers serving many industries
will not hesitate to extract maximum proﬁts from each one.
If a particular industry accounts for a large portion of a supplier group’s volume or proﬁt, however, suppliers will want
to protect the industry through reasonable pricing and assist in activities such as R&D and lobbying.
• Industry participants face switching costs in changing
suppliers. For example, shifting suppliers is difﬁcult if companies have invested heavily in specialized ancillary equip-
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Proﬁtability of Selected U.S. Industries
Average Return on Invested Capital
in U.S. Industries, 1992–2006
50
10th percentile
7.0%
25th
percentile
10.9%
Median:
14.3%
10%
15%
Average ROIC, 1992–2006
75th percentile
18.6%
90th percentile
25.3%
20%
30%
Number of Industries
40
30
20
10
0
0%
or lower
5%
25%
ROIC
35%
or higher
Return on invested capital (ROIC) is the appropriate measure
of proﬁtability for strategy formulation, not to mention for equity
investors. Return on sales or the growth rate of proﬁts fail to
account for the capital required to compete in the industry. Here,
we utilize earnings before interest and taxes divided by average
invested capital less excess cash as the measure of ROIC. This
measure controls for idiosyncratic differences in capital structure
and tax rates across companies and industries.
Source: Standard & Poor’s, Compustat, and author’s calculations
ment or in learning how to operate a supplier’s equipment
(as with Bloomberg terminals used by ﬁnancial professionals). Or ﬁrms may have located their production lines adjacent to a supplier’s manufacturing facilities (as in the case
of some beverage companies and container manufacturers).
When switching costs are high, industry participants ﬁnd it
hard to play suppliers off against one another. (Note that
suppliers may have switching costs as well. This limits their
power.)
• Suppliers offer products that are differentiated. Pharmaceutical companies that offer patented drugs with distinctive medical beneﬁts have more power over hospitals,
health maintenance organizations, and other drug buyers,
for example, than drug companies offering me-too or generic products.
• There is no substitute for what the supplier group provides. Pilots’ unions, for example, exercise considerable supplier power over airlines partly because there is no good
alternative to a well-trained pilot in the cockpit.
• The supplier group can credibly threaten to integrate forward into the industry. In that case, if industry participants
make too much money relative to suppliers, they will induce
suppliers to enter the market.
Security Brokers and Dealers
Soft Drinks
Prepackaged Software
Pharmaceuticals
Perfume, Cosmetics, Toiletries
Advertising Agencies
Distilled Spirits
Semiconductors
Medical Instruments
Men’s and Boys’ Clothing
Tires
Household Appliances
Malt Beverages
Child Day Care Services
Household Furniture
Drug Stores
Grocery Stores
Iron and Steel Foundries
Cookies and Crackers
Mobile Homes
Wine and Brandy
Bakery Products
Engines and Turbines
Book Publishing
Laboratory Equipment
Oil and Gas Machinery
Soft Drink Bottling
Knitting Mills
Hotels
Catalog, Mail-Order Houses
Airlines
40.9%
37.6%
37.6%
31.7%
28.6%
27.3%
26.4%
21.3%
21.0%
19.5%
19.5%
19.2%
19.0%
17.6%
17.0%
16.5%
16.0%
15.6%
15.4%
Average industry
15.0%
ROIC in the U.S.
13.9%
14.9%
13.8%
13.7%
13.4%
13.4%
12.6%
11.7%
10.5%
10.4%
5.9%
5.9%
THE POWER OF BUYERS. Powerful customers – the ﬂip
side of powerful suppliers – can capture more value by forcing down prices, demanding better quality or more service
(thereby driving up costs), and generally playing industry
participants off against one another, all at the expense of
industry proﬁtability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially
if they are price sensitive, using their clout primarily to pressure price reductions.
As with suppliers, there may be distinct groups of customers who differ in bargaining power. A customer group has
negotiating leverage if:
• There are few buyers, or each one purchases in volumes
that are large relative to the size of a single vendor. Largevolume buyers are particularly powerful in industries with
high ﬁxed costs, such as telecommunications equipment, offshore drilling, and bulk chemicals. High ﬁxed costs and low
marginal costs amplify the pressure on rivals to keep capacity ﬁlled through discounting.
• The industry’s products are standardized or undifferentiated. If buyers believe they can always ﬁnd an equivalent
product, they tend to play one vendor against another.
• Buyers face few switching costs in changing vendors.
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
• Buyers can credibly threaten to integrate backward and
produce the industry’s product themselves if vendors are
too proﬁtable. Producers of soft drinks and beer have long
controlled the power of packaging manufacturers by threatening to make, and at times actually making, packaging materials themselves.
A buyer group is price sensitive if:
• The product it purchases from the industry represents
a signiﬁcant fraction of its cost structure or procurement
budget. Here buyers are likely to shop around and bargain
hard, as consumers do for home mortgages. Where the product sold by an industry is a small fraction of buyers’ costs or
expenditures, buyers are usually less price sensitive.
• The buyer group earns low proﬁts, is strapped for cash,
or is otherwise under pressure to trim its purchasing costs.
Highly proﬁtable or cash-rich customers, in contrast, are generally less price sensitive (that is, of course, if the item does
not represent a large fraction of their costs).
• The quality of buyers’ products or services is little affected by the industry’s product. Where quality is very much
affected by the industry’s product, buyers are generally less
price sensitive. When purchasing or renting production quality cameras, for instance, makers of major motion pictures
opt for highly reliable equipment with the latest features.
They pay limited attention to price.
• The industry’s product has little effect on the buyer’s
other costs. Here, buyers focus on price. Conversely, where
an industry’s product or service can pay for itself many times
over by improving performance or reducing labor, material,
or other costs, buyers are usually more interested in quality
than in price. Examples include products and services like tax
accounting or well logging (which measures below-ground
conditions of oil wells) that can save or even make the buyer
money. Similarly, buyers tend not to be price sensitive in services such as investment banking, where poor performance
can be costly and embarrassing.
Most sources of buyer power apply equally to consumers and to business-to-business customers. Like industrial
customers, consumers tend to be more price sensitive if they
are purchasing products that are undifferentiated, expensive
relative to their incomes, and of a sort where product performance has limited consequences. The major difference with
consumers is that their needs can be more intangible and
harder to quantify.
Intermediate customers, or customers who purchase the
product but are not the end user (such as assemblers or distribution channels), can be analyzed the same way as other buyers, with one important addition. Intermediate customers
gain signiﬁcant bargaining power when they can inﬂuence
the purchasing decisions of customers downstream. Consumer electronics retailers, jewelry retailers, and agriculturalequipment distributors are examples of distribution channels that exert a strong inﬂuence on end customers.
Producers often attempt to diminish channel clout
through exclusive arrangements with particular distributors
or retailers or by marketing directly to end users. Component manufacturers seek to develop power over assemblers
by creating preferences for their components with downstream customers. Such is the case with bicycle parts and
with sweeteners. DuPont has created enormous clout by
advertising its Stainmaster brand of carpet ﬁbers not only
to the carpet manufacturers that actually buy them but
also to downstream consumers. Many consumers request
Stainmaster carpet even though DuPont is not a carpet
manufacturer.
THE THREAT OF SUBSTITUTES. A substitute performs
the same or a similar function as an industry’s product by a
different means. Videoconferencing is a substitute for travel.
Plastic is a substitute for aluminum. E-mail is a substitute
for express mail. Sometimes, the threat of substitution is
downstream or indirect, when a substitute replaces a buyer
industry’s product. For example, lawn-care products and services are threatened when multifamily homes in urban areas
substitute for single-family homes in the suburbs. Software
sold to agents is threatened when airline and travel websites
substitute for travel agents.
Substitutes are always present, but they are easy to overlook because they may appear to be very different from the
industry’s product: To someone searching for a Father’s Day
gift, neckties and power tools may be substitutes. It is a substitute to do without, to purchase a used product rather than
a new one, or to do it yourself (bring the service or product
in-house).
When the threat of substitutes is high, industry proﬁtability suffers. Substitute products or services limit an industry’s
proﬁt potential by placing a ceiling on prices. If an industry
does not distance itself from substitutes through product
performance, marketing, or other means, it will suffer in
terms of proﬁtability – and often growth potential.
Substitutes not only limit proﬁts in normal times, they
also reduce the bonanza an industry can reap in good times.
In emerging economies, for example, the surge in demand
for wired telephone lines has been capped as many consumers opt to make a mobile telephone their ﬁrst and only
phone line.
The threat of a substitute is high if:
• It offers an attractive price-performance trade-off to the
industry’s product. The better the relative value of the substitute, the tighter is the lid on an industry’s proﬁt potential. For example, conventional providers of long-distance
telephone service have suffered from the advent of inexpensive internet-based phone services such as Vonage and
Skype. Similarly, video rental outlets are struggling with the
emergence of cable and satellite video-on-demand services,
online video rental services such as Netﬂix, and the rise of
internet video sites like Google’s YouTube.
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• The buyer’s cost of switching to the substitute is low.
Switching from a proprietary, branded drug to a generic
drug usually involves minimal costs, for example, which is
why the shift to generics (and the fall in prices) is so substantial and rapid.
Strategists should be particularly alert to changes in other
industries that may make them attractive substitutes when
they were not before. Improvements in plastic materials, for
example, allowed them to substitute for steel in many automobile components. In this way, technological changes
may participate in an industry for image reasons or to offer
a full line. Clashes of personality and ego have sometimes
exaggerated rivalry to the detriment of proﬁtability in ﬁelds
such as the media and high technology.
• Firms cannot read each other’s signals well because of
lack of familiarity with one another, diverse approaches to
competing, or differing goals.
The strength of rivalry reﬂects not just the intensity of
competition but also the basis of competition. The dimensions on which competition takes place, and whether rivals
Rivalry is especially destructive to proﬁtability if it gravitates
solely to price because price competition transfers proﬁts directly
from an industry to its customers.
or competitive discontinuities in seemingly unrelated businesses can have major impacts on industry proﬁtability. Of
course the substitution threat can also shift in favor of an
industry, which bodes well for its future proﬁtability and
growth potential.
RIVALRY AMONG EXISTING COMPETITORS. Rivalry
among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements. High rivalry
limits the proﬁtability of an industry. The degree to which rivalry drives down an industry’s proﬁt potential depends, ﬁrst,
on the intensity with which companies compete and, second,
on the basis on which they compete.
The intensity of rivalry is greatest if:
• Competitors are numerous or are roughly equal in size
and power. In such situations, rivals ﬁnd it hard to avoid
poaching business. Without an industry leader, practices desirable for the industry as a whole go unenforced.
• Industry growth is slow. Slow growth precipitates ﬁghts
for market share.
• Exit barriers are high. Exit barriers, the ﬂip side of entry
barriers, arise because of such things as highly specialized
assets or management’s devotion to a particular business.
These barriers keep companies in the market even though
they may be earning low or negative returns. Excess capacity
remains in use, and the proﬁtability of healthy competitors
suffers as the sick ones hang on.
• Rivals are highly committed to the business and have
aspirations for leadership, especially if they have goals that
go beyond economic performance in the particular industry.
High commitment to a business arises for a variety of reasons.
For example, state-owned competitors may have goals that
include employment or prestige. Units of larger companies
converge to compete on the same dimensions, have a major
inﬂuence on proﬁtability.
Rivalry is especially destructive to proﬁtability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. Price cuts are
usually easy for competitors to see and match, making successive rounds of retaliation likely. Sustained price competition also trains customers to pay less attention to product
features and service.
Price competition is most liable to occur if:
• Products or services of rivals are nearly identical and
there are few switching costs for buyers. This encourages
competitors to cut prices to win new customers. Years of airline price wars reﬂect these circumstances in that industry.
• Fixed costs are high and marginal costs are low. This
creates intense pressure for competitors to cut prices below
their average costs, even close to their marginal costs, to steal
incremental customers while still making some contribution
to covering ﬁxed costs. Many basic-materials businesses, such
as paper and aluminum, suffer from this problem, especially
if demand is not growing. So do delivery companies with
ﬁxed networks of routes that must be served regardless of
volume.
• Capacity must be expanded in large increments to be
efﬁcient. The need for large capacity expansions, as in the
polyvinyl chloride business, disrupts the industry’s supplydemand balance and often leads to long and recurring periods of overcapacity and price cutting.
• The product is perishable. Perishability creates a strong
temptation to cut prices and sell a product while it still has
value. More products and services are perishable than is
commonly thought. Just as tomatoes are perishable because
they rot, models of computers are perishable because they
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
soon become obsolete, and information may be perishable
if it diffuses rapidly or becomes outdate

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