In 1979 Michael Porter wrote an article that was published in the Harvard Business Review, entitled, “How Competitive Forces Shape Strategy.” He subsequently published an expanded discussion on this in a published work in 1981.

Porter proposed that the competitive environment can be analyzed through a five factor categorization (rivalry amongst existing competitors, threat of new entrants, etc. – see below) and suggested that companies respond in one of three ways – cost leadership; differentiation from competitors; or focus on market segment(s).

 

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Essentially competitive pressure on a business can come from either vertical relationships or horizontal relationships, as well as from direct competitors. The more a business owner understands the forces, the better equipped the business owner is to not only respond, but proactively act against these competitive forces.

The Harvard Business Review published Mr. Porter’s revisit to the subject in its January 2008 edition, entitled, “The Five Competitive Forces That Shape Strategy.” A link to a thirteen minute online video of Porter describing his updated article is available here.

Why has Porter’s model endured? Because it is a simple, yet comprehensive way to analyze and understand the competitive environment in which a company operates. If we can understand our competitive environment, we can develop effective strategies to compete against our competitors – selling more and better margins. Who doesn’t want that?