Playing to win: How strategy really works

by A.G. Lafley

To understand structural attractiveness, we can turn to Mike Porter’s seminal five-forces analysis and ask about the bargaining power of suppliers, the bargaining power of buyers, the degree of rivalry, the threat of new entrants, and the threat of substitutes (figure 7-2). Porter’s framework is a very useful aid to understanding the profit potential of markets and segments. FIGURE 7-2 Porter’s five forces Source: Reprinted with permission from On Competition, by Michael E. Porter, Harvard Business School Press, 2008. The five forces can be divided into two axes. The vertical axis—threat from new entrants and threat of substitute products—determines how much value is generated by the industry (and is therefore available to be split up among industry players). If it is very difficult for new players to enter the industry and there are no substitutes to the industry’s product or services to which buyers can turn, then the industry will generate high value. This is why the pharmaceutical industry was so profitable through the 1980s and 1990s; it took enormous capital and expertise to get into the business and the buyers generally had little choice but to pay up for the products, which had no substitutes. Contrast this to the airline industry. There, whenever profitability spiked, a slew of new competitors entered. Or, compare it to steel, where everything from plastic to aluminum to ceramics to titanium can be a substitute. The horizontal axis determines which entity will cap...