Most 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.
Powerful 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.
These 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.