Quotes from Joan Magretta

The five forces framework applies in all industries for the simple reason that it encompasses relationships fundamental to all commerce: those between buyers and sellers, between sellers and suppliers, between rival sellers, and between supply and demand.

matters that you grasp the deeper point: there are a limited number of structural forces at work in every industry that systematically impact profitability in a predictable direction.

But in practice, very few markets are "perfect." Porter's five forces framework offers a way to think systematically about imperfect markets.

Industry structure can be linked directly to the income statements and balance sheets of every company in the industry. The insights gained from this kind of analysis should lead directly to decisions about where and how to compete.

A distinct strategy will produce its own unique structure. One strategy might, for example, result in 20 percent higher costs but 35 percent higher price. Companies such as Apple or BMW lean in that direction. Another strategy might lead to 10 percent lower costs and 5 percent lower price. Companies such as IKEA and Southwest have chosen this kind of structure. Where the net result of the configuration is positive, the strategy has, by definition, created competitive advantage.

On this score, for-profit managers have it easier. Market prices give them a clear yardstick against which to measure the value they create. Nonprofit managers face the same task, creating value, but without the clarity of that yardstick.

Why is current industry profitability what it is? What's propping it up? What's changing? How is profitability likely to shift? What limiting factors must be overcome to capture more of the value you create?

Porter's definition of strategy is normative, not descriptive. That is, it distinguishes a good strategy from a bad one. His focus is on content, not process. His focus is on where you want to be, not on the decision-making process by which you got there—not how, or even whether, you do formal strategic planning, nor whether your strategy can be captured in fifty words or less.

Strategy," Porter writes, "can be viewed as building defenses against the competitive forces or finding a position in the industry where the forces are weakest.

In this section of chapters, we'll cover five tests every good strategy must pass: A distinctive value proposition A tailored value chain Trade-offs different from rivals Fit across value chain Continuity over time

Industry structure is dynamic, not static, a point that Porter has to repeat often because there has been a remarkably persistent misconception that industry structure and positioning are static, and therefore irrelevant in a fast-changing world.

Customer segmentation is typically part of any good industry analysis, and choosing the customer(s) you will serve can be an important anchor in your positioning vis-à-vis the five forces. In the examples that follow, note how each reflects a different basis for segmentation: Walmart's segmentation was based on geography, Progressive's on demographics, and Edward Jones's on psychographics.