Summary for 2 articles and answer question for case

1. The length of the summary for each article should be between 15-30 lines (single-spaced, Times New Roman, 12-point font, 1-inch margins). Please use a space between the paragraphs.

2. Please make sure to separate each article and case by the title of the article or case in bold format.

3.The length of the case answer for each question should be between 10-30 lines (single-spaced, Times New Roman, 12-point font, 1-inch margins). Please note that for some questions you need to draw a table and use bullet points. You need to submit the case questions along with the article summary in one document. You can use outside sources to answer case questions, but make sure to paraphrase and have references in the text and at the end of the document. Please write the original question and use a space between the paragraphs.

Article(1): Porter, M. E. & Kramer, M. R. 2006. Strategy and society: The Link Between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review, 84 (12): 78-92. 

Article(2): Porter, M. 2008. The five competitive forces that shape strategy. Harvard Business Review, 86(1): 78-93.

Case: Case: The Pub

• Case questions: 

1. Conduct a macro environmental analysis (PEST) for The Pub. What are the favorable or unfavorable trends affecting this industry?

2. Identify the industry in which The Pub operates and conduct a Five Forces analysis of the industry. Is this an attractive industry?

PEST and PESTEL analysis:

https://www.strategicmanagementinsight.com/tools/pest-pestel-analysis.html

TOWS Matrix: definition, practical example and free template:

https://www.toolshero.com/strategy/tows-matrix/

www.hbrreprints.org

HBR S

POTLIGHT

Strategy & Society

The Link Between Competitive Advantage and
Corporate Social Responsibility

by Michael E. Porter and

Mark R. Kramer

•

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work

1

Article Summary

2

Strategy & Society: The Link Between Competitive Advantage and
Corporate Social Responsibility

A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

16

Further Reading

Reprint R0612D

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H B R S

P O T L I G H T

Strategy & Society

The Link Between Competitive Advantage and Corporate Social Responsibility

page 1

The Idea in Brief The Idea in Practice

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Many firms’ corporate social responsibility
(CSR) efforts are counterproductive, for
two reasons: They pit business against so-
ciety, when the two are actually interde-
pendent. And they pressure companies to
think of CSR in generic ways, instead of
crafting social initiatives appropriate to
their individual strategies.

CSR can be much more than just a cost,
constraint, or charitable deed. Approached
strategically, it generates opportunity, in-
novation, and competitive advantage for
corporations—while solving pressing so-
cial problems.

How to practice strategic CSR? Porter and
Kramer advise pioneering innovations in
your offerings and operations that create
distinctive value for your company

and

so-
ciety. Take Toyota. The company’s early re-
sponse to public concern about auto emis-
sions gave rise to the hybrid-engine Prius.
The Prius has not only significantly reduced
pollutants; it’s given Toyota an enviable lead
over rivals in hybrid technology.

To practice strategic CSR:

1. Identify points of intersection between
your company and society.

•

In what ways does your organization affect
society? For example, do you provide safe
working conditions and reasonable
wages? Do your operations create envi-
ronmental hazards?

•

How does society affect your competitive-
ness? For instance, do countries where you
operate protect intellectual property? Sup-
ply enough talented workers? Encourage
outside investors?

2. Select social issues to address.

Given your
company’s and society’s impact on each
other, how might you address social needs in
ways that create shared value—a meaningful
benefit for society that also adds to your com-
pany’s bottom line?

Example:

By addressing the AIDS pandemic in Africa,
a mining company such as Anglo American
would not only improve the standard of liv-
ing on that continent; it would also im-
prove the productivity of the African labor
force on which its success depends.

3. Mount a small number of initiatives that
generate large and distinctive benefits for
society

and

your company.

Example:

To enter the Indian market, Nestlé needed
to establish local sources of milk from a
large, diversified base of small farmers. It re-
ceived government permission to build a
dairy in the district of Moga. But in Moga,
farmers were impoverished, failed crops led
to a high death rate in calves, and lack of re-
frigeration prevented farmers from ship-
ping milk or keeping it fresh.

Nestlé built refrigerated dairies as milk col-
lection points in each Moga town and sent
its trucks to the dairies to collect the milk.

With the trucks went veterinarians, nutri-
tionists, agronomists, and quality assurance
experts. Farmers learned that milk quality
hinged on adequate feed crop irrigation.
With financing and technical assistance
from Nestlé, farmers dug deep-bore wells.
The consequent improved irrigation re-
duced calves’ death rate 75%, increased
milk production 50-fold, and allowed Nestlé
to pay higher prices to farmers than those
set by the government.

With steady revenues, farmers could now
obtain credit. Moga’s standard of living im-
proved: More homes had electricity and
telephones; more towns established pri-
mary, secondary, and high schools; and
Moga had five times the number of doc-
tors as neighboring regions. Meanwhile,
Nestlé gained a stable supply of high-
quality commodities—without having to
pay middlemen—and saw demand for its
products increase in India.

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This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

HBR S

POTLIGHT

Strategy & Society

The Link Between Competitive Advantage and
Corporate Social Responsibility

by Michael E. Porter and Mark R. Kramer

harvard business review • december 2006 page 2

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Governments, activists, and the media have
become adept at holding companies to ac-
count for the social consequences of their ac-
tivities. Myriad organizations rank companies
on the performance of their corporate social
responsibility (CSR), and, despite sometimes
questionable methodologies, these rankings
attract considerable publicity. As a result, CSR
has emerged as an inescapable priority for
business leaders in every country.

Many companies have already done much
to improve the social and environmental con-
sequences of their activities, yet these efforts
have not been nearly as productive as they
could be—for two reasons. First, they pit busi-
ness against society, when clearly the two are
interdependent. Second, they pressure compa-
nies to think of corporate social responsibility
in generic ways instead of in the way most ap-
propriate to each firm’s strategy.

The fact is, the prevailing approaches to CSR
are so fragmented and so disconnected from
business and strategy as to obscure many of the
greatest opportunities for companies to benefit

society. If, instead, corporations were to analyze
their prospects for social responsibility using the
same frameworks that guide their core business
choices, they would discover that CSR can be
much more than a cost, a constraint, or a chari-
table deed—it can be a source of opportunity

,

innovation, and competitive advantage.

In this article, we propose a new way to look
at the relationship between business and soci-
ety that does not treat corporate success and
social welfare as a zero-sum game. We intro-
duce a framework companies can use to iden-
tify all of the effects, both positive and negative,
they have on society; determine which ones to
address; and suggest effective ways to do so.
When looked at strategically, corporate social
responsibility can become a source of tremen-
dous social progress, as the business applies its
considerable resources, expertise, and insights
to activities that benefit society.

The Emergence of Corporate Social
Responsibility

Heightened corporate attention to CSR has

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 3

not been entirely voluntary. Many companies
awoke to it only after being surprised by pub-
lic responses to issues they had not previously
thought were part of their business responsi-
bilities. Nike, for example, faced an extensive
consumer boycott after the

New York Times

and other media outlets reported abusive labor
practices at some of its Indonesian suppliers in
the early 1990s. Shell Oil’s decision to sink the

Brent Spar,

an obsolete oil rig, in the North Sea
led to Greenpeace protests in 1995 and to in-
ternational headlines. Pharmaceutical compa-
nies discovered that they were expected to re-
spond to the AIDS pandemic in Africa even
though it was far removed from their primary
product lines and markets. Fast-food and pack-
aged food companies are now being held re-
sponsible for obesity and poor nutrition.

Activist organizations of all kinds, both on
the right and the left, have grown much more
aggressive and effective in bringing public pres-
sure to bear on corporations. Activists may
target the most visible or successful companies
merely to draw attention to an issue, even if
those corporations actually have had little im-
pact on the problem at hand. Nestlé, for ex-
ample, the world’s largest purveyor of bottled
water, has become a major target in the glo-
bal debate about access to fresh water, despite
the fact that Nestlé’s bottled water sales con-
sume just 0.0008% of the world’s fresh water
supply. The inefficiency of agricultural irriga-
tion, which uses 70% of the world’s supply
annually, is a far more pressing issue, but it
offers no equally convenient multinational
corporation to target.

Debates about CSR have moved all the way
into corporate boardrooms. In 2005, 360 dif-
ferent CSR-related shareholder resolutions
were filed on issues ranging from labor condi-
tions to global warming. Government regula-
tion increasingly mandates social responsi-
bility reporting. Pending legislation in the
UK, for example, would require every publicly
listed company to disclose ethical, social,
and environmental risks in its annual report.
These pressures clearly demonstrate the ex-
tent to which external stakeholders are seek-
ing to hold companies accountable for social
issues and highlight the potentially large fi-
nancial risks for any firm whose conduct is
deemed unacceptable.

While businesses have awakened to these
risks, they are much less clear on what to do

about them. In fact, the most common corpo-
rate response has been neither strategic nor
operational but cosmetic: public relations and
media campaigns, the centerpieces of which
are often glossy CSR reports that showcase
companies’ social and environmental good
deeds. Of the 250 largest multinational corpo-
rations, 64% published CSR reports in 2005, ei-
ther within their annual report or, for most, in
separate sustainability reports—supporting a
new cottage industry of report writers.

Such publications rarely offer a coherent
framework for CSR activities, let alone a strate-
gic one. Instead, they aggregate anecdotes about
uncoordinated initiatives to demonstrate a com-
pany’s social sensitivity. What these reports
leave out is often as telling as what they in-
clude. Reductions in pollution, waste, carbon
emissions, or energy use, for example, may be
documented for specific divisions or regions
but not for the company as a whole. Philan-
thropic initiatives are typically described in terms
of dollars or volunteer hours spent but almost
never in terms of impact. Forward-looking
commitments to reach explicit performance
targets are even rarer.

This proliferation of CSR reports has been
paralleled by growth in CSR ratings and rank-
ings. While rigorous and reliable ratings might
constructively influence corporate behavior,
the existing cacophony of self-appointed score-
keepers does little more than add to the confu-
sion. (See the sidebar “The Ratings Game.”)

In an effort to move beyond this confusion,
corporate leaders have turned for advice to a
growing collection of increasingly sophisti-
cated nonprofit organizations, consulting firms,
and academic experts. A rich literature on CSR
has emerged, though what practical guidance
it offers corporate leaders is often unclear. Ex-
amining the primary schools of thought about
CSR is an essential starting point in under-
standing why a new approach is needed to in-
tegrating social considerations more effectively
into core business operations and strategy.

Four Prevailing Justifications for
CSR

Broadly speaking, proponents of CSR have
used four arguments to make their case: moral
obligation, sustainability, license to operate,
and reputation. The moral appeal—arguing
that companies have a duty to be good citizens
and to “do the right thing”—is prominent in

Michael E. Porter

is the Bishop William
Lawrence University Professor at Har-
vard University; he is based at Harvard
Business School in Boston. He is a fre-
quent contributor to HBR, and his most
recent article is “Seven Surprises for New
CEOs” (October 2004).

Mark R. Kramer

(mark.kramer@fsg-impact.org) is the
managing director of FSG Social Impact
Advisors, an international nonprofit con-
sulting firm, and a senior fellow in the
CSR Initiative at Harvard’s John F.
Kennedy School of Government in
Cambridge, Massachusetts. Porter and
Kramer are the cofounders of both FSG
Social Impact Advisors and the Center
for Effective Philanthropy, a nonprofit re-
search organization.

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mailto://(null)mark.kramer@fsg-impact.org

Strategy & Society

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HBR S

POTLIGHT

harvard business review • december 2006 page 4

the goal of Business for Social Responsibility,
the leading nonprofit CSR business associa-
tion in the United States. It asks that its mem-
bers “achieve commercial success in ways that
honor ethical values and respect people, com-
munities, and the natural environment.” Sus-
tainability emphasizes environmental and
community stewardship. An excellent defini-
tion was developed in the 1980s by Norwegian
Prime Minister Gro Harlem Brundtland and
used by the World Business Council for Sus-
tainable Development: “Meeting the needs of
the present without compromising the ability
of future generations to meet their own
needs.” The notion of license to operate de-
rives from the fact that every company

needs

tacit or explicit permission from governments,
communities, and numerous other stakehold-
ers to do business. Finally, reputation is used
by many companies to justify CSR initiatives
on the grounds that they will improve a com-

pany’s image, strengthen its brand, enliven
morale, and even raise the value of its stock.
These justifications have advanced thinking in
the field, but none offers sufficient guidance
for the difficult choices corporate leaders must
make. Consider the practical limitations of
each approach.

The CSR field remains strongly imbued with
a moral imperative. In some areas, such as hon-
esty in filing financial statements and operat-
ing within the law, moral considerations are
easy to understand and apply. It is the nature
of moral obligations to be absolute mandates,
however, while most corporate social choices
involve balancing competing values, interests,
and costs. Google’s recent entry into China, for
example, has created an irreconcilable conflict
between its U.S. customers’ abhorrence of cen-
sorship and the legal constraints imposed by
the Chinese government. The moral calculus
needed to weigh one social benefit against an-
other, or against its financial costs, has yet to
be developed. Moral principles do not tell a
pharmaceutical company how to allocate its
revenues among subsidizing care for the indi-
gent today, developing cures for the future,
and providing dividends to its investors.

The principle of sustainability appeals to en-
lightened self-interest, often invoking the so-
called triple bottom line of economic, social,
and environmental performance. In other
words, companies should operate in ways that
secure long-term economic performance by
avoiding short-term behavior that is socially
detrimental or environmentally wasteful. The
principle works best for issues that coincide
with a company’s economic or regulatory in-
terests. DuPont, for example, has saved over
$2 billion from reductions in energy use since
1990. Changes to the materials McDonald’s
uses to wrap its food have reduced its solid
waste by 30%. These were smart business deci-
sions entirely apart from their environmental
benefits. In other areas, however, the notion of
sustainability can become so vague as to be
meaningless. Transparency may be said to be
more “sustainable” than corruption. Good em-
ployment practices are more “sustainable”
than sweatshops. Philanthropy may contribute
to the “sustainability” of a society. However
true these assertions are, they offer little basis
for balancing long-term objectives against the
short-term costs they incur. The sustainability
school raises questions about these trade-offs

The Ratings Game

Measuring and publicizing social perfor-
mance is a potentially powerful way to
influence corporate behavior—assuming
that the ratings are consistently mea-
sured and accurately reflect corporate
social impact. Unfortunately, neither
condition holds true in the current pro-
fusion of CSR checklists.

The criteria used in the rankings vary
widely. The Dow Jones Sustainability
Index, for example, includes aspects of
economic performance in its evalua-
tion. It weights customer service al-
most 50% more heavily than corporate
citizenship. The equally prominent
FTSE4Good Index, by contrast, contains
no measures of economic performance
or customer service at all. Even when
criteria happen to be the same, they are
invariably weighted differently in the
final scoring.

Beyond the choice of criteria and their
weightings lies the even more perplexing
question of how to judge whether the cri-
teria have been met. Most media, non-
profits, and investment advisory organi-
zations have too few resources to audit a
universe of complicated global corporate

activities. As a result, they tend to use
measures for which data are readily and
inexpensively available, even though they
may not be good proxies for the social or
environmental effects they are intended
to reflect. The Dow Jones Sustainability
Index, for example, uses the size of a com-
pany’s board as a measure of community
involvement, even though size and in-
volvement may be entirely unrelated.

1

Finally, even if the measures chosen
accurately reflect social impact, the data
are frequently unreliable. Most ratings
rely on surveys whose response rates are
statistically insignificant, as well as on
self-reported company data that have not
been verified externally. Companies with
the most to hide are the least likely to re-
spond. The result is a jumble of largely
meaningless rankings, allowing almost
any company to boast that it meets some
measure of social responsibility—and
most do.

1. For a fuller discussion of the problem of CSR
ratings, see Aaron Chatterji and David Levine,
“Breaking Down the Wall of Codes: Evaluating
Non-Financial Performance Measurement,”

Cali-
fornia Management Review,

Winter 2006.

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 5

Mapping Social Opportunities

The interdependence of a company and
society can be analyzed with the same
tools used to analyze competitive posi-
tion and develop strategy. In this way,
the firm can focus its particular CSR ac-
tivities to best effect. Rather than merely
acting on well-intentioned impulses or
reacting to outside pressure, the organi-
zation can set an affirmative CSR
agenda that produces maximum social
benefit as well as gains for the business.

These two tools should be used in dif-
ferent ways. When a company uses the
value chain to chart all the social conse-
quences of its activities, it has, in effect,
created an inventory of problems and

opportunities—mostly operational
issues—that need to be investigated,
prioritized, and addressed. In general,
companies should attempt to clear away
as many negative value-chain social im-
pacts as possible. Some company activi-
ties will prove to offer opportunities for
social and strategic distinction.

In addressing competitive context,
companies cannot take on every area
in the diamond. Therefore, the task is
to identify those areas of social context
with the greatest strategic value. A
company should carefully choose from
this menu one or a few social initia-
tives that will have the greatest shared

value: benefit for both society and its
own competitiveness.

Looking Inside Out: Mapping
the Social Impact of the Value
Chain

The

value chain

depicts all the activities
a company engages in while doing
business. It can be used as a frame-
work to identify the positive and nega-
tive social impact of those activities.
These “inside-out” linkages may range
from hiring and layoff policies to
greenhouse gas emissions, as the par-
tial list of examples illustrated here
demonstrates.

Inbound
Logistics

(e.g., incoming
material

storage, data,
collection,
service,

customer
access)

Operations
(e.g.,

assembly,
component
fabrication,

branch
operations)

Outbound
Logistics
(e.g., order
processing,

warehousing,
report

preparation)

Marketing &
Sales

(e.g., sales
force,

promotion,
advertising,

proposal
writing, Web

site)

After-Sales
Service

(e.g., installation,
customer support,

complaint resolution,
repair)

S
up

po
rt

A
ct

iv
it

ie
s

Pr
im

ar
y

A
ct

iv
it

ie
s

Firm Infrastructure
(e.g., financing, planning, investor relations)

Human Resource Management
(e.g., recruiting, training, compensation system)

Technology Development
(e.g., product design, testing, process design, material research, market research)

Procurement
(e.g., components, machinery, advertising, & services)

• Relationships with universities

• Ethical research
practices (e.g., animal testing,
GMOs)

• Product safety

• Conservation of raw materials

• Recycling

• Procurement & supply chain
practices (e.g., bribery, child
labor, conflict diamonds,
pricing to farmers)

• Uses of particular inputs
(e.g., animal fur)

• Utilization of natural
resources

• Transportation
impacts (e.g.,
emissions, con-
gestion, logging
roads)

• Emissions & waste

• Biodiversity &
ecological impacts

• Energy & water
usage

• Worker safety &
labor relations

• Hazardous materials

• Packaging use
and disposal
(McDonald’s
clamshell)

• Transportation
impacts

• Marketing & advertising
(e.g., truthful advertising,
advertising to children)

• Pricing practices (e.g.,
price discrimination
among customers,
anticompetitive pricing
practices, pricing policy
to the poor)

• Consumer information

• Privacy

• Financial reporting
practices

• Government
practices

• Transparency

• Use of lobbying

• Education & job training

• Safe working conditions

• Diversity & discrimination

• Health care & other benefits

• Compensation policies

• Layoff policies

• Disposal
of obsolete
products

• Handling of
consumables
(e.g., motor
oil, printing
ink)

• Customer
privacy

Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985

For the exclusive use of S. Wang, 2023.

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 6

without offering a framework to answer them.
Managers without a strategic understanding
of CSR are prone to postpone these costs,
which can lead to far greater costs when the
company is later judged to have violated its
social obligation.

The license-to-operate approach, by con-
trast, is far more pragmatic. It offers a concrete
way for a business to identify social issues that
matter to its stakeholders and make decisions
about them. This approach also fosters con-
structive dialogue with regulators, the local cit-
izenry, and activists—one reason, perhaps,
that it is especially prevalent among compa-
nies that depend on government consent, such

as those in mining and other highly regulated
and extractive industries. That is also why the
approach is common at companies that rely on
the forbearance of their neighbors, such as
those, like chemical manufacturing, whose op-
erations are noxious or environmentally haz-
ardous. By seeking to satisfy stakeholders, how-
ever, companies cede primary control of their
CSR agendas to outsiders. Stakeholders’ views
are obviously important, but these groups can
never fully understand a corporation’s capabili-
ties, competitive positioning, or the trade-offs
it must make. Nor does the vehemence of a
stakeholder group necessarily signify the im-
portance of an issue—either to the company

Looking Outside In: Social Influences
on Competitiveness

In addition to understanding the social ram-
ifications of the value chain, effective CSR
requires an understanding of the social di-

mensions of the company’s competitive
context—the “outside-in” linkages that af-
fect its ability to improve productivity and
execute strategy. These can be understood
using the

diamond framework,

which shows

how the conditions at a company’s locations
(such as transportation infrastructure and
honestly enforced regulatory policy) affect
its ability to compete.

Context for
Firm Strategy

and Rivalry
The rules and
incentives that

govern competition

Local Demand
Conditions
The nature and

sophistication of
local customer

needs

Related and
Supporting
Industries

The local availability
of supporting

industries

• Fair and open local competition
(e.g., the absence of trade barriers,
fair regulations)

• Intellectual property protection

• Transparency (e.g., financial report-
ing, corruption: Extractive Industries
Transparency Initiative)

• Rule of law (e.g., security, protection
of property, legal system)

• Meritocratic incentive systems
(e.g., antidiscrimination)

• Availability of human resources (Marriott’s job
training)

• Access to research institutions and universities
(Microsoft’s Working Connections)

• Efficient physical infrastructure

• Efficient administrative infrastructure

• Availability of scientific and technological
infrastructure (Nestlé’s knowledge
transfer to milk farmers)

• Sustainable natural resources
(GrupoNueva’s water
conservation)

• Efficient access to capital

• Availability of local suppliers
(Sysco’s locally grown produce;
Nestlé’s milk collection dairies)

• Access to firms in related fields

• Presence of clusters instead of isolated
industries

• Sophistication of local demand (e.g.
appeal of social value propositions:
Whole Foods’ customers)

• Demanding regulatory standards
(California auto emissions &
mileage standards)

• Unusual local needs that can be
served nationally and globally
(Urbi’s housing financing, Unilever’s
“bottom of the pyramid” strategy)

Factor (Input)
Conditions

Presence of high-
quality, specialized

inputs available
to firms

Source: Michael E. Porter, The Competitive Advantage of Nations, 1990

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 7

or to the world. A firm that views CSR as a way
to placate pressure groups often finds that its
approach devolves into a series of short-term
defensive reactions—a never-ending public re-
lations palliative with minimal value to society
and no strategic benefit for the business.

Finally, the reputation argument seeks that
strategic benefit but rarely finds it. Concerns
about reputation, like license to operate, focus
on satisfying external audiences. In consumer-
oriented companies, it often leads to high-
profile cause-related marketing campaigns. In
stigmatized industries, such as chemicals and
energy, a company may instead pursue social
responsibility initiatives as a form of insurance,
in the hope that its reputation for social con-
sciousness will temper public criticism in the
event of a crisis. This rationale once again risks
confusing public relations with social and busi-
ness results.

A few corporations, such as Ben & Jerry’s,
Newman’s Own, Patagonia, and the Body
Shop, have distinguished themselves through
an extraordinary long-term commitment to so-
cial responsibility. But even for these compa-
nies, the social impact achieved, much less the
business benefit, is hard to determine. Studies
of the effect of a company’s social reputation
on consumer purchasing preferences or on
stock market performance have been inconclu-
sive at best. As for the concept of CSR as insur-
ance, the connection between the good deeds
and consumer attitudes is so indirect as to be
impossible to measure. Having no way to
quantify the benefits of these investments puts
such CSR programs on shaky ground, liable to
be dislodged by a change of management or a
swing in the business cycle.

All four schools of thought share the same
weakness: They focus on the tension between
business and society rather than on their inter-
dependence. Each creates a generic rationale
that is not tied to the strategy and operations
of any specific company or the places in which
it operates. Consequently, none of them is suf-
ficient to help a company identify, prioritize,
and address the social issues that matter most
or the ones on which it can make the biggest
impact. The result is oftentimes a hodgepodge
of uncoordinated CSR and philanthropic activ-
ities disconnected from the company’s strategy
that neither make any meaningful social im-
pact nor strengthen the firm’s long-term com-
petitiveness. Internally, CSR practices and initi-

atives are often isolated from operating units—
and even separated from corporate philan-
thropy. Externally, the company’s social impact
becomes diffused among numerous unrelated
efforts, each responding to a different stake-
holder group or corporate pressure point.

The consequence of this fragmentation is a
tremendous lost opportunity. The power of
corporations to create social benefit is dissi-
pated, and so is the potential of companies to
take actions that would support both their
communities and their business goals.

Integrating Business and Society

To advance CSR, we must root it in a broad
understanding of the interrelationship be-
tween a corporation and society while at the
same time anchoring it in the strategies and
activities of specific companies. To say broadly
that business and society need each other
might seem like a cliché, but it is also the basic
truth that will pull companies out of the mud-
dle that their current corporate-responsibility
thinking has created.

Successful corporations need a healthy soci-
ety. Education, health care, and equal opportu-
nity are essential to a productive workforce.
Safe products and working conditions not only
attract customers but lower the internal costs
of accidents. Efficient utilization of land, water,
energy, and other natural resources makes
business more productive. Good government,
the rule of law, and property rights are essen-
tial for efficiency and innovation. Strong regu-
latory standards protect both consumers and
competitive companies from exploitation. Ulti-
mately, a healthy society creates expanding de-
mand for business, as more human needs are
met and aspirations grow. Any business that
pursues its ends at the expense of the society in
which it operates will find its success to be illu-
sory and ultimately temporary.

At the same time, a healthy society needs suc-
cessful companies. No social program can rival
the business sector when it comes to creating the
jobs, wealth, and innovation that improve stan-
dards of living and social conditions over time.
If governments, NGOs, and other participants
in civil society weaken the ability of business to
operate productively, they may win battles but
will lose the war, as corporate and regional
competitiveness fade, wages stagnate, jobs dis-
appear, and the wealth that pays taxes and sup-
ports nonprofit contributions evaporates.

The prevailing
approaches to CSR are so
disconnected from
business as to obscure
many of the greatest
opportunities for
companies to benefit
society.

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harvard business review • december 2006 page 8

Leaders in both business and civil society
have focused too much on the friction be-
tween them and not enough on the points of
intersection. The mutual dependence of cor-
porations and society implies that both busi-
ness decisions and social policies must follow
the principle of

shared value

. That is, choices
must benefit both sides. If either a business or
a society pursues policies that benefit its in-
terests at the expense of the other, it will find
itself on a dangerous path. A temporary gain
to one will undermine the long-term prosper-
ity of both.

1

To put these broad principles into practice,
a company must integrate a social perspective
into the core frameworks it already uses to
understand competition and guide its busi-
ness strategy.

Identifying the points of intersection.

The interdependence between a company and
society takes two forms. First, a company im-
pinges upon society through its operations
in the normal course of business: These are

inside-out linkages

.
Virtually every activity in a company’s value

chain touches on the communities in which
the firm operates, creating either positive or
negative social consequences. (For an example
of this process, see the exhibit “Looking Inside
Out: Mapping the Social Impact of the Value
Chain.”) While companies are increasingly
aware of the social impact of their activities
(such as hiring practices, emissions, and waste
disposal), these impacts can be more subtle
and variable than many managers realize. For
one thing, they depend on location. The same
manufacturing operation will have very differ-

ent social consequences in China than in the
United States.

A company’s impact on society also changes
over time, as social standards evolve and sci-
ence progresses. Asbestos, now understood as
a serious health risk, was thought to be safe in
the early 1900s, given the scientific knowledge
then available. Evidence of its risks gradually
mounted for more than 50 years before any
company was held liable for the harms it can
cause. Many firms that failed to anticipate the
consequences of this evolving body of research
have been bankrupted by the results. No
longer can companies be content to monitor
only the obvious social impacts of today. With-
out a careful process for identifying evolving
social effects of tomorrow, firms may risk their
very survival.

Not only does corporate activity affect soci-
ety, but external social conditions also influ-
ence corporations, for better and for worse.
These are

outside-in linkages

.
Every company operates within a competi-

tive context, which significantly affects its
ability to carry out its strategy, especially in the
long run. Social conditions form a key part of
this context. Competitive context garners far
less attention than value chain impacts but can
have far greater strategic importance for both
companies and societies. Ensuring the health
of the competitive context benefits both the
company and the community.

Competitive context can be divided into four
broad areas: first, the quantity and quality of
available business inputs—human resources,
for example, or transportation infrastructure;
second, the rules and incentives that govern

Prioritizing Social Issues

Social Dimensions
of Competitive
Context

Social issues in the
external environment
that significantly affect
the underlying drivers
of a company’s
competitiveness in
the locations where
it operates.

Value Chain
Social Impacts

Social issues that
are significantly
affected by a
company’s
activities in the
ordinary course
of business.

Generic Social
Issues

Social issues that
are not significantly
affected by a
company’s
operations nor
materially affect
its long-term
competitiveness.

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harvard business review • december 2006 page 9

competition—such as policies that protect in-
tellectual property, ensure transparency, safe-
guard against corruption, and encourage in-
vestment; third, the size and sophistication of
local demand, influenced by such things as
standards for product quality and safety, con-
sumer rights, and fairness in government pur-
chasing; fourth, the local availability of sup-
porting industries, such as service providers
and machinery producers. Any and all of these
aspects of context can be opportunities for
CSR initiatives. (See the exhibit “Looking Out-
side In: Social Influences on Competitiveness.”)
The ability to recruit appropriate human re-
sources, for example, may depend on a num-
ber of social factors that companies can influ-
ence, such as the local educational system, the
availability of housing, the existence of dis-
crimination (which limits the pool of work-
ers), and the adequacy of the public health
infrastructure.

2

Choosing which social issues to address.

No business can solve all of society’s problems
or bear the cost of doing so. Instead, each com-
pany must select issues that intersect with its
particular business. Other social agendas are
best left to those companies in other indus-
tries, NGOs, or government institutions that
are better positioned to address them. The es-
sential test that should guide CSR is not
whether a cause is worthy but whether it pre-
sents an opportunity to create shared value—
that is, a meaningful benefit for society that is
also valuable to the business.

Our framework suggests that the social is-
sues affecting a company fall into three catego-
ries, which distinguish between the many
worthy causes and the narrower set of social
issues that are both important and strategic for
the business.

Generic social issues

may be important to so-
ciety but are neither significantly affected by
the company’s operations nor influence the
company’s long-term competitiveness.

Value
chain social impacts

are those that are signifi-
cantly affected by the company’s activities in
the ordinary course of business.

Social dimen-
sions of competitive context

are factors in the ex-
ternal environment that significantly affect the
underlying drivers of competitiveness in those
places where the company operates. (See the
exhibit “Prioritizing Social Issues.”)

Every company will need to sort social issues
into these three categories for each of its busi-
ness units and primary locations, then rank
them in terms of potential impact. Into which
category a given social issue falls will vary from
business unit to business unit, industry to in-
dustry, and place to place.

Supporting a dance company may be a ge-
neric social issue for a utility like Southern
California Edison but an important part of
the competitive context for a corporation like
American Express, which depends on the
high-end entertainment, hospitality, and tour-
ism cluster. Carbon emissions may be a ge-
neric social issue for a financial services firm
like Bank of America, a negative value chain

Generic Social
Impacts

Corporate Involvement in
Society: A Strategic Approach

Value Chain
Social Impacts

Good citizenship Mitigate harm
from value chain
activities

Social Dimensions
of Competitive
Context

Strategic philanthropy
that leverages capa-
bilities to improve
salient areas of
competitive context

Transform value-
chain activities to
benefit society
while reinforcing
strategy

Strategic
CSR

Responsive
CSR

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harvard business review • december 2006 page 10

impact for a transportation-based company
like UPS, or both a value chain impact and a
competitive context issue for a car manufac-
turer like Toyota. The AIDS pandemic in Af-
rica may be a generic social issue for a U.S. re-
tailer like Home Depot, a value chain impact
for a pharmaceutical company like Glaxo-
SmithKline, and a competitive context issue
for a mining company like Anglo American
that depends on local labor in Africa for its
operations.

Even issues that apply widely in the econ-
omy, such as diversity in hiring or conserva-
tion of energy, can have greater significance
for some industries than for others. Health
care benefits, for example, will present fewer
challenges for software development or bio-
technology firms, where workforces tend to
be small and well compensated, than for
companies in a field like retailing, which is
heavily dependent on large numbers of lower-
wage workers.

Within an industry, a given social issue may
cut differently for different companies, owing
to differences in competitive positioning. In
the auto industry, for example, Volvo has cho-
sen to make safety a central element of its com-
petitive positioning, while Toyota has built a
competitive advantage from the environmen-
tal benefits of its hybrid technology. For an
individual company, some issues will prove to
be important for many of its business units
and locations, offering opportunities for strate-
gic corporatewide CSR initiatives.

Where a social issue is salient for many
companies across multiple industries, it can
often be addressed most effectively through
cooperative models. The Extractive Industries
Transparency Initiative, for example, includes
19 major oil, gas, and mining companies that
have agreed to discourage corruption through
full public disclosure and verification of all
corporate payments to governments in the
countries in which they operate. Collective
action by all major corporations in these in-
dustries prevents corrupt governments from
undermining social benefit by simply choos-
ing not to deal with the firms that disclose
their payments.

Creating a corporate social agenda.

Categorizing and ranking social issues is just
the means to an end, which is to create an ex-
plicit and affirmative corporate social agenda.
A corporate social agenda looks beyond com-

munity expectations to opportunities to achieve
social and economic benefits simultaneously.
It moves from mitigating harm to finding ways
to reinforce corporate strategy by advancing
social conditions.

Such a social agenda must be responsive to
stakeholders, but it cannot stop there. A sub-
stantial portion of corporate resources and at-
tention must migrate to truly strategic CSR.
(See the exhibit “Corporate Involvement in
Society: A Strategic Approach.”) It is through
strategic CSR that the company will make the
most significant social impact and reap the
greatest business benefits.

Responsive CSR.

Responsive CSR comprises
two elements: acting as a good corporate citi-
zen, attuned to the evolving social concerns of
stakeholders, and mitigating existing or antici-
pated adverse effects from business activities.

Good citizenship is a sine qua non of CSR,
and companies need to do it well. Many wor-
thy local organizations rely on corporate con-
tributions, while employees derive justifiable
pride from their company’s positive involve-
ment in the community.

The best corporate citizenship initiatives in-
volve far more than writing a check: They spec-
ify clear, measurable goals and track results
over time. A good example is GE’s program to
adopt underperforming public high schools
near several of its major U.S. facilities. The
company contributes between $250,000 and
$1 million over a five-year period to each
school and makes in-kind donations as well.
GE managers and employees take an active
role by working with school administrators
to assess needs and mentor or tutor students.
In an independent study of ten schools in the
program between 1989 and 1999, nearly all
showed significant improvement, while the
graduation rate in four of the five worst-
performing schools doubled from an average
of 30% to 60%.

Effective corporate citizenship initiatives
such as this one create goodwill and improve
relations with local governments and other im-
portant constituencies. What’s more, GE’s em-
ployees feel great pride in their participation.
Their effect is inherently limited, however.
No matter how beneficial the program is, it re-
mains incidental to the company’s business,
and the direct effect on GE’s recruiting and re-
tention is modest.

The second part of responsive CSR—

The vehemence of a
stakeholder group does
not necessarily signify the
importance of an issue—
either to the company or
to the world.

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harvard business review • december 2006 page 11

mitigating the harm arising from a firm’s value
chain activities—is essentially an operational
challenge. Because there are a myriad of possi-
ble value chain impacts for each business unit,
many companies have adopted a checklist ap-
proach to CSR, using standardized sets of so-
cial and environmental risks. The Global Re-
porting Initiative, which is rapidly becoming a
standard for CSR reporting, has enumerated a
list of 141 CSR issues, supplemented by auxil-
iary lists for different industries.

These lists make for an excellent starting
point, but companies need a more proactive
and tailored internal process. Managers at
each business unit can use the value chain as a
tool to identify systematically the social im-
pacts of the unit’s activities in each location.
Here operating management, which is closest
to the work actually being done, is particularly
helpful. Most challenging is to anticipate im-
pacts that are not yet well recognized. Con-
sider B&Q, an international chain of home
supply centers based in England. The company
has begun to analyze systematically tens of
thousands of products in its hundreds of stores
against a list of a dozen social issues—from cli-
mate change to working conditions at its sup-
pliers’ factories—to determine which products
pose potential social responsibility risks and
how the company might take action before
any external pressure is brought to bear.

For most value chain impacts, there is no
need to reinvent the wheel. The company
should identify best practices for dealing with
each one, with an eye toward how those prac-
tices are changing. Some companies will be
more proactive and effective in mitigating the
wide array of social problems that the value
chain can create. These companies will gain an
edge, but—just as for procurement and other
operational improvements—any advantage is
likely to be temporary.

Strategic CSR.

For any company, strategy
must go beyond best practices. It is about
choosing a unique position—doing things dif-
ferently from competitors in a way that lowers
costs or better serves a particular set of cus-
tomer needs. These principles apply to a com-
pany’s relationship to society as readily as to
its relationship to its customers and rivals.

Strategic CSR moves beyond good corporate
citizenship and mitigating harmful value chain
impacts to mount a small number of initiatives
whose social and business benefits are large

and distinctive. Strategic CSR involves both
inside-out and outside-in dimensions working
in tandem. It is here that the opportunities for
shared value truly lie.

Many opportunities to pioneer innovations
to benefit both society and a company’s own
competitiveness can arise in the product offer-
ing and the value chain. Toyota’s response to con-
cerns over automobile emissions is an example.
Toyota’s Prius, the hybrid electric/gasoline ve-
hicle, is the first in a series of innovative car mod-
els that have produced competitive advantage
and environmental benefits. Hybrid engines
emit as little as 10% of the harmful pollutants
conventional vehicles produce while consum-
ing only half as much gas. Voted 2004 Car of
the Year by

Motor Trend

magazine, Prius has
given Toyota a lead so substantial that Ford and
other car companies are licensing the technol-
ogy. Toyota has created a unique position with
customers and is well on its way to establishing
its technology as the world standard.

Urbi, a Mexican construction company, has
prospered by building housing for disadvan-
taged buyers using novel financing vehicles such
as flexible mortgage payments made through
payroll deductions. Crédit Agricole, France’s
largest bank, has differentiated itself by offer-
ing specialized financial products related to
the environment, such as financing packages
for energy-saving home improvements and for
audits to certify farms as organic.

Strategic CSR also unlocks shared value by
investing in social aspects of context that
strengthen company competitiveness. A symbi-
otic relationship develops: The success of the
company and the success of the community be-
come mutually reinforcing. Typically, the more
closely tied a social issue is to the company’s
business, the greater the opportunity to lever-
age the firm’s resources and capabilities, and
benefit society.

Microsoft’s Working Connections partner-
ship with the American Association of Commu-
nity Colleges (AACC) is a good example of a
shared-value opportunity arising from invest-
ments in context. The shortage of information
technology workers is a significant constraint
on Microsoft’s growth; currently, there are
more than 450,000 unfilled IT positions in the
United States alone. Community colleges, with
an enrollment of 11.6 million students, repre-
senting 45% of all U.S. undergraduates, could
be a major solution. Microsoft recognizes, how-

An affirmative corporate
social agenda moves
from mitigating harm to
reinforcing corporate
strategy through social
progress.

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harvard business review • december 2006 page 12

ever, that community colleges face special chal-
lenges: IT curricula are not standardized, tech-
nology used in classrooms is often outdated,
and there are no systematic professional devel-
opment programs to keep faculty up to date.

Microsoft’s $50 million five-year initiative
was aimed at all three problems. In addition to
contributing money and products, Microsoft
sent employee volunteers to colleges to assess
needs, contribute to curriculum development,
and create faculty development institutes.
Note that in this case, volunteers and assigned
staff were able to use their core professional
skills to address a social need, a far cry from
typical volunteer programs. Microsoft has
achieved results that have benefited many
communities while having a direct—and po-
tentially significant—impact on the company.

Integrating inside-out and outside-in prac-
tices.

Pioneering value chain innovations and

addressing social constraints to competitive-
ness are each powerful tools for creating eco-
nomic and social value. However, as our exam-
ples illustrate, the impact is even greater if
they work together. Activities in the value
chain can be performed in ways that reinforce
improvements in the social dimensions of con-
text. At the same time, investments in compet-
itive context have the potential to reduce con-
straints on a company’s value chain activities.
Marriott, for example, provides 180 hours of
paid classroom and on-the-job training to
chronically unemployed job candidates. The
company has combined this with support for
local community service organizations, which
identify, screen, and refer the candidates to
Marriott. The net result is both a major bene-
fit to communities and a reduction in Marri-
ott’s cost of recruiting entry-level employees.
Ninety percent of those in the training pro-

Integrating Company Practice and Context: Nestlé’s Milk District

Nestlé’s approach to working with small
farmers exemplifies the symbiotic relation-
ship between social progress and competitive
advantage. Ironically, while the company’s
reputation remains marred by a 30-year-old
controversy surrounding sales of infant for-
mula in Africa, the corporation’s impact in
developing countries has often been pro-
foundly positive.

Consider the history of Nestlé’s milk busi-
ness in India. In 1962, the company wanted to
enter the Indian market, and it received gov-
ernment permission to build a dairy in the
northern district of Moga. Poverty in the re-
gion was severe; people were without elec-
tricity, transportation, telephones, or medical
care. A farmer typically owned less than five
acres of poorly irrigated and infertile soil.
Many kept a single buffalo cow that produced
just enough milk for their own consumption.
Sixty percent of calves died newborn. Because
farmers lacked refrigeration, transportation,
or any way to test for quality, milk could not
travel far and was frequently contaminated
or diluted.

Nestlé came to Moga to build a business,
not to engage in CSR. But Nestlé’s value
chain, derived from the company’s origins in
Switzerland, depended on establishing local
sources of milk from a large, diversified base

of small farmers. Establishing that value chain
in Moga required Nestlé to transform the
competitive context in ways that created tre-
mendous shared value for both the company
and the region.

Nestlé built refrigerated dairies as collec-
tion points for milk in each town and sent its
trucks out to the dairies to collect the milk.
With the trucks went veterinarians, nutrition-
ists, agronomists, and quality assurance ex-
perts. Medicines and nutritional supplements
were provided for sick animals, and monthly
training sessions were held for local farmers.
Farmers learned that the milk quality de-
pended on the cows’ diet, which in turn de-
pended on adequate feed crop irrigation. With
financing and technical assistance from
Nestlé, farmers began to dig previously unaf-
fordable deep-bore wells. Improved irrigation
not only fed cows but increased crop yields,
producing surplus wheat and rice and raising
the standard of living.

When Nestlé’s milk factory first opened,
only 180 local farmers supplied milk. Today,
Nestlé buys milk from more than 75,000 farm-
ers in the region, collecting it twice daily from
more than 650 village dairies. The death rate
of calves has dropped by 75%. Milk production
has increased 50-fold. As the quality has im-
proved, Nestlé has been able to pay higher

prices to farmers than those set by the govern-
ment, and its steady biweekly payments have
enabled farmers to obtain credit. Competing
dairies and milk factories have opened, and an
industry cluster is beginning to develop.

Today, Moga has a significantly higher stan-
dard of living than other regions in the vicin-
ity. Ninety percent of the homes have electric-
ity, and most have telephones; all villages
have primary schools, and many have second-
ary schools. Moga has five times the number
of doctors as neighboring regions. The in-
creased purchasing power of local farmers has
also greatly expanded the market for Nestlé’s
products, further supporting the firm’s eco-
nomic success.

Nestlé’s commitment to working with small
farmers is central to its strategy. It enables the
company to obtain a stable supply of high-
quality commodities without paying middle-
men. The corporation’s other core products—
coffee and cocoa—are often grown by small
farmers in developing countries under similar
conditions. Nestlé’s experience in setting up
collection points, training farmers, and intro-
ducing better technology in Moga has been
repeated in Brazil, Thailand, and a dozen
other countries, including, most recently,
China. In each case, as Nestlé has prospered,
so has the community.

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harvard business review • december 2006 page 13

gram take jobs with Marriott. One year later,
more than 65% are still in their jobs, a substan-
tially higher retention rate than the norm.

When value chain practices and investments
in competitive context are fully integrated,
CSR becomes hard to distinguish from the day-
to-day business of the company. Nestlé, for ex-
ample, works directly with small farmers in
developing countries to source the basic com-
modities, such as milk, coffee, and cocoa, on
which much of its global business depends.
(See the sidebar “Integrating Company Prac-
tice and Context: Nestlé’s Milk District.”) The
company’s investment in local infrastructure
and its transfer of world-class knowledge and
technology over decades has produced enor-
mous social benefits through improved health
care, better education, and economic develop-
ment, while giving Nestlé direct and reliable
access to the commodities it needs to maintain
a profitable global business. Nestlé’s distinctive
strategy is inseparable from its social impact.

Creating a social dimension to the value
proposition.

At the heart of any strategy is a
unique value proposition: a set of needs a
company can meet for its chosen customers
that others cannot. The most strategic CSR oc-
curs when a company adds a social dimension
to its value proposition, making social impact
integral to the overall strategy.

Consider Whole Foods Market, whose value
proposition is to sell organic, natural, and
healthy food products to customers who are
passionate about food and the environment.
Social issues are fundamental to what makes
Whole Foods unique in food retailing and to
its ability to command premium prices. The
company’s sourcing emphasizes purchases
from local farmers through each store’s pro-
curement process. Buyers screen out foods
containing any of nearly 100 common ingredi-
ents that the company considers unhealthy or
environmentally damaging. The same stan-
dards apply to products made internally. Whole
Foods’ baked goods, for example, use only un-
bleached and unbromated flour.

Whole Foods’ commitment to natural and
environmentally friendly operating practices
extends well beyond sourcing. Stores are con-
structed using a minimum of virgin raw mate-
rials. Recently, the company purchased renew-
able wind energy credits equal to 100% of its
electricity use in all of its stores and facilities,
the only

Fortune

500 company to offset its elec-

tricity consumption entirely. Spoiled produce
and biodegradable waste are trucked to re-
gional centers for composting. Whole Foods’
vehicles are being converted to run on biofu-
els. Even the cleaning products used in its stores
are environmentally friendly. And through its
philanthropy, the company has created the An-
imal Compassion Foundation to develop more
natural and humane ways of raising farm ani-
mals. In short, nearly every aspect of the com-
pany’s value chain reinforces the social dimen-
sions of its value proposition, distinguishing
Whole Foods from its competitors.

Not every company can build its entire
value proposition around social issues as Whole
Foods does, but adding a social dimension to
the value proposition offers a new frontier in
competitive positioning. Government regula-
tion, exposure to criticism and liability, and
consumers’ attention to social issues are all
persistently increasing. As a result, the num-
ber of industries and companies whose com-
petitive advantage can involve social value
propositions is constantly growing. Sysco, for
example, the largest distributor of food prod-
ucts to restaurants and institutions in North
America, has begun an initiative to preserve
small, family-owned farms and offer locally
grown produce to its customers as a source of
competitive differentiation. Even large global
multinationals—such as General Electric, with
its “ecomagination” initiative that focuses on
developing water purification technology and
other “green” businesses, and Unilever, through
its efforts to pioneer new products, packag-
ing, and distribution systems to meet the
needs of the poorest populations—have de-
cided that major business opportunities lie in
integrating business and society.

Organizing for CSR

Integrating business and social needs takes
more than good intentions and strong leader-
ship. It requires adjustments in organization,
reporting relationships, and incentives. Few
companies have engaged operating manage-
ment in processes that identify and prioritize
social issues based on their salience to business
operations and their importance to the com-
pany’s competitive context. Even fewer have
unified their philanthropy with the manage-
ment of their CSR efforts, much less sought to
embed a social dimension into their core value
proposition. Doing these things requires a far

Typically the more closely
tied a social issue is to a
company’s business, the
greater the opportunity
to leverage the firm’s
resources—and benefit
society.

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 14

different approach to both CSR and philan-
thropy than the one prevalent today. Compa-
nies must shift from a fragmented, defensive
posture to an integrated, affirmative approach.
The focus must move away from an emphasis
on image to an emphasis on substance.

The current preoccupation with measuring
stakeholder satisfaction has it backwards. What
needs to be measured is social impact. Operat-
ing managers must understand the importance
of the outside-in influence of competitive con-
text, while people with responsibility for CSR
initiatives must have a granular understanding
of every activity in the value chain. Value
chain and competitive-context investments in
CSR need to be incorporated into the perfor-
mance measures of managers with P&L re-
sponsibility. These transformations require more
than a broadening of job definition; they re-
quire overcoming a number of long-standing
prejudices. Many operating managers have de-
veloped an ingrained us-versus-them mind-
set that responds defensively to the discussion
of any social issue, just as many NGOs view
askance the pursuit of social value for profit.
These attitudes must change if companies
want to leverage the social dimension of corpo-
rate strategy.

Strategy is always about making choices,
and success in corporate social responsibility is
no different. It is about choosing which social
issues to focus on. The short-term performance
pressures companies face rule out indiscrimi-
nate investments in social value creation. They
suggest, instead, that creating shared value
should be viewed like research and develop-
ment, as a long-term investment in a company’s
future competitiveness. The billions of dollars
already being spent on CSR and corporate phi-
lanthropy would generate far more benefit to
both business and society if consistently in-
vested using the principles we have outlined.

While responsive CSR depends on being a
good corporate citizen and addressing every
social harm the business creates, strategic CSR
is far more selective. Companies are called on
to address hundreds of social issues, but only a
few represent opportunities to make a real dif-
ference to society or to confer a competitive
advantage. Organizations that make the right
choices and build focused, proactive, and inte-
grated social initiatives in concert with their
core strategies will increasingly distance them-
selves from the pack.

The Moral Purpose of Business

By providing jobs, investing capital, purchas-
ing goods, and doing business every day, cor-
porations have a profound and positive influ-
ence on society. The most important thing a
corporation can do for society, and for any
community, is contribute to a prosperous
economy. Governments and NGOs often for-
get this basic truth. When developing coun-
tries distort rules and incentives for business,
for example, they penalize productive compa-
nies. Such countries are doomed to poverty,
low wages, and selling off their natural re-
sources. Corporations have the know-how and
resources to change this state of affairs, not
only in the developing world but also in eco-
nomically disadvantaged communities in ad-
vanced economies.

This cannot excuse businesses that seek
short-term profits deceptively or shirk the so-
cial and environmental consequences of their
actions. But CSR should not be only about
what businesses have done that is wrong—
important as that is. Nor should it be only
about making philanthropic contributions to
local charities, lending a hand in time of disas-
ter, or providing relief to society’s needy—
worthy though these contributions may be. Ef-
forts to find shared value in operating practices
and in the social dimensions of competitive
context have the potential not only to foster
economic and social development but to
change the way companies and society think
about each other. NGOs, governments, and
companies must stop thinking in terms of “cor-
porate social responsibility” and start thinking
in terms of “corporate social integration.”

Perceiving social responsibility as building
shared value rather than as damage control or
as a PR campaign will require dramatically dif-
ferent thinking in business. We are convinced,
however, that CSR will become increasingly
important to competitive success.

Corporations are not responsible for all
the world’s problems, nor do they have the
resources to solve them all. Each company
can identify the particular set of societal
problems that it is best equipped to help re-
solve and from which it can gain the greatest
competitive benefit. Addressing social issues
by creating shared value will lead to self-
sustaining solutions that do not depend on
private or government subsidies. When a
well-run business applies its vast resources,

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Strategy & Society

•

•

•

HBR S

POTLIGHT

harvard business review • december 2006 page 15

expertise, and management talent to prob-
lems that it understands and in which it has a
stake, it can have a greater impact on social
good than any other institution or philan-
thropic organization.

1. An early discussion of the idea of CSR as an opportunity
rather than a cost can be found in David Grayson and
Adrian Hodges,

Corporate Social Opportunity

(Greenleaf,
2004).
2. For a more complete discussion of the importance of
competitive context and the diamond model, see Michael
E. Porter and Mark R. Kramer, “The Competitive Advan-

tage of Corporate Philanthropy,” HBR December 2002.
See also Michael Porter’s book

The Competitive Advantage
of Nations

(The Free Press, 1990) and his article “Locations,
Clusters, and Company Strategy,” in

The Oxford Handbook
of Economic Geography

,

edited by Gordon L. Clark, Mary-
ann P. Feldman, and Meric S. Gertler (Oxford University
Press, 2000).

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H B R S

P O T L I G H T

Strategy & Society

The Link Between Competitive Advantage and Corporate Social Responsibility

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page 16

Further Reading
A R T I C L E
Disruptive Innovation for Social Change
by Clayton M. Christensen, Heiner Baumann,
Rudy Ruggles, and Thomas M. Sadtler
Harvard Business Review
December 2006
Product no. R0612E

One of the best ways to gain competitive ad-
vantage while serving society is to identify
and invest in disruptive innovations in the so-
cial sector. These innovations take the form of
low-cost and simple—but useful—services
for people whom traditional social sector or-
ganizations ignore. Consider MinuteClinics, lo-
cated in stores such as CVS: nurse practitio-
ners, armed with software-based protocols,
provide fast, affordable walk-in diagnosis and
treatment for common health problems. Less
expensive for uninsured people than physi-
cian office visits—and convenient for the
insured—MinuteClinics have a 99% customer
satisfaction level.

Disruptive innovations that drive real social
change crop up in other arenas besides health
care—including education and economic de-
velopment. For example, Apex Learning pro-
vides special online classes (for instance, in
certain languages) to tens of thousands of U.S.
high school students. This innovation enables
school systems to offer good-enough courses
at a fraction of what live courses cost and ex-
pands students’ options. As education bud-
gets are squeezed and online learning alterna-
tives improve, organizations like Apex may
well become the de facto educators for many
subjects, particularly noncore classes.

And in economic development, Bangladesh’s
Grameen Bank makes small loans to latent en-
trepreneurs who otherwise have little or no
access to capital. By the end of 2005, it had 4.6
million borrowers. Since its inception in 1976,
it has lent over $5.2 billion, with a 99% recov-
ery rate. And it has generated a profit for its
owners in every year but three.

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The Five Competitive
Forces That Shape
Strategy

by

Michael E. Porter

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work

1

Article Summary

2

The Five Competitive Forces That Shape Strategy

A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

18

Further Reading

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.

Reprint R0801E

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The Five Competitive Forces That Shape
Strategy

page 1

The Idea in Brief The Idea in Practice

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You know that to sustain long-term profit-
ability you must respond strategically to
competition. And you naturally keep tabs
on your

established rivals

. But as you scan
the competitive arena, are you also looking

beyond

your direct competitors? As Porter
explains in this update of his revolutionary
1979 HBR article, four additional competi-
tive forces can hurt your prospective profits:

•

Savvy

customers

can force down prices
by playing you and your rivals against
one another.

•

Powerful

suppliers

may constrain your
profits if they charge higher prices.

•

Aspiring

entrants

, armed with new ca-
pacity and hungry for market share, can
ratchet up the investment required for
you to stay in the game.

•

Substitute offerings

can lure customers
away.

Consider commercial aviation: It’s one of
the least profitable industries because all
five forces are strong.

Established rivals

compete intensely on price.

Customers

are
fickle, searching for the best deal regardless
of carrier.

Suppliers

—plane and engine
manufacturers, along with unionized labor
forces—bargain away the lion’s share of air-
lines’ profits.

New players

enter the indus-
try in a constant stream. And

substitutes

are readily available—such as train or car
travel.

By analyzing all five competitive forces, you
gain a complete picture of what’s influenc-
ing profitability in your industry. You iden-
tify game-changing trends early, so you can
swiftly exploit them. And you spot ways to
work around constraints on profitability—
or even reshape the forces in your favor.

By understanding how the five competitive forces influence profitability in your industry, you can
develop a strategy for enhancing your company’s long-term profits. Porter suggests the following:

POSITION YOUR COMPANY W HERE THE
FORCES ARE WEAKEST

Example:

In the heavy-truck industry, many buyers
operate large fleets and are highly moti-
vated to drive down truck prices. Trucks are
built to regulated standards and offer simi-
lar features, so price competition is stiff;
unions exercise considerable supplier
power; and buyers can use substitutes such
as cargo delivery by rail.

To create and sustain long-term profitability
within this industry, heavy-truck maker Pac-
car chose to focus on one customer group
where competitive forces are weakest: indi-
vidual drivers who own their trucks and
contract directly with suppliers. These oper-
ators have limited clout as buyers and are
less price sensitive because of their emo-
tional ties to and economic dependence
on their own trucks.

For these customers, Paccar has developed
such features as luxurious sleeper cabins,
plush leather seats, and sleek exterior styl-
ing. Buyers can select from thousands of
options to put their personal signature on
these built-to-order trucks.

Customers pay Paccar a 10% premium, and
the company has been profitable for 68
straight years and earned a long-run return
on equity above 20%.

EXPLOIT CHANGES IN THE FORCES

Example:

With the advent of the Internet and digital
distribution of music, unauthorized down-
loading created an illegal but potent substi-
tute for record companies’ services. The
record companies tried to develop technical
platforms for digital distribution themselves,
but major labels didn’t want to sell their
music through a platform owned by a rival.

Into this vacuum stepped Apple, with its
iTunes music store supporting its iPod music
player. The birth of this powerful new gate-
keeper has whittled down the number of
major labels from six in 1997 to four today.

RESHAPE THE FORCES IN YOUR FAVOR

Use tactics designed specifically to reduce
the share of profits leaking to other players.
For example:

•

To neutralize

supplier power

, standardize
specifications for parts so your company
can switch more easily among vendors.

•

To counter

customer power

, expand your
services so it’s harder for customers to leave
you for a rival.

•

To temper price wars initiated by

estab-
lished rivals

, invest more heavily in prod-
ucts that differ significantly from competi-
tors’ offerings.

•

To scare off

new entrants

, elevate the fixed
costs of competing; for instance, by escalat-
ing your R&D expenditures.

•

To limit the threat of

substitutes

, offer bet-
ter value through wider product accessibil-
ity. Soft-drink producers did this by intro-
ducing vending machines and
convenience store channels, which dramat-
ically improved the availability of soft drinks
relative to other beverages.

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The Five Competitive
Forces That Shape
Strategy

by Michael E. Porter

harvard business review • january 2008 page 2

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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.

Editor’s Note:

In 1979,

Harvard Business Review

published “How Competitive Forces Shape Strat-
egy” by a young economist and associate profes-
sor, 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 sig-
nature economic rigor to the study of competi-
tive 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 col-
league Joan Magretta, Porter here reaffirms, up-
dates, and extends the classic work. He also ad-
dresses 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 under-
stand and cope with competition. Often, how-
ever, managers define competition too nar-
rowly, as if it occurred only among today’s

direct competitors. Yet competition for profits
goes beyond established industry rivals to in-
clude 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 competi-
tive 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 glo-
bal auto industry, for instance, appears to
have nothing in common with the worldwide
market for art masterpieces or the heavily
regulated health-care delivery industry in Eu-
rope. But to understand industry competition
and profitability in each of those three cases,
one must analyze the industry’s underlying
structure in terms of the five forces. (See the
exhibit “The Five Forces That Shape Industry
Competition.”)

If the forces are intense, as they are in such
industries as airlines, textiles, and hotels, al-
most no company earns attractive returns on

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page

3

investment. If the forces are benign, as they are
in industries such as software, soft drinks, and
toiletries, many companies are profitable. In-
dustry structure drives competition and profit-
ability, 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 in the short run—including the
weather and the business cycle—industry
structure, manifested in the competitive forces,
sets industry profitability in the medium and
long run. (See the exhibit “Differences in In-
dustry Profitability.”)

Understanding the competitive forces, and
their underlying causes, reveals the roots of an
industry’s current profitability while providing
a framework for anticipating and influencing
competition (and profitability) over time. A
healthy industry structure should be as much a
competitive concern to strategists as their com-
pany’s own position. Understanding industry
structure is also essential to effective strategic
positioning. As we will see, defending against
the competitive forces and shaping them in a
company’s favor are crucial to strategy.

Forces That Shape Competition

The configuration of the five forces differs by
industry. In the market for commercial air-
craft, fierce rivalry between dominant produc-
ers Airbus and Boeing and the bargaining
power of the airlines that place huge orders
for aircraft are strong, while the threat of en-
try, the threat of substitutes, and the power of
suppliers are more benign. In the movie the-
ater industry, the proliferation of substitute
forms of entertainment and the power of the
movie producers and distributors who supply
movies, the critical input, are important.

The strongest competitive force or forces de-
termine the profitability of an industry and be-
come the most important to strategy formula-
tion. The most salient force, however, is not
always obvious.

For example, even though rivalry is often
fierce in commodity industries, it may not be
the factor limiting profitability. Low returns in
the photographic film industry, for instance,
are the result of a superior substitute prod-
uct—as Kodak and Fuji, the world’s leading
producers of photographic film, learned with
the advent of digital photography. In such a sit-
uation, coping with the substitute product be-

comes the number one strategic priority.
Industry structure grows out of a set of eco-

nomic and technical characteristics that deter-
mine the strength of each competitive force.
We will examine these drivers in the pages that
follow, taking the perspective of an incumbent,
or a company already present in the industry.
The analysis can be readily extended to under-
stand the challenges facing a potential entrant.

Threat of entry.

New entrants to an indus-
try bring new capacity and a desire to gain
market share that puts pressure on prices,
costs, and the rate of investment necessary to
compete. Particularly when new entrants are
diversifying from other markets, they can le-
verage existing capabilities and cash flows to
shake up competition, as Pepsi did when it en-
tered the bottled water industry, Microsoft did
when it began to offer internet browsers, and
Apple did when it entered the music distribu-
tion business.

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 new-
comers expect little retaliation from the en-
trenched competitors, the threat of entry is
high and industry profitability is moderated. It
is the

threat

of entry, not whether entry actu-
ally occurs, that holds down profitability.

Barriers to entry.

Entry barriers are advan-
tages that incumbents have relative to new en-
trants. There are seven major sources:

1.

Supply-side economies of scale.

These econ-
omies 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 com-
mand 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 dis-
lodging entrenched competitors, or to accept
a cost disadvantage.

Scale economies can be found in virtually
every activity in the value chain; which ones

Michael E. Porter

is the Bishop Will-
iam Lawrence University Professor at
Harvard University, based at Harvard
Business School in Boston. He is a six-
time McKinsey Award winner, includ-
ing for his most recent HBR article,
“Strategy and Society,” coauthored
with Mark R. Kramer (December 2006).

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 4

are most important varies by industry.

1

In mi-
croprocessors, 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
small-package delivery, economies of scale
arise in national logistical systems and infor-
mation technology.

2.

Demand-side benefits of scale.

These bene-
fits, also known as network effects, arise in in-
dustries where a buyer’s willingness to pay for
a company’s product increases with the num-
ber 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 com-
puter maker). Buyers may also value being in a
“network” with a larger number of fellow cus-
tomers. For instance, online auction partici-
pants are attracted to eBay because it offers
the most potential trading partners. Demand-
side benefits of scale discourage entry by limit-
ing the willingness of customers to buy from a
newcomer and by reducing the price the new-
comer 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 exam-
ple, alter product specifications, retrain em-
ployees to use a new product, or modify pro-
cesses or information systems. The larger the
switching costs, the harder it will be for an en-
trant 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 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 neces-
sary not only for fixed facilities but also to ex-
tend customer credit, build inventories, and
fund start-up losses. The barrier is particularly
great if the capital is required for unrecover-
able and therefore harder-to-finance expendi-
tures, 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 require-
ments 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 ex-
pected 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 numer-
ous 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 avail-
able to potential rivals. These advantages can
stem from such sources as proprietary technol-
ogy, preferential access to the best raw mate-
rial sources, preemption of the most favorable
geographic locations, established brand identi-
ties, or cumulative experience that has allowed
incumbents to learn how to produce more effi-
ciently. Entrants try to bypass such advantages.
Upstart discounters such as Target and Wal-

The Five Forces That Shape Industry Competition

Bargaining
Power of
Suppliers

Threat
of New

Entrants

Bargaining
Power of
Buyers

Threat of
Substitute
Products or

Services

Rivalry
Among
Existing

Competitors

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 5

Mart, for example, have located stores in free-
standing 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 distri-
bution of its product or service. A new food
item, for example, must displace others from
the supermarket shelf via price breaks, promo-
tions, intense selling efforts, or some other
means. The more limited the wholesale or re-
tail channels are and the more that existing
competitors have tied them up, the tougher
entry into an industry will be. Sometimes ac-
cess to distribution is so high a barrier that new
entrants must bypass distribution channels al-
together or create their own. Thus, upstart
low-cost airlines have avoided distribution
through travel agents (who tend to favor estab-

lished higher-fare carriers) and have encour-
aged 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 bar-
riers. Government directly limits or even fore-
closes entry into industries through, for in-
stance, 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 pro-
tect proprietary technology from imitation or
environmental or safety regulations that raise
scale economies facing newcomers. Of course,
government policies may also make entry eas-
ier—directly through subsidies, for instance, or

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 in-
vested 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 pre-
packaged software, which have been almost six times more profitable than the airline industry over the period.

Profitability of Selected U.S. Industries
Average ROIC, 1992–2006

N
um

be
r

of
In

du
st

rie
s

ROIC

0% 5% 10% 15% 20% 25% 30% 35%

40

50

30

20

10

0

10th percentile
7.0%

25th
percentile
10

.9%

Median:
14.3%

75th percentile
18.6%

90th percentile
25.3%

or higheror lower

Average Return on Invested Capital
in U.S. Industries, 1992–2006

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

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

Average industry
ROIC in the U.S.
14.9%

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%
15.0%
13.9%

13.8%
13.7%

13.4%
13.4%
12.6%

11.7%
10.5%
10.4%

5
5.9%

.9%

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 6

indirectly by funding basic research and mak-
ing it available to all firms, new and old, reduc-
ing 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 ex-
amples illustrate, the strategist must be mind-
ful of the creative ways newcomers might find
to circumvent apparent barriers.

Expected retaliation.

How potential entrants
believe incumbents may react will also influ-
ence 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 com-
mitment to defending market share.

Newcomers are likely to fear expected retali-
ation if:

• Incumbents have previously responded
vigorously to new entrants.

• Incumbents possess substantial resources
to fight back, including excess cash and unused
borrowing power, available productive capac-
ity, or clout with distribution channels and cus-
tomers.

• Incumbents seem likely to cut prices be-
cause they are committed to retaining market
share at all costs or because the industry has
high fixed costs, which create a strong motiva-
tion 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 com-
pany 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 partici-
pating in the industry.

The power of suppliers.

Powerful suppliers
capture more of the value for themselves by
charging higher prices, limiting quality or ser-
vices, or shifting costs to industry participants.
Powerful suppliers, including suppliers of la-
bor, can squeeze profitability out of an indus-
try that is unable to pass on cost increases in
its own prices. Microsoft, for instance, has con-
tributed 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 differ-
ent 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. Suppli-
ers serving many industries will not hesitate to

Industry Analysis in Practice

Good industry analysis looks rigor-
ously at the structural underpinnings
of profitability. A first step is to under-
stand the appropriate time horizon.

One of the essential tasks in industry
analysis is to distinguish temporary or
cyclical changes from structural
changes. A good guideline for the appro-
priate time horizon is the full business
cycle for the particular industry. For
most industries, a three-to-five-year hori-
zon is appropriate, although in some in-
dustries with long lead times, such as
mining, the appropriate horizon might
be a decade or more. It is average profit-
ability over this period, not profitability
in any particular year, that should be the
focus of analysis.

The point of industry analysis is not
to declare the industry attractive or un-
attractive but to understand the under-
pinnings of competition and the root
causes of profitability.

As much as possi-
ble, analysts should look at industry
structure quantitatively, rather than be
satisfied with lists of qualitative factors.
Many elements of the five forces can be
quantified: the percentage of the buyer’s
total cost accounted for by the industry’s
product (to understand buyer price sensi-
tivity); the percentage of industry sales
required to fill a plant or operate a logisti-
cal network of efficient scale (to help as-
sess barriers to entry); the buyer’s switch-
ing cost (determining the inducement an
entrant or rival must offer customers).

The strength of the competitive
forces affects prices, costs, and the in-
vestment required to compete; thus
the forces are directly tied to the in-
come statements and balance sheets of
industry participants.

Industry struc-
ture defines the gap between revenues
and costs. For example, intense rivalry
drives down prices or elevates the costs of
marketing, R&D, or customer service, re-
ducing margins. How much? Strong sup-
pliers drive up input costs. How much?
Buyer power lowers prices or elevates the
costs of meeting buyers’ demands, such
as the requirement to hold more inven-
tory or provide financing. How much?
Low barriers to entry or close substitutes
limit the level of sustainable prices. How
much? It is these economic relationships
that sharpen the strategist’s understand-
ing of industry competition.

Finally, good industry analysis does
not just list pluses and minuses but
sees an industry in overall, systemic
terms.

Which forces are underpinning
(or constraining) today’s profitability?
How might shifts in one competitive
force trigger reactions in others? Answer-
ing such questions is often the source of
true strategic insights.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 7

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 activi-
ties 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 equipment 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 manu-
facturing facilities (as in the case of some bever-
age companies and container manufacturers).
When switching costs are high, industry partic-
ipants 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 differen-
tiated. Pharmaceutical companies that offer
patented drugs with distinctive medical bene-
fits have more power over hospitals, health
maintenance organizations, and other drug
buyers, for example, than drug companies of-
fering me-too or generic products.

• There is no substitute for what the sup-
plier group provides. Pilots’ unions, for exam-
ple, exercise considerable supplier power over
airlines partly because there is no good alterna-
tive 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.

The power of buyers.

Powerful customers—
the flip side of powerful suppliers—can cap-
ture more value by forcing down prices, de-
manding better quality or more service (thereby
driving up costs), and generally playing industry
participants off against one another, all at the ex-
pense of industry profitability. Buyers are power-
ful 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 le-
verage if:

• There are few buyers, or each one pur-
chases in volumes that are large relative to the

size of a single vendor. Large-volume buyers are
particularly powerful in industries with high
fixed costs, such as telecommunications equip-
ment, 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 chang-
ing vendors.

• Buyers can credibly threaten to integrate
backward and produce the industry’s product
themselves if vendors are too profitable. Pro-
ducers of soft drinks and beer have long con-
trolled 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 indus-

try 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 usu-
ally less price sensitive.

• The buyer group earns low profits, is
strapped for cash, or is otherwise under pres-
sure to trim its purchasing costs. Highly profit-
able 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 in-
dustry’s product, buyers are generally less price
sensitive. When purchasing or renting produc-
tion 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, ma-
terial, or other costs, buyers are usually more
interested in quality than in price. Examples in-
clude products and services like tax accounting
or well logging (which measures below-ground

Industry structure drives
competition and
profitability, not whether
an industry is emerging
or mature, high tech or
low tech, regulated or
unregulated.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 8

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 in-
vestment banking, where poor performance
can be costly and embarrassing.

Most sources of buyer power apply equally
to consumers and to business-to-business cus-
tomers. Like industrial customers, consumers
tend to be more price sensitive if they are pur-
chasing products that are undifferentiated, ex-
pensive relative to their incomes, and of a sort
where product performance has limited conse-
quences. The major difference with consum-
ers 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 deci-
sions of customers downstream. Consumer
electronics retailers, jewelry retailers, and agri-
cultural-equipment distributors are examples
of distribution channels that exert a strong in-
fluence on end customers.

Producers often attempt to diminish chan-
nel clout through exclusive arrangements with
particular distributors or retailers or by mar-
keting directly to end users. Component manu-
facturers seek to develop power over assem-
blers 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 manufac-
turers that actually buy them but also to down-
stream consumers. Many consumers request
Stainmaster carpet even though DuPont is not
a carpet manufacturer.

The threat of substitutes.

A substitute per-
forms the same or a similar function as an in-
dustry’s product by a different means. Video-
conferencing is a substitute for travel. Plastic is
a substitute for aluminum. E-mail is a substi-
tute 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, indus-
try 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 indus-
try can reap in good times. In emerging econo-
mies, for example, the surge in demand for
wired telephone lines has been capped as
many consumers opt to make a mobile tele-
phone 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-dis-
tance 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-de-
mand services, online video rental services such
as Netflix, and the rise of internet video sites
like Google’s YouTube.

• The buyer’s cost of switching to the substi-
tute 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 sub-
stantial 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 or competitive disconti-
nuities in seemingly unrelated businesses can

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 9

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 famil-
iar 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, ri-
vals 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 pre-
cipitates 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 manage-
ment’s devotion to a particular business. These
barriers keep companies in the market even
though they may be earning low or negative re-
turns. Excess capacity remains in use, and the
profitability of healthy competitors suffers as
the sick ones hang on.

• Rivals are highly committed to the busi-
ness and have aspirations for leadership, espe-
cially if they have goals that go beyond eco-
nomic performance in the particular industry.
High commitment to a business arises for a va-
riety of reasons. For example, state-owned com-
petitors may have goals that include employ-
ment or prestige. Units of larger companies
may participate in an industry for image rea-
sons 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 compe-
tition takes place, and whether rivals converge
to compete on the

same dimensions

, have a
major influence on profitability.

Rivalry is especially destructive to profitabil-
ity 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. Sus-
tained 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 competi-
tors to cut prices below their average costs,
even close to their marginal costs, to steal incre-
mental customers while still making some con-
tribution to covering fixed costs. Many basic-
materials businesses, such as paper and alumi-
num, suffer from this problem, especially if de-
mand 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 incre-
ments to be efficient. The need for large capac-
ity expansions, as in the polyvinyl chloride busi-
ness, disrupts the industry’s supply-demand
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 prod-
ucts and services are perishable than is com-
monly thought. Just as tomatoes are perishable
because they rot, models of computers are per-
ishable because they soon become obsolete,
and information may be perishable if it diffuses
rapidly or becomes outdated, thereby losing its
value. Services such as hotel accommodations
are perishable in the sense that unused capacity
can never be recovered.

Competition on dimensions other than
price—on product features, support services,
delivery time, or brand image, for instance—is
less likely to erode profitability because it im-
proves customer value and can support higher
prices. Also, rivalry focused on such dimen-
sions can improve value relative to substitutes
or raise the barriers facing new entrants. While
nonprice rivalry sometimes escalates to levels

Rivalry is especially
destructive to
profitability if it
gravitates solely to price
because price
competition transfers
profits directly from an
industry to its customers.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 10

that undermine industry profitability, this is
less likely to occur than it is with price rivalry.

As important as the dimensions of rivalry is
whether rivals compete on the

same

dimen-
sions. When all or many competitors aim to
meet the same needs or compete on the same
attributes, the result is zero-sum competition.
Here, one firm’s gain is often another’s loss,
driving down profitability. While price compe-
tition runs a stronger risk than nonprice com-
petition of becoming zero sum, this may not
happen if companies take care to segment
their markets, targeting their low-price offer-
ings to different customers.

Rivalry can be positive sum, or actually in-
crease the average profitability of an industry,
when each competitor aims to serve the needs
of different customer segments, with different
mixes of price, products, services, features, or
brand identities. Such competition can not
only support higher average profitability but
also expand the industry, as the needs of more
customer groups are better met. The opportu-
nity for positive-sum competition will be
greater in industries serving diverse customer
groups. With a clear understanding of the
structural underpinnings of rivalry, strategists
can sometimes take steps to shift the nature of
competition in a more positive direction.

Factors, Not Forces

Industry structure, as manifested in the
strength of the five competitive forces, deter-
mines the industry’s long-run profit potential
because it determines how the economic
value created by the industry is divided—how
much is retained by companies in the industry
versus bargained away by customers and sup-
pliers, limited by substitutes, or constrained by
potential new entrants. By considering all five
forces, a strategist keeps overall structure in
mind instead of gravitating to any one ele-
ment. In addition, the strategist’s attention re-
mains focused on structural conditions rather
than on fleeting factors.

It is especially important to avoid the com-
mon pitfall of mistaking certain visible at-
tributes of an industry for its underlying struc-
ture. Consider the following:

Industry growth rate.

A common mistake is
to assume that fast-growing industries are al-
ways attractive. Growth does tend to mute ri-
valry, because an expanding pie offers oppor-
tunities for all competitors. But fast growth

can put suppliers in a powerful position, and
high growth with low entry barriers will draw
in entrants. Even without new entrants, a high
growth rate will not guarantee profitability if
customers are powerful or substitutes are at-
tractive. Indeed, some fast-growth businesses,
such as personal computers, have been among
the least profitable industries in recent years.
A narrow focus on growth is one of the major
causes of bad strategy decisions.

Technology and innovation.

Advanced tech-
nology or innovations are not by themselves
enough to make an industry structurally at-
tractive (or unattractive). Mundane, low-tech-
nology industries with price-insensitive buy-
ers, high switching costs, or high entry barriers
arising from scale economies are often far
more profitable than sexy industries, such as
software and internet technologies, that at-
tract competitors.

2

Government.

Government is not best un-
derstood as a sixth force because government
involvement is neither inherently good nor
bad for industry profitability. The best way to
understand the influence of government on
competition is to analyze how specific govern-
ment policies affect the five competitive
forces. For instance, patents raise barriers to
entry, boosting industry profit potential. Con-
versely, government policies favoring unions
may raise supplier power and diminish profit
potential. Bankruptcy rules that allow failing
companies to reorganize rather than exit can
lead to excess capacity and intense rivalry.
Government operates at multiple levels and
through many different policies, each of
which will affect structure in different ways.

Complementary products and services.

Complements are products or services used to-
gether with an industry’s product. Comple-
ments arise when the customer benefit of two
products combined is greater than the sum of
each product’s value in isolation. Computer
hardware and software, for instance, are valu-
able together and worthless when separated.

In recent years, strategy researchers have
highlighted the role of complements, espe-
cially in high-technology industries where they
are most obvious.

3

By no means, however, do
complements appear only there. The value of a
car, for example, is greater when the driver also
has access to gasoline stations, roadside assis-
tance, and auto insurance.

Complements can be important when they

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 11

affect the overall demand for an industry’s
product. However, like government policy,
complements are not a sixth force determining
industry profitability since the presence of
strong complements is not necessarily bad (or
good) for industry profitability. Complements
affect profitability through the way they influ-
ence the five forces.

The strategist must trace the positive or neg-
ative influence of complements on all five
forces to ascertain their impact on profitability.
The presence of complements can raise or
lower barriers to entry. In application software,
for example, barriers to entry were lowered
when producers of complementary operating
system software, notably Microsoft, provided
tool sets making it easier to write applications.
Conversely, the need to attract producers of
complements can raise barriers to entry, as it
does in video game hardware.

The presence of complements can also affect
the threat of substitutes. For instance, the need
for appropriate fueling stations makes it diffi-
cult for cars using alternative fuels to substi-
tute for conventional vehicles. But comple-
ments can also make substitution easier. For
example, Apple’s iTunes hastened the substitu-
tion from CDs to digital music.

Complements can factor into industry ri-
valry either positively (as when they raise
switching costs) or negatively (as when they
neutralize product differentiation). Similar
analyses can be done for buyer and supplier
power. Sometimes companies compete by al-
tering conditions in complementary industries
in their favor, such as when videocassette-re-
corder producer JVC persuaded movie studios
to favor its standard in issuing prerecorded
tapes even though rival Sony’s standard was
probably superior from a technical standpoint.

Identifying complements is part of the ana-
lyst’s work. As with government policies or im-
portant technologies, the strategic significance
of complements will be best understood
through the lens of the five forces.

Changes in Industry Structure

So far, we have discussed the competitive
forces at a single point in time. Industry struc-
ture proves to be relatively stable, and indus-
try profitability differences are remarkably
persistent over time in practice. However, in-
dustry structure is constantly undergoing
modest adjustment—and occasionally it can

change abruptly.
Shifts in structure may emanate from out-

side an industry or from within. They can
boost the industry’s profit potential or reduce
it. They may be caused by changes in technol-
ogy, changes in customer needs, or other
events. The five competitive forces provide a
framework for identifying the most important
industry developments and for anticipating
their impact on industry attractiveness.

Shifting threat of new entry.

Changes to any
of the seven barriers described above can raise
or lower the threat of new entry. The expira-
tion of a patent, for instance, may unleash new
entrants. On the day that Merck’s patents for
the cholesterol reducer Zocor expired, three
pharmaceutical makers entered the market
for the drug. Conversely, the proliferation of
products in the ice cream industry has gradu-
ally filled up the limited freezer space in gro-
cery stores, making it harder for new ice cream
makers to gain access to distribution in North
America and Europe.

Strategic decisions of leading competitors
often have a major impact on the threat of en-
try. Starting in the 1970s, for example, retailers
such as Wal-Mart, Kmart, and Toys “R” Us
began to adopt new procurement, distribution,
and inventory control technologies with large
fixed costs, including automated distribution
centers, bar coding, and point-of-sale termi-
nals. These investments increased the econo-
mies of scale and made it more difficult for
small retailers to enter the business (and for ex-
isting small players to survive).

Changing supplier or buyer power.

As the
factors underlying the power of suppliers and
buyers change with time, their clout rises or
declines. In the global appliance industry, for
instance, competitors including Electrolux,
General Electric, and Whirlpool have been
squeezed by the consolidation of retail chan-
nels (the decline of appliance specialty stores,
for instance, and the rise of big-box retailers
like Best Buy and Home Depot in the United
States). Another example is travel agents, who
depend on airlines as a key supplier. When the
internet allowed airlines to sell tickets directly
to customers, this significantly increased their
power to bargain down agents’ commissions.

Shifting threat of substitution.

The most com-
mon reason substitutes become more or less
threatening over time is that advances in tech-
nology create new substitutes or shift price-

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 12

performance comparisons in one direction or
the other. The earliest microwave ovens, for
example, were large and priced above $2,000,
making them poor substitutes for conven-
tional ovens. With technological advances,
they became serious substitutes. Flash com-
puter memory has improved enough recently
to become a meaningful substitute for low-ca-
pacity hard-disk drives. Trends in the availabil-
ity or performance of complementary produc-
ers also shift the threat of substitutes.

New bases of rivalry.

Rivalry often intensi-
fies naturally over time. As an industry ma-
tures, growth slows. Competitors become
more alike as industry conventions emerge,
technology diffuses, and consumer tastes con-
verge. Industry profitability falls, and weaker
competitors are driven from the business. This
story has played out in industry after industry;
televisions, snowmobiles, and telecommunica-
tions equipment are just a few examples.

A trend toward intensifying price competi-
tion and other forms of rivalry, however, is by
no means inevitable. For example, there has
been enormous competitive activity in the U.S.
casino industry in recent decades, but most of
it has been positive-sum competition directed
toward new niches and geographic segments
(such as riverboats, trophy properties, Native
American reservations, international expan-
sion, and novel customer groups like families).
Head-to-head rivalry that lowers prices or
boosts the payouts to winners has been lim-
ited.

The nature of rivalry in an industry is al-
tered by mergers and acquisitions that intro-
duce new capabilities and ways of competing.
Or, technological innovation can reshape ri-
valry. In the retail brokerage industry, the ad-
vent of the internet lowered marginal costs
and reduced differentiation, triggering far
more intense competition on commissions and
fees than in the past.

In some industries, companies turn to merg-
ers and consolidation not to improve cost and
quality but to attempt to stop intense competi-
tion. Eliminating rivals is a risky strategy, how-
ever. The five competitive forces tell us that a
profit windfall from removing today’s competi-
tors often attracts new competitors and back-
lash from customers and suppliers. In New
York banking, for example, the 1980s and 1990s
saw escalating consolidations of commercial
and savings banks, including Manufacturers

Hanover, Chemical, Chase, and Dime Savings.
But today the retail-banking landscape of Man-
hattan is as diverse as ever, as new entrants
such as Wachovia, Bank of America, and Wash-
ington Mutual have entered the market.

Implications for Strategy

Understanding the forces that shape industry
competition is the starting point for develop-
ing strategy. Every company should already
know what the average profitability of its in-
dustry is and how that has been changing over
time. The five forces reveal

why

industry prof-
itability is what it is. Only then can a company
incorporate industry conditions into strategy.

The forces reveal the most significant aspects
of the competitive environment. They also pro-
vide a baseline for sizing up a company’s
strengths and weaknesses: Where does the
company stand versus buyers, suppliers, en-
trants, rivals, and substitutes? Most impor-
tantly, an understanding of industry structure
guides managers toward fruitful possibilities
for strategic action, which may include any or
all of the following: positioning the company
to better cope with the current competitive
forces; anticipating and exploiting shifts in the
forces; and shaping the balance of forces to cre-
ate a new industry structure that is more favor-
able to the company. The best strategies ex-
ploit more than one of these possibilities.

Positioning the company.

Strategy can be
viewed as building defenses against the com-
petitive forces or finding a position in the in-
dustry where the forces are weakest. Consider,
for instance, the position of Paccar in the mar-
ket for heavy trucks. The heavy-truck industry
is structurally challenging. Many buyers oper-
ate large fleets or are large leasing companies,
with both the leverage and the motivation to
drive down the price of one of their largest
purchases. Most trucks are built to regulated
standards and offer similar features, so price
competition is rampant. Capital intensity
causes rivalry to be fierce, especially during
the recurring cyclical downturns. Unions exer-
cise considerable supplier power. Though
there are few direct substitutes for an 18-
wheeler, truck buyers face important substi-
tutes for their services, such as cargo delivery
by rail.

In this setting, Paccar, a Bellevue, Washing-
ton–based company with about 20% of the
North American heavy-truck market, has cho-

Eliminating rivals is a
risky strategy. A profit
windfall from removing
today’s competitors often
attracts new competitors
and backlash from
customers and suppliers.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 13

sen to focus on one group of customers: owner-
operators—drivers who own their trucks and
contract directly with shippers or serve as sub-
contractors to larger trucking companies. Such
small operators have limited clout as truck
buyers. They are also less price sensitive be-
cause of their strong emotional ties to and eco-
nomic dependence on the product. They take
great pride in their trucks, in which they spend
most of their time.

Paccar has invested heavily to develop an
array of features with owner-operators in
mind: luxurious sleeper cabins, plush leather
seats, noise-insulated cabins, sleek exterior styl-
ing, and so on. At the company’s extensive net-
work of dealers, prospective buyers use soft-
ware to select among thousands of options to
put their personal signature on their trucks.
These customized trucks are built to order, not
to stock, and delivered in six to eight weeks.
Paccar’s trucks also have aerodynamic designs
that reduce fuel consumption, and they main-
tain their resale value better than other trucks.
Paccar’s roadside assistance program and IT-
supported system for distributing spare parts
reduce the time a truck is out of service. All
these are crucial considerations for an owner-
operator. Customers pay Paccar a 10% pre-
mium, and its Kenworth and Peterbilt brands
are considered status symbols at truck stops.

Paccar illustrates the principles of position-
ing a company within a given industry struc-
ture. The firm has found a portion of its indus-
try where the competitive forces are weaker—
where it can avoid buyer power and price-
based rivalry. And it has tailored every single
part of the value chain to cope well with the
forces in its segment. As a result, Paccar has
been profitable for 68 years straight and has
earned a long-run return on equity above 20%.

In addition to revealing positioning opportu-
nities within an existing industry, the five
forces framework allows companies to rigor-
ously analyze entry and exit. Both depend on
answering the difficult question: “What is the
potential of this business?” Exit is indicated
when industry structure is poor or declining
and the company has no prospect of a superior
positioning. In considering entry into a new in-
dustry, creative strategists can use the frame-
work to spot an industry with a good future
before this good future is reflected in the
prices of acquisition candidates. Five forces
analysis may also reveal industries that are not

necessarily attractive for the average entrant
but in which a company has good reason to be-
lieve it can surmount entry barriers at lower
cost than most firms or has a unique ability to
cope with the industry’s competitive forces.

Exploiting industry change.

Industry changes
bring the opportunity to spot and claim prom-
ising new strategic positions if the strategist
has a sophisticated understanding of the com-
petitive forces and their underpinnings. Con-
sider, for instance, the evolution of the music
industry during the past decade. With the ad-
vent of the internet and the digital distribu-
tion of music, some analysts predicted the
birth of thousands of music labels (that is,
record companies that develop artists and
bring their music to market). This, the analysts
argued, would break a pattern that had held
since Edison invented the phonograph: Be-
tween three and six major record companies
had always dominated the industry. The inter-
net would, they predicted, remove distribu-
tion as a barrier to entry, unleashing a flood of
new players into the music industry.

A careful analysis, however, would have re-
vealed that physical distribution was not the
crucial barrier to entry. Rather, entry was
barred by other benefits that large music labels
enjoyed. Large labels could pool the risks of de-
veloping new artists over many bets, cushion-
ing the impact of inevitable failures. Even
more important, they had advantages in break-
ing through the clutter and getting their new
artists heard. To do so, they could promise
radio stations and record stores access to well-
known artists in exchange for promotion of
new artists. New labels would find this nearly
impossible to match. The major labels stayed
the course, and new music labels have been
rare.

This is not to say that the music industry is
structurally unchanged by digital distribution.
Unauthorized downloading created an illegal
but potent substitute. The labels tried for years
to develop technical platforms for digital distri-
bution themselves, but major companies hesi-
tated to sell their music through a platform
owned by a rival. Into this vacuum stepped
Apple with its iTunes music store, launched in
2003 to support its iPod music player. By per-
mitting the creation of a powerful new gate-
keeper, the major labels allowed industry
structure to shift against them. The number of
major record companies has actually de-

Using the five forces
framework, creative
strategists may be able to
spot an industry with a
good future before this
good future is reflected in
the prices of acquisition
candidates.

For the exclusive use of S. Wang, 2023.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 14

clined—from six in 1997 to four today—as
companies struggled to cope with the digital
phenomenon.

When industry structure is in flux, new and
promising competitive positions may appear.
Structural changes open up new needs and
new ways to serve existing needs. Established
leaders may overlook these or be constrained
by past strategies from pursuing them. Smaller
competitors in the industry can capitalize on
such changes, or the void may well be filled by
new entrants.

Shaping industry structure.

When a com-
pany exploits structural change, it is recogniz-
ing, and reacting to, the inevitable. However,
companies also have the ability to shape in-
dustry structure. A firm can lead its industry
toward new ways of competing that alter the
five forces for the better. In reshaping struc-

ture, a company wants its competitors to fol-
low so that the entire industry will be trans-
formed. While many industry participants
may benefit in the process, the innovator can
benefit most if it can shift competition in di-
rections where it can excel.

An industry’s structure can be reshaped in
two ways: by redividing profitability in favor of
incumbents or by expanding the overall profit
pool. Redividing the industry pie aims to in-
crease the share of profits to industry competi-
tors instead of to suppliers, buyers, substitutes,
and keeping out potential entrants. Expanding
the profit pool involves increasing the overall
pool of economic value generated by the in-
dustry in which rivals, buyers, and suppliers
can all share.

Redividing profitability.

To capture more pro-
fits for industry rivals, the starting point is to

Defining the Relevant Industry

Defining the industry in which competition
actually takes place is important for good in-
dustry analysis, not to mention for develop-
ing strategy and setting business unit bound-
aries. Many strategy errors emanate from
mistaking the relevant industry, defining it
too broadly or too narrowly. Defining the in-
dustry too broadly obscures differences
among products, customers, or geographic
regions that are important to competition,
strategic positioning, and profitability. Defin-
ing the industry too narrowly overlooks com-
monalities and linkages across related prod-
ucts or geographic markets that are crucial to
competitive advantage. Also, strategists must
be sensitive to the possibility that industry
boundaries can shift.

The boundaries of an industry consist of
two primary dimensions. First is the

scope of
products or services

. For example, is motor oil
used in cars part of the same industry as
motor oil used in heavy trucks and stationary
engines, or are these different industries? The
second dimension is

geographic scope

. Most
industries are present in many parts of the
world. However, is competition contained
within each state, or is it national? Does com-
petition take place within regions such as Eu-
rope or North America, or is there a single glo-
bal industry?

The five forces are the basic tool to resolve

these questions. If industry structure for two
products is the same or very similar (that is, if
they have the same buyers, suppliers, barriers
to entry, and so forth), then the products are
best treated as being part of the same indus-
try. If industry structure differs markedly, how-
ever, the two products may be best under-
stood as separate industries.

In lubricants, the oil used in cars is similar
or even identical to the oil used in trucks, but
the similarity largely ends there. Automotive
motor oil is sold to fragmented, generally un-
sophisticated customers through numerous
and often powerful channels, using extensive
advertising. Products are packaged in small
containers and logistical costs are high, neces-
sitating local production. Truck and power
generation lubricants are sold to entirely dif-
ferent buyers in entirely different ways using a
separate supply chain. Industry structure
(buyer power, barriers to entry, and so forth) is
substantially different. Automotive oil is thus a
distinct industry from oil for truck and station-
ary engine uses. Industry profitability will dif-
fer in these two cases, and a lubricant com-
pany will need a separate strategy for
competing in each area.

Differences in the five competitive forces
also reveal the geographic scope of competi-
tion. If an industry has a similar structure in
every country (rivals, buyers, and so on), the

presumption is that competition is global, and
the five forces analyzed from a global perspec-
tive will set average profitability. A single glo-
bal strategy is needed. If an industry has quite
different structures in different geographic re-
gions, however, each region may well be a dis-
tinct industry. Otherwise, competition would
have leveled the differences. The five forces an-
alyzed for each region will set profitability
there.

The extent of differences in the five forces
for related products or across geographic
areas is a matter of degree, making industry
definition often a matter of judgment. A rule
of thumb is that where the differences in any
one force are large, and where the differences
involve more than one force, distinct indus-
tries may well be present.

Fortunately, however, even if industry
boundaries are drawn incorrectly, careful five
forces analysis should reveal important com-
petitive threats. A closely related product
omitted from the industry definition will show
up as a substitute, for example, or competitors
overlooked as rivals will be recognized as po-
tential entrants. At the same time, the five
forces analysis should reveal major differences
within overly broad industries that will indi-
cate the need to adjust industry boundaries or
strategies.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 15

determine which force or forces are currently
constraining industry profitability and address
them. A company can potentially influence all
of the competitive forces. The strategist’s goal
here is to reduce the share of profits that leak
to suppliers, buyers, and substitutes or are sac-
rificed to deter entrants.

To neutralize supplier power, for example, a
firm can standardize specifications for parts to
make it easier to switch among suppliers. It
can cultivate additional vendors, or alter tech-
nology to avoid a powerful supplier group alto-
gether. To counter customer power, companies
may expand services that raise buyers’ switch-
ing costs or find alternative means of reaching
customers to neutralize powerful channels. To
temper profit-eroding price rivalry, companies
can invest more heavily in unique products, as
pharmaceutical firms have done, or expand
support services to customers. To scare off en-
trants, incumbents can elevate the fixed cost of
competing—for instance, by escalating their
R&D or marketing expenditures. To limit the
threat of substitutes, companies can offer bet-
ter value through new features or wider prod-
uct accessibility. When soft-drink producers in-
troduced vending machines and convenience
store channels, for example, they dramatically
improved the availability of soft drinks relative

to other beverages.
Sysco, the largest food-service distributor in

North America, offers a revealing example of
how an industry leader can change the struc-
ture of an industry for the better. Food-service
distributors purchase food and related items
from farmers and food processors. They then
warehouse and deliver these items to restau-
rants, hospitals, employer cafeterias, schools,
and other food-service institutions. Given low
barriers to entry, the food-service distribution
industry has historically been highly frag-
mented, with numerous local competitors.
While rivals try to cultivate customer relation-
ships, buyers are price sensitive because food
represents a large share of their costs. Buyers
can also choose the substitute approaches of
purchasing directly from manufacturers or
using retail sources, avoiding distributors alto-
gether. Suppliers wield bargaining power:
They are often large companies with strong
brand names that food preparers and consum-
ers recognize. Average profitability in the in-
dustry has been modest.

Sysco recognized that, given its size and na-
tional reach, it might change this state of af-
fairs. It led the move to introduce private-label
distributor brands with specifications tailored
to the food-service market, moderating sup-
plier power. Sysco emphasized value-added
services to buyers such as credit, menu plan-
ning, and inventory management to shift the
basis of competition away from just price.
These moves, together with stepped-up invest-
ments in information technology and regional
distribution centers, substantially raised the
bar for new entrants while making the substi-
tutes less attractive. Not surprisingly, the in-
dustry has been consolidating, and industry
profitability appears to be rising.

Industry leaders have a special responsibility
for improving industry structure. Doing so
often requires resources that only large players
possess. Moreover, an improved industry struc-
ture is a public good because it benefits every
firm in the industry, not just the company that
initiated the improvement. Often, it is more in
the interests of an industry leader than any
other participant to invest for the common
good because leaders will usually benefit the
most. Indeed, improving the industry may be a
leader’s most profitable strategic opportunity,
in part because attempts to gain further mar-
ket share can trigger strong reactions from ri-

Typical Steps in Industry Analysis

Define the relevant industry:
•

What products are in it? Which ones
are part of another distinct indus-
try?

•

What is the geographic scope of
competition?

Identify the participants and segment
them into groups, if appropriate:

Who are
•

the buyers and buyer groups?

•

the suppliers and supplier groups?

•

the competitors?

•

the substitutes?

•

the potential entrants?

Assess the underlying drivers of each
competitive force to determine which
forces are strong and which are weak
and why.

Determine overall industry structure,
and test the analysis for consistency:

•

Why

is the level of profitability what
it is?

•

Which are the

controlling

forces for
profitability?

•

Is the industry analysis consistent
with actual long-run profitability?

•

Are more-profitable players better
positioned in relation to the five
forces?

Analyze recent and likely future
changes in each force, both positive
and negative.

Identify aspects of industry structure that
might be influenced by competitors, by
new entrants, or by your company.

For the exclusive use of S. Wang, 2023.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 16

vals, customers, and even suppliers.
There is a dark side to shaping industry

structure that is equally important to under-
stand. Ill-advised changes in competitive posi-
tioning and operating practices can

undermine

industry structure. Faced with pressures to
gain market share or enamored with innova-
tion for its own sake, managers may trigger
new kinds of competition that no incumbent
can win. When taking actions to improve their
own company’s competitive advantage, then,
strategists should ask whether they are setting
in motion dynamics that will undermine indus-
try structure in the long run. In the early days
of the personal computer industry, for in-
stance, IBM tried to make up for its late entry
by offering an open architecture that would set
industry standards and attract complementary
makers of application software and peripher-
als. In the process, it ceded ownership of the
critical components of the PC—the operating
system and the microprocessor—to Microsoft
and Intel. By standardizing PCs, it encouraged
price-based rivalry and shifted power to suppli-
ers. Consequently, IBM became the tempo-
rarily dominant firm in an industry with an en-
duringly unattractive structure.

Expanding the profit pool.

When overall de-
mand grows, the industry’s quality level rises,
intrinsic costs are reduced, or waste is elimi-
nated, the pie expands. The total pool of value
available to competitors, suppliers, and buyers
grows. The total profit pool expands, for exam-
ple, when channels become more competitive
or when an industry discovers latent buyers
for its product that are not currently being
served. When soft-drink producers rational-
ized their independent bottler networks to
make them more efficient and effective, both
the soft-drink companies and the bottlers ben-
efited. Overall value can also expand when
firms work collaboratively with suppliers to
improve coordination and limit unnecessary
costs incurred in the supply chain. This lowers
the inherent cost structure of the industry, al-
lowing higher profit, greater demand through
lower prices, or both. Or, agreeing on quality
standards can bring up industrywide quality
and service levels, and hence prices, benefiting
rivals, suppliers, and customers.

Expanding the overall profit pool creates
win-win opportunities for multiple industry
participants. It can also reduce the risk of de-
structive rivalry that arises when incumbents

attempt to shift bargaining power or capture
more market share. However, expanding the
pie does not reduce the importance of industry
structure. How the expanded pie is divided will
ultimately be determined by the five forces.
The most successful companies are those that
expand the industry profit pool in ways that
allow them to share disproportionately in the
benefits.

Defining the industry.

The five competitive
forces also hold the key to defining the rele-
vant industry (or industries) in which a com-
pany competes. Drawing industry boundaries
correctly, around the arena in which competi-
tion actually takes place, will clarify the causes
of profitability and the appropriate unit for
setting strategy. A company needs a separate
strategy for each distinct industry. Mistakes in
industry definition made by competitors
present opportunities for staking out superior
strategic positions. (See the sidebar “Defining
the Relevant Industry.”)

Competition and Value
The competitive forces reveal the drivers of in-
dustry competition. A company strategist who
understands that competition extends well be-
yond existing rivals will detect wider competi-
tive threats and be better equipped to address
them. At the same time, thinking comprehen-
sively about an industry’s structure can un-
cover opportunities: differences in customers,
suppliers, substitutes, potential entrants, and
rivals that can become the basis for distinct
strategies yielding superior performance. In a
world of more open competition and relent-
less change, it is more important than ever to
think structurally about competition.
Understanding industry structure is equally
important for investors as for managers. The
five competitive forces reveal whether an in-
dustry is truly attractive, and they help inves-
tors anticipate positive or negative shifts in in-
dustry structure before they are obvious. The
five forces distinguish short-term blips from
structural changes and allow investors to take
advantage of undue pessimism or optimism.
Those companies whose strategies have indus-
try-transforming potential become far clearer.
This deeper thinking about competition is a
more powerful way to achieve genuine invest-
ment success than the financial projections
and trend extrapolation that dominate today’s
investment analysis.

Common Pitfalls
In conducting the analysis avoid
the following common mistakes:

• Defining the industry too
broadly or too narrowly.

• Making lists instead of engaging
in rigorous analysis.

• Paying equal attention to all of
the forces rather than digging
deeply into the most important
ones.

• Confusing effect (price sensitiv-
ity) with cause (buyer econom-
ics).

• Using static analysis that ignores
industry trends.

• Confusing cyclical or transient
changes with true structural
changes.

• Using the framework to declare
an industry attractive or unat-
tractive rather than using it to
guide strategic choices.

For the exclusive use of S. Wang, 2023.

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The Five Competitive Forces That Shape Strategy

harvard business review • january 2008 page 17

If both executives and investors looked at
competition this way, capital markets would be
a far more effective force for company success
and economic prosperity. Executives and inves-
tors would both be focused on the same funda-
mentals that drive sustained profitability. The
conversation between investors and execu-
tives would focus on the structural, not the
transient. Imagine the improvement in com-
pany performance—and in the economy as a
whole—if all the energy expended in “pleasing
the Street” were redirected toward the factors
that create true economic value.

1. For a discussion of the value chain framework, see
Michael E. Porter, Competitive Advantage: Creating and Sus-
taining Superior Performance (The Free Press, 1998).
2. For a discussion of how internet technology improves the
attractiveness of some industries while eroding the profit-
ability of others, see Michael E. Porter, “Strategy and the
Internet” (HBR, March 2001).
3. See, for instance, Adam M. Brandenburger and Barry J.
Nalebuff, Co-opetition (Currency Doubleday, 1996).

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The Five Competitive Forces That Shape
Strategy

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page 18

Further Reading
A R T I C L E
What Is Strategy?
by Michael E. Porter
Harvard Business Review
February 2000
Product no. 4134

By analyzing the five competitive forces, you
uncover opportunities to position your com-
pany strategically; that is, to gain a sustainable
advantage over rivals by preserving what’s
distinctive about your company. Your strategic
position hinges on performing different activi-
ties from competitors or performing similar
activities, but in different ways. It emerges
from three sources: 1) serving few needs of
many customers (for example, Jiffy Lube pro-
vides only auto lubricants), 2) serving broad
needs of few customers (Bessemer Trust tar-
gets only very high-wealth clients), or 3) serv-
ing broad needs of many customers in a nar-
row market (Carmike Cinemas operates only
in cities with a population under 200,000).

B O O K S
Redefining Health Care: Creating Value-
Based Competition on Results
by Michael E. Porter and
Elizabeth Olmsted Teisberg
Harvard Business School Press
May 2006
Product no. 7782

In this book Porter and Teisberg analyze the
competitive forces responsible for the current
crisis in U.S. health care. The authors argue
that participants in the health care system
have competed to shift costs, accumulate bar-
gaining power, and restrict services rather
than create value for patients. This zero-sum
competition takes place at the wrong level—
among health plans, networks, and hospi-
tals—rather than where it matters most: in the
diagnosis, treatment, and prevention of spe-
cific health conditions. Redefining Health Care
lays out a breakthrough framework for rede-
fining health care competition based on pa-
tient value. With specific recommendations

for hospitals, doctors, health plans, employers,
and policy makers, this book shows how to
move to a positive-sum competition that will
unleash stunning improvements in quality
and efficiency.

On Competition
by Michael E. Porter
Harvard Business School Press
September 1998
Product no. 7951

Porter’s work, which began with his original
formulation of the five forces, has defined our
fundamental understanding of competition
and competitive strategy. This book is a com-
pilation of a dozen Porter articles: two new ar-
ticles and ten of his articles from Harvard Busi-
ness Review. Together, these essays provide a
complete picture of Porter’s perspective on
modern competition. Organized around three
primary categories: Competition and Strategy:
Core Concepts, The Competitiveness of Loca-
tion, and Competitive Solutions to Societal
Problems, these articles develop the building
blocks that define competitive strategy.

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The Pub: Survive, Thrive, or Die? 1

It was midnight on a Friday night in the middle of April 2008, and Mount Allison
University campus was alive. The Pub was filling up. Patrons waited in line for twen-
ty minutes, had their identification cards thoroughly checked, and entered into the

basement-level facility. The music was pumping, the strobe lights were moving, and the
dance floor was crammed. It was going to be another entertaining night at The Pub.
Behind the bar was a familiar face—Jonathan Clark—known to everyone in town a

s

Scooter. Scooter had been The Pub’s regular manager since 1993. Students and alumni
would remember him long after they had forgotten their grade point average. On that
particular night, Scooter’s thoughts were elsewhere. He was thinking about the board
meeting held earlier that week. The board talked at length about The Pub’s financial sit-
uation and the need to change how it did business.

The Pub had experienced financial difficulties for several years, although the current
year had been financially sound. The likelihood of The Pub remaining profitable in the
future was unclear. Competition among bars had increased as alcohol consumption pat-
terns in Canada changed. The Pub had a special connection with the student base as
their campus pub, but students were fickle and quick to move on to a different bar if it
offered something more appealing. The Pub was set to move to a new location on cam-
pus in August 2008, and the board and Scooter needed to determine the most appro-
priate business model to ensure its survival. Scooter needed a plan to bring back to the
board at the end of the summer.

THE CAMPUS

Officially known as The Tantramarsh Club, The Pub was formed in 1974 at Mount
Allison University (Mount A) in Sackville, New Brunswick, Canada. The town of
Sackville was located in southeastern New Brunswick, in the middle of the Maritime
provinces of Canada. The town bordered the province of Nova Scotia. Sackville’s econ-
omy was driven by tourism and the staff, students, and visitors of Mount A. Sackville’s

The Pub: Survive, Thrive, or Die?
Gina Grandy, Mount Allison University
Moritz P. Gunther, Mount Allison University
Andrew Couturier, Mount Allison University
Ben Goldberg, Mount Allison University
Iain MacLeod, Mount Allison University
Trevor Steeves, Mount Allison University

Copyright 2010 by the Case Research Journal and by G. Grandy, M.P. Gunther, A. Couturier, B.
Goldberg, I. MacLeod and T. Steeves. The authors would like to acknowledge the help of Tupper Cawsey
and three reviewers. An earlier version of this case was presented at the Atlantic Schools of Business
Conference held in St. John’s, Newfoundland, Canada in 2008.

NA00

8

4

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2 Case Research Journal • Volume 30 • Issue 1 • Winter 201

0

population was comprised of approximately 5,000 residents and a university student
base of an additional 2,000 people.

Mount A was a public university and employed approximately 180 faculty (30
part-time and 150 full-time) and 340 staff (50 part-time and 290 full-time)1. The
university’s target enrollment level was 2,275 students. The university administration
deliberately controlled enrollment at this target number to ensure students benefited
from the close-knit nature of relationships with students, staff, and faculty. The univer-
sity experienced a decline in enrollments in 2004–2005 that took four years to work
through the system. Enrollment levels were approximately 2,200 in 2007–2008.

National trends indicated that between 2001 and 2011, undergraduate enrollment
would increase by 34 percent. Data showed that 85 percent of all full-time students were
enrolled in undergraduate programs. These rising participation rates were attributed to
(1) an increasing number of university-educated parents influencing their children to
attend university, and (2) students’ perceptions that a university degree would result in
a higher paying and more rewarding career.2 National trends also indicated that males
represented 42 percent of total enrollment at universities.3 This national pattern was also
evident at Mount A where female enrollment made up 61 to 64 percent of total enroll-
ment in any given year. Mount A was primarily an undergraduate university with more
than forty distinct programs. The university offered bachelor’s degrees in arts, science,
commerce, fine arts, and music, as well as master of science (biology and chemistry) and
a certificate in bilingualism. Mount A ranked as the number one undergraduate univer-
sity in 2007 by Maclean’s magazine. The university achieved this number one position
twelve times over a seventeen-year period.4

Founded in 1839, the university was known for excellence in liberal arts education.
There were more than 140 clubs and societies (e.g., Bio-Med Society, Commerce
Society, Coalition for Social Justice, Garnet and Gold Musical Theatre Society, Judo
Club), a campus theatre, a visiting performing arts series, and numerous concerts (often
performed by students and faculty of the music department). University constituen

ts

were also actively involved in community-based activities in Sackville. The university
had a strong alumni base and there were more than thirty chapter locations across the
world. The university held two significant on-campus events annually: the reunion
weekend in May and the homecoming weekend in September.

TRACING THE PUB’S ROOTS

The university established regulations in 1968 that permitted students to consume alco-
hol on campus. Mount A’s governing body approved the formation of a campus pub in
1973 but it would operate as a separate entity from the university. The Pub’s financial
year did coincide with the university’s financial reporting year (May 1 through to April
30). The Constitution, originally approved on November 2, 1973, outlined the purpose
of The Pub as:

. . . fostering and promoting artistic, literary, educational, social, recreational, and sport-
ing activities for the advancement of the interests of its members and others; providing a
club room and other conveniences and facilities for members and guests; promoting
social and friendly intercourse among its members and guests; and, affording opportuni-
ties for informal conferences on all matters of common interest.5

Most campus pubs were non-profit entities operated through university student
unions. The Pub at Mount A operated separately from the Student Administrative

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The Pub: Survive, Thrive, or Die?

3

Council (SAC) and had its own insurance and financial reporting. Over the years,
The Pub and SAC organized joint events and benefitted from cross marketing but in
general, income generated by The Pub rested with the management of The Pub. The
Pub’s net profits were re-invested into operations and facilities or held as savings.

The university signed a formal agreement with The Pub in 1984 to more clearly out-
line the relationship between the two organizations. The university appointed a senior
administrative official to The Pub board. The director of administrative services,
Michelle Strain, assumed this responsibility. Strain indicated, “The Pub does not oper-
ate fully at arm’s length. The University has some input into decisions of The Pub.” The
university’s lease agreement with The Pub read, “The university has a vital interest in
ensuring that the operations of the club within the premises will not create an adverse
reflection of the university.” The Pub existed at the discretion of the university. The uni-
versity dictated whether or not The Pub was to purchase new appliances or engage in
other upgrades to reflect the university’s intended image to potential students, visitors,
and the public at large. The Pub’s lease could be terminated if its management did not
comply with the requirements set by Mount A’s administrators and board of regents.

Within a year of opening, the directors of The Pub employed a full-time manager to
handle all operational issues. The manager’s duties included, staffing, inventory control,
cash reconciliations, bank deposits, liquor purchasing and pickup, security, mainte-
nance, cleaning and equipment maintenance, payroll, accounting assistance, record-
keeping, public relations, promotions and advertising, music/entertainment control, and
regular operational maintenance of the third-party ATM machine. The manager acted
in a similar fashion as an owner/operator would in such a small organization of approx-
imately twenty-two employees, twenty of whom were part-time student employees.

A WORN BUT ADORED PLACE

The Pub was located in the basement of the University Centre on the north side of
campus. Access via a treacherous staircase meant that students with disabilities had
difficulty entering The Pub. No signage appeared on the exterior of the building, but
most individuals on campus knew exactly where to find it. The Pub symbolized tradi-
tion and for former and current students it was a nostalgic place. A vibrant overhead
mural on the entrance staircase corresponded with the interior décor. Walls were also
painted with colorful murals depicting political and social scenes. Small round tables,
painted like the rest of the facility, dotted the premises in no real order or form. A small
coat check was at the entrance, covered with pictures of patrons from years gone by. A
long, thin, cramped bar stretched the length of the room, with clear signs stating, “Order
in this Area.” There was one cash register and this slowed down ordering, despite the best
efforts of the employees. A maximum of two bartenders served customers. On some
nights The Pub set up a second bar in another corner of the club as a remedy to address
slow service.

A DJ booth overlooked a dance floor to the left as patrons entered the facility.
Speakers surrounded the DJ booth and pool tables were located in the back area. The
ceiling was exposed, allowing all who entered to notice the piping and ventilation sys-
tems. The majority of the floors were covered with old, stained carpet and the rest with
bland tile. This was The Pub, and despite its run-down appearance, it had been the
adored hangout of Mount A students for decades.

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4 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

Fire regulations limited The Pub’s maximum capacity to 175 patrons. Long lines
were common on nights with special entertainment, and on Friday and Saturday nights
in general. Customers’ most frequent complaint was waiting in line at The Pub.

The development of a new University Centre on campus meant The Pub would
move to a new location later in 2008. Strain indicated, “there was a campus facility
master plan done in 2001 and the decision was made to move all student-related func-
tions over to one student centre. So, all non-academic services including the radio sta-
tion, bookstore, cafe, pub, and registrar’s office will be located there. As a part of that
plan, a building on campus, Trueman House, was selected to be renovated because it is
in the student services zone with the athletics building.” Scooter indicated that moving
The Pub would be bittersweet for staff as there was both anxiety and anticipation.
There were still uncertainties with the new location. There would be a new layout and
employees were concerned about the size of The Pub and the absence of a permanent
DJ booth. They also worried that the culture and working environment would change
with the new location. Strain noted, “People are apprehensive. The old Pub is falling
apart. There are leaking pipes, electrical issues, sewage back-ups and a few things not up
to building code. On the one hand, students know it has to move to a new building with
new facilities. One big factor in people’s minds is the size. The Pub is now 3,300 square
feet and the new Pub will be 2,800 square feet. And so, that 500 feet has become a big
issue for quite a few people.” However, the new Pub did provide new opportunities.
Scooter stated, “It will certainly take a bit of time for us to become accustomed to a dif-
ferent bar layout, but the new bar presents an opportunity for greater efficiencies in serv-
ing customers, especially since we will be able to have more serving stations in place.”

THE MOST SOCIAL WORKPLACE ON CAMPUS

All employees of The Pub were students, except Scooter and the doorman. The staff con-
sidered The Pub to be the most social workplace on campus. Promotions manager Chris
Grove pointed out, “it helps build another side of students’ education here at Mount A.”
Employees were offered drink discounts on nights they were not working, were allowed
to walk past lines, and shared tips equally (regardless of position) amounting to $300 or
$400 per individual annually. Scooter donated his share of the tips to charity. Most
employees moved between positions depending on what needed to get done. No formal
job descriptions existed. Generally, hiring occurred in early September and January, fol-
lowed by several weeks of training for newcomers. If the Pub needed more staff during
the year, further employees would be hired. Scooter expressed, “we’ve always tried to
purposefully aim for the broadest possible selection of students during the hiring
process. In terms of gender, the split is fairly equal. In terms of academic standing,
there is a heavier emphasis on upper-year students, although we try to hire students
in their second year to minimize turnover. We try to have at least one member of each
of the four or five biggest varsity sports teams and rugby clubs, at least one student
from each of the dozen most popular areas of study, members of most of the biggest
campus extra-curricular bodies and charities, several students who speak multiple lan-
guages, a few international students, and a few students with diverse sexual orienta-
tions.”

The full-time management and DJ positions required extensive training of at least
one year and replacement was difficult, as individuals graduated and left the univer-
sity. Scooter indicated that retention was the biggest challenge to The Pub given its

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employee structure. As a partial remedy, the board was considering hiring another non-
student full-time employee in the future.

Staff described the working environment at The Pub as informal and fun, despite the
fact that almost all positions paid minimum wage. Employees joked around and every-
one was easy to get along with. At the same time, one bartender pointed out that
employees “recognize there is a job to do and they get it done.” On busy nights, partic-
ularly weekends, it was a demanding working environment, often with late nights. Once
clean-up was finished at around four in the morning, employees sat down for half an
hour, had a drink, and relaxed. The board expected staff members to be role models to
other students. Unruly behavior and excessive drinking were reprimanded by bans from
The Pub, the elimination of discounts, or reduced hours, but almost never a notice to
leave employment forever. Underperformance on the job, such as slow service as a bar-
tender, was discussed by Scooter and Grove. The managers frequently worked as bar-
tenders on busy nights. In general, less experienced staff members were scheduled to
work on slower nights during the week.

DECISION MAKING AND GOVERNANCE

The Pub had a clear, but not necessarily strict hierarchy (see Exhibit 1). This hierarchy,
although informal, was clearly understood by employees. One bartender noted, “roles
are not entrenched or established within contracts or job descriptions.” Seniority and
experience played a significant role and best described the structure of The Pub. Staff
members who had been employed at The Pub for a number of years—usually two or
more—were given added responsibilities such as key access so that they could open The
Pub on nights they were working.

The Pub: Survive, Thrive, or Die? 5

Exhibit 1 The Pub’s Structure

Board of
Directors

(15–17 people)

Manager
(Scooter)

Student
Promotions Manager

(Chris Grove)

Bartenders Coat
Check

Doorman
Ian Allen—long time employee

and Mount A staff member

Bus
Staff

• Five Mount A students, elected and voting

• One university administrator, appointed by the
university and voting.

• Two Mount A alumni, elected and voting.

• Two members at large from the university com-
munity, elected and voting.

• Up to two alternative members at large, elected
and non-voting.

• One faculty member, elected and voting.

• One SAC representative, appointed by SAC.

• One accountant, appointed and non-voting.

• One manager, appointed and non-voting.

• One student manager, appointed and non-voting.

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Scooter, a graduate of the commerce program at Mount Allison, was a well-rec-
ognized face on campus. Staff felt that he had a pleasant disposition and was easy
going. Scooter also had strong ties to the community. He owned and operated a
local restaurant, The Olive Branch, and did a lot of local contracting work with
video and audio recording and productions. He worked as The Pub’s manager dur-
ing the regular academic year (September to April) and travelled to Western Canada
during the summer months working as a tree planter. A Mount A student-employee
took on the responsibility of manager during the slow, summer months. The Pub’s
sales during the summer break were minimal because the majority of students left
town, so The Pub operated at reduced hours.

The Pub was a non-profit entity with an active board of directors. The board pri-
marily fulfilled an advisory and governance role providing checks and balances, rather
than getting involved with the operational side of the organization. Yet, the board was
also a key resource to the university in monitoring The Pub and influencing its actions.
For example, similar to most universities across Canada, Mount A made an effort to
ensure responsible drinking on and around campus. The board was one way for the uni-
versity to keep a check on the activities of The Pub and ensure safe and responsible
drinking on campus.

In 1995, the board requested that Scooter compile a list of sanctions commonly
imposed upon patrons who caused problems. Using Scooter’s list as the starting point,
Scooter and a sub-committee of the board developed a set of disciplinary policies and
procedures in line with the university judicial guidelines. In the event of unruly patrons,
The Pub enforced appropriate sanctions as outlined in its Disciplinary Guidelines,

6

including details on smuggling alcohol on premises, attempting to access a restricted
area, breakage of bottles/glasses, violence/aggression, damage to property, drinking and
driving, drinking after being cut off, fighting, harassment, indecency, loaning identifica-
tion cards, refusal to comply with staff, theft, use/possession of illegal drugs, and under-
age drinking. An appeal process was also outlined, as well as guidance, albeit in less
detail, on appropriate behavior for staff and board members.

Strain described her role on the board as “someone who brings sober second thought.
Anyone who has been the university representative is articulate enough to present the
university’s position without having to veto decisions.” Board decisions were mostly
unanimous, and it had made some tough decisions over the years. For the 2006–200

7

academic year, the board decided to reduce Scooter’s salary and responsibilities at The
Pub to cut expenses. His salary was reduced from $42,000 to $28,000. In 2006–2007
the board also decided to hire a student manager to fulfill some of Scooter’s responsibil-
ities (e.g., promotions) at an estimated annual expense of $4,000. “Collectively we had
no choice, we had cut back other costs and one big cost is Scooter’s salary. So when you
are running deficits, savings are depleted. In an effort to turn it around, we all agreed to
reduce the manager’s salary for one year,” explained Strain.

TARGET MARKETS

The Pub was open to all past and present members of the Mount A “community,” that
is, faculty, alumni, current students, and anyone with a definable affiliation with the uni-
versity. Patrons were required to provide government issued identification indicating that
they were of legal drinking age (nineteen years old) before entering the facility. Scooter
stated, “the core group of customers at the Pub would be the Pub members. Almost half

6 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

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of Mount A’s students purchase a VIP membership that gives them a number of bene-
fits. Basically, those students who purchase Pub memberships are generally the most
social students on campus, the ones who will come to the Pub at least a couple times per
month throughout the year.” While all students at Mount A were technically members,
only those who purchased a membership of The Pub for $40 were granted entry with-
out having to pay a cover charge or discount on the cover charged at special events. The
membership provided other privileges, such as drink tickets for a free glass of mixed hard
liquor and frequent e-mail updates on events and drink specials at The Pub.

Scooter and Grove promoted the annual memberships aggressively. Memberships
were $40 ($30 for one term) and The Pub sold more than 700 memberships in the
2007–2008 academic year. The two years prior, the number of memberships sold was
approximately 550 per year. However, Scooter noted that incentives offered in conjunc-
tion with these memberships (e.g., tickets for free drinks) had eliminated a substantial
portion of the associated profits.

Scooter indicated that from time to time, faculty used the facility for a class event;
however, this was infrequent. Scooter noted “in terms of revenue, the most valuable
group of students are those who frequent The Pub because they are attracted to the
dance floor. About 80 to 90 percent of the revenue earned by The Pub happens on
Friday and Saturday nights, when we have dance parties. There are certainly other mar-
ket niches—a small group of students prefers a sit-down Pub atmosphere, and will usu-
ally only visit The Pub on weeknights for quieter events such as trivia, games nights, and
nights with no special theme or louder dance music. However, the majority of students
prefer the dance club atmosphere of the weekend dance parties.” The Pub did not offer
hot food—just snacks such as nuts, chips, and bars. Scooter also explained that provid-
ing food would not be option for The Pub in its current location. It did not have a
kitchen and the cafeteria in the University Centre was located on another floor, and
would be moved to the new University Centre.

The Pub offered a wet/dry event every Wednesday night and sometimes for special
events such as when there was live music. For these events, individuals who were under
the legal drinking age and those who chose to refrain from the consumption of liquor
were restricted to a clearly marked and separated area within The Pub. On rare occasions
The Pub hosted completely dry events. Scooter expressed that attempts to host wet/dry
events in close co-operation with SAC had not always resulted in the expected turnout
of students. Generally speaking, turnout of non-drinkers depended upon what else was
offered, such as live music or other forms of entertainment. Scooter explained that prof-
it margins on non-alcoholic beverages were low.

The most attended event during the weekday evenings was Trivia Night on Tuesdays.
It was a quiet night and teams that correctly answered the most trivia questions in a
round of ten won drink tickets. On any given Tuesday, The Pub was likely to give away
more than thirty drink tickets. Various events, such as live music, often in support of
charitable causes, were sometimes hosted at The Pub and most of the cover charge for
these events was passed on to the bands or charity. (Exhibit 2 provides a schedule of the
usual events hosted at The Pub during a regular week).

The Pub’s open access Web site had become a popular outlet to keep members as well
as the broader community up-to-date on past, present, and future events.7 Photos taken
at The Pub were posted on a weekly basis. There was a section devoted to alumni that
included an e-mail directory and photos of homecoming and convocation/reunion.

The Pub: Survive, Thrive, or Die? 7

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FINANCIAL CRISIS

During the last decade, The Pub had experienced several years of financial loss (see
Exhibit 3). The Pub drew upon its savings accumulated in the 1990s to cover its
losses and if those reserves expired, The Pub would likely close. The Pub had nearly
exhausted financial reserves and, at times, it was close to bankruptcy. New Brunswick’s
rising minimum wage had increased expenses for a number of years. For example, in
2004 the minimum wage rate in New Brunswick was $6.20, in 2005 $6.30, in 2006
$6.70, in 2007 $7.25 and in 2008 $7.75. Strain indicated that The Pub’s financial situ-
ation was particularly acute in 2003/2004 when insurance costs shifted sharply.

Beginning January 1, 2004, changes by the university’s insurance provider, the
Canadian University Reciprocal Insurance Exchange (CURIE), prohibited the uni-
versity from providing liability coverage to The Pub. CURIE provided coverage for most
universities across Canada. CURIE decided to remove coverage from all student groups
on every campus. The Pub was not the only organization on campus affected by this.
The student-led newspaper (The Argosy), the student-led radio station (CHMA), and the
SAC all had to find and fund their own coverage. CURIE’s rationale was that each mem-
ber university did not control the risk associated with these groups. Cases involving
student groups were driving up costs of coverage. This resulted in The Pub having to
purchase liability insurance externally, costing an average of $17,000 per year. In sub-
sequent years Strain noted, “the insurance market became less risk averse in general
and our broker was able to get better rates for the same insurance, which helped.”

The Pub mounted television sets to screen advertisements along with pictures of
patrons in an attempt to increase revenues. Scooter estimated that advertising revenue
was less than $600 annually for each of the last three years. The Pub made minimal

8 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

Day Mon. Tues. Wed. Thurs. Fri. Sat.

Hours of operation
(Closed Sun)

Normal Bar
Hours
(9 P.M.–1 A.M.)

Normal Bar Hours
(9 P.M.–1 A.M)

Normal Bar
Hours
(9 P.M.–1 A.M)

Normal Bar
Hours
(9 P.M.–1 A.M)

9 P.M.–2 A.M 9 P.M.–2 A.M

Special
programming

None Trivia Wet/Dry
Wednesdays

Club/Society
Event or Bingo

Dance/Music Dance/Music

Cover charge Usually none Usually none Usually none Usually none Yes Yes

Description of
activities

No particular
program

• Three rounds of
trivia questions/
music in between

• Molson Canadian
draft drink tickets
as prizes

• Busiest night dur-
ing the week
(excluding Friday
and Saturday)

• Live enter-
tainment

• Part of
facility
separated
for non-
drinking

• Bingo on tel-
evision
screens

• Molson
Canadian
draft drink
tickets as
prices

• Music

• Music, pool,
dance floor,
quiet areas

• Second
busiest night
of the week

• Music, pool,
dance floor

• Usually the
busiest night
of the week

Note: Some university affiliated organizations, such as The Argosy (the student newspaper), occasionally obtained exclusive
access to The Pub on a weeknight, for example, to hold their semi-annual staff party there. Usually The Pub sponsored any alcohol
that was consumed and was allowed certain privileges in return. For example, The Argosy allowed The Pub to advertise for free in
the paper, although The Pub rarely did this.

Exhibit 2 The Tantramarch Club Weekly Schedule

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

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,0

56

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

10 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

Tantramarsh Club Inc. Balance Sheet Fiscal Year Ended April 30, 2007

2007 2006
Assets
CURRENT ASSETS:

Cash $10,037 $30,729

Term Deposits 18,936 21,307

Inventory (Note 3) 23,524 8,304

Prepaid Expenses 5,215 6,541

Total current assets $57,712 $66,881

EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Note 4) $24,620 $28,265

Total Assets $82,332 $95,146
Liabilities and Members’ Equity:
CURRENT LIABILITIES:

Accounts payable and accrued liabilities $1,526 $41

Due to Mount Allison University 1,141 805

Total Liabilities $2,667 $846

MEMBERS’ EQUITY:

Retained Earnings $79,665 $94,300

Total Liabilities and Members’ Equity $82,332 $95,146

Tantramarsh Club Inc. Statement of Cash Flows
Fiscal Year Ended April 30, 2007

2007 2006
Operating Activities
Cash receipts from customers $193,498 $226,931

Cash paid to suppliers & employees (211,444) (230,981)

Interest paid (835) (874)

Cash Flow Used By Operating Activities $(18,781) $(4,924)

Investing Activities
Additions to capital assets $(4,618) $(1,053)

Proceeds on disposal of capital assets — 274

Term deposits 2,371 (361)

Cash flow used by investing activities $(2,247) $(1,140)

Financing Activity
Advances from (to) related parties $-336 $(1,319)

Cash flow from (used by) financing activity $336 $(1,319)

Decrease in Cash Flow $(20,692) $(7,383)
Cash—Beginning of year 30,729 38,112

Cash—End of Year $10,037 $30,729

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

attempts to make the facilities available to conference guests over the summer months.
The idea was promising, as higher prices could be charged to these guests and tips were
usually much higher than with students. Approximately 3,000 conference attendees over
nineteen years of age stayed on campus during the spring and summer months.
Unfortunately, as Scooter noted, The Pub was old, tired, and had a student-oriented
physical appearance, which discouraged conference attendees from visiting. Some sum-
mer guests had openly commented that the colorful drawings, worn-down plastic chairs,
1950s style repainted tables, openly displayed heating pipes and air vents on the ceiling,
noticeable stench, and countless stains on the carpet were powerful reasons for not enter-
ing the locale. Strain echoed Scooter’s comments and she too felt that the run-down
appearance of The Pub affected sales from conference attendees. She also noted “the
manager goes away in the summer and The Pub hires a student manager. Sometimes the
summer manager has another job and can decide when and how often The Pub is open.
So it is problematic. To ensure service for conference guests, it is sometimes better to rec-
ommend that they go to Ducky’s, in town.” Scooter and Strain anticipated that faculty
and conference attendees would be more inclined to visit The Pub in its new location.
Both felt that The Pub needed to find a way to capitalize on this opportunity.

COMPETING FOR A SMALL MARKET

Scooter indicated “2007–2008 shows signs of being one of our most profitable years in
some time, partly because of the closure of one of the competing bars in town.” Three
competing bars catered primarily to students (see Exhibit 4). There had been a fourth
competitor but it had recently closed. All bars were located within a one kilometer radius
of each other. Scooter was friendly with the management of these other pubs. Often, one
of The Pub board’s members was a manager from one of the competing pubs in town.
There were also several other small bars located in Sackville that primarily attracted
locals, but not students. Scooter estimated that each direct competitor took away
approximately 10 percent of The Pub’s potential sales revenue and affected its contribu-
tion margin by $15,000. “We were faced with a strong competitive challenge from one
specific establishment located off-campus. That establishment recently closed, due in
part to regulatory noncompliance issues relating to the fact that a large number of under-
age university students were able to get into that bar on a regular basis. As soon as that
establishment closed down, business volumes and profitability returned to The Pub.”

The Pub’s primary focus was to offer a service to Mount A constituents and as a non-
profit organization, it offered the lowest prices on alcoholic beverages in town. Recent
provincial legislation permitted bars to advertise prices. However, The Pub’s close affili-
ation with Mount A and its related university policies and regulations prevented this.
The Mount A Liquor Policy indicated that advertising on campus, outside The Pub, and
for events at The Pub, had to comply with University policies.8 Prices of alcohol (includ-
ing reduced prices) were not to be quoted and promotion of overconsumption was not
permitted.

The local liquor store (Alcool New Brunswick Liquor (ANBL)) was approximately
1 kilometer from The Pub. The town of Amherst, Nova Scotia, was about 20 kilome-
ters from Sackville and the city of Moncton, New Brunswick, about 50 kilometers.
Scooter did not consider bars in Amherst and Moncton a threat; however, students were
known to travel to these areas from time to time for a night out. A University Club on

The Pub: Survive, Thrive, or Die? 11

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

12 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

Exhibit 4 Competitor Details and Map of Sackville

Uncle Larry’s. Located approximately a kilometer from The Pub in downtown Sackville. The facility could hold approximately 300 people and was
a popular hangout for locals of Sackville throughout the week, as well as a popular hangout for students when special events were held there. It
was formerly a Dooley’s franchise and as a result, numerous pool tables were located throughout the facility. There was also a dance floor compa-
rable to or slightly bigger than the dance floor space at The Pub. The facility itself was much larger than The Pub and could therefore accommo-
date a larger group. Generally, Friday and Saturday nights were the busiest nights at Uncle Larry’s. Students frequent Uncle Larry’s usually for
special events such as Keith’s Crew and Mount A fundraisers. Keith’s Crew was an event held once or twice a semester sponsored by Alexander
Keith’s Brewery. Entry was $12 for all you could drink of Keith’s beer and there was usually a live band. It was usually held on a weeknight
(Thursday) and the bar was often filled to its capacity. Uncle Larry’s also hosted events for fundraisers such as Shinerama.

Operating hours were 10 A.M. until 12 A.M. Sunday to Thursday (unless there was a special event) and Friday and Saturday until 2 A.M. Prices
were comparable to The Pub and there were always drink specials that were comparable with The Pub. There was a large selection of available
drinks and this was comparable to other places in town.

Ducky’s. A venue considerably smaller than Uncle Larry’s, The Pub or George’s Roadhouse. It was located near Uncle Larry’s in the downtown
of Sackville, less than a kilometer from The Pub. Ducky’s typical consumer was someone interested in non-mainstream music (e.g., indie music
was popular there). The crowd of Ducky’s was very low key; students who wanted to go out for a drink would go to Ducky’s rather than go to The
Pub where people usually had more than a drink. It was a laid back atmosphere. Students, locals and faculty of the university were known to fre-
quent Ducky’s. The manager of Ducky’s was a former Mount A graduate who was also a member of The Pub board of directors. There was no
dance floor but there was a large screen television. There were some couches located near the television. It was open seven days a week from
3 P.M. to 2 A.M. The busiest nights were Friday and Saturdays, although Tequila Tuesdays (reduced prices on Tequila) were popular as well.

George’s Roadhouse. Located the furthest from downtown Sackville, at approximately 1.5 kilometers from The Pub. It was not a regular hangout
for students who preferred mainstream music, although the inexpensive Sunday brunch was known to draw a Mount A following. Mount A students
who had an interest in Indie music were likely to frequent George’s for live acts by student bands or visiting bands. George’s had a stage to sup-
port live music acts and hosted visiting acts organized by The Tantramarsh Blues Society every couple of months. The Tantramarsh Blues Society
was a non-profit organization that coordinated live blues’ music acts. The contact person for the society was a faculty member of Mount A17. The
Roadhouse provided an avenue for non-mainstream music. The music would be different than what would be heard at The Pub or Uncle Larry’s.

Source. http://www.mta.ca/conference/images/map_sackville.gif

For the exclusive use of S. Wang, 2023.

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campus targeted faculty and staff. It offered bar services for special events usually held
on Fridays. The University Club was open for lunch throughout the week, but did not
offer bar services during that time.

LESS ALCOHOL MORE FOOD

Revenues for the Canadian Food Services and Drinking Places industry were $40.6 bil-
lion in 2006, up 4.5 percent from 2005.9 Three of the four sectors of the industry expe-
rienced growth. The Limited Service sector (restaurants where meals were ordered and
paid at the counter) experienced growth of 6.6 percent, the Special Food Services sector
(contractors, social caterers, and mobile food services) experienced growth of 6.2 percent
and Full Service Restaurants (consumers ordered and paid for meals at a table) experi-
enced a growth of 4 percent. The fourth sector, Drinking Places, was the only sector to
experience a decline in operating revenues. In 2006 the decline was 6.2 percent, and that
was the second consecutive year of decline for that sector. In 2006, sales of food and non-
alcoholic beverages accounted for 83 percent of total sales in the industry, while sales of
alcoholic beverages accounted for 14 percent.

Campus pubs had been hit hard by the decline in their alcoholic beverages’ sales.
Campus pubs were no longer lucrative cash cows. In Canada, most campus pubs had
experienced declining revenues as students became more studious, health conscious, and
money minded.10 Students preferred to spend time socializing at campus coffee shops
rather than at campus pubs. For example, in 2006 Dalhousie University’s campus pub,
the Grawood Lounge, located in Halifax, Nova Scotia, had experienced a $40,000 loss,
and one of the campus pubs at University of Alberta, the Power Plant, was closed and
replaced by a coffee shop.

To survive, campus pubs moved from a model that focused on alcohol sales to one
that was more multi-purpose with food offerings and a diversified range of programming
to attract and retain consumers.11 For example, the University of Windsor’s campus pub,
the Basement, experienced a decline in alcohol sales in 2007, but food sales were up and
overall revenues increased. Renovations to the facilities, new catering options, and
changes to the entertainment resulted in the higher sales. Student unions were quick to
argue that the intent of campus pubs was not to attain profits but rather, break-even and
provide a safe and convenient locale for students. For example, Oliver’s, Carleton
University’s campus pub, subsidized the cost of food to keep prices as low as possible for
students.

UNIVERSITIES TAKING ON RESPONSIBLE DRINKING

There were efforts at universities across the country to tackle social norms and alcohol
consumption. BACCHUS Canada, a part of The Student Life Education Company, was
a non-profit organization committed to the promotion of healthy decisions on the use
and non-use of alcohol and other health issues by post-secondary education students.12

Through its membership base, BACCHUS strived to disseminate information to stu-
dents and worked to facilitate change on campuses across the country. Research indi-
cated that students’ estimates of alcohol consumption by peers were much higher than
real consumption.13 In 2004, BACCHUS conducted research with 14,000 university
students at ten universities in Canada. Sixty-three percent drank twice or less per month,
but 80 percent believed that their peers drank once or more per week. Other campus

The Pub: Survive, Thrive, or Die? 13

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

groups across the country, similar to BACCHUS, strived to eliminate misconceptions
about alcohol consumption among students.

Mount A implemented several mechanisms through which non-drinking and mod-
erate drinking were encouraged. The Health Matters Society organized health promo-
tion activities annually to promote non-drinking and responsible drinking.14 An alcohol
use/awareness week often occurred at the same time as homecoming weekend. The Pub
was sometimes involved in these initiatives. In 2006, a partnership between SAC and the
Student Life Department at the university set out to celebrate Mount A students who
did not drink, drank moderately, or changed their alcohol behaviors temporarily.15 The
“Our Best Times Are Not Wasted” initiative offered mini grants to individuals or groups
who organized non-alcoholic events and the group offered tips for moderate drinking.
More than 400 people attended one event held at The Pub in September 2006.16

OPPORTUNITY FOR A NEW BUSINESS MODEL

Mount A began renovations in 2007 on one of the older buildings on campus to create
a new University Centre housing almost all administrative and non-academic student-
related operations of the university. The Pub’s move to its new location within the new
centre was scheduled to take place in August 2008. Many details were still unclear and
The Pub still needed to make decisions about the type of bar that it was to become.
Strain expressed, “the board was giving input all along the way. It was back and forth.
Right now it is a dance bar opened essentially for two hours on two nights of the week.
We discussed where we will place a DJ booth, does it have to be like the DJ booth in the
current location or is it going to be one we can push into a closet, pull out and set up to
allow more flexibility. Even though we are moving in a few months, the board has not
really made many decisions that need to be made. For example, about the pool tables,
the number of seats, the types of tables. The university will have to make those decisions
if the board and Scooter do not.” Scooter had been heavily involved in the planning of
the new location. He designed the bar to serve up to 300 guests; however, the new pub’s
capacity would be 150. In The Pub’s new location up to four bartenders would be able
to serve customers and two cash registers would be available. Strain indicated that the
new pub could also rent a space adjacent to it which would increase its capacity to 200.
“The university designed a space that was as flexible as possible, so that The Pub can be
anything it wants to be” said Strain.

The new location was expected to provide many improvements. It would be more
professional in terms of physical appearance, thus allowing for corporate and conference
guests to bring business to The Pub over the slow summer months. It would have a debit
card payment option for patrons and an ATM would be located outside The Pub but
within the University Centre building. New appliances, such as a more environmen-
tally friendly dishwasher, better draft pouring appliances, new chairs, tables, counters,
and a generally more convenient bar set-up, would provide for more efficient service and
increased profitability. Scooter noted, “some of the most likely opportunities for the new
location will relate specifically to the facility and to the nearby location of the universi-
ty café. From an operational point of view, the current location is in pretty rough shape
as far as the infrastructure goes, so it will be nice to move into a new location with func-
tional plumbing and electrical, which doesn’t require repairs every week or so. From the
customers’ point of view, we should be able to partner with the new café in terms of hav-

14 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

ing pub food available, which could enhance our weekday traffic and increase sales and
profitability during times when the dance floor is not operational.”

The university would cover incidental costs such as moving fees and infrastructure
needs. The university would provide The Pub with a loan to buy the new equipment
and furniture that the university required it to purchase. This loan would be repaid over
a number of years. University officials had recently indicated that the loan would be
more than the $100,000 first expected. The Pub was to make a $40,000 down payment
on the loan and set up a payback plan at a 2 percent interest rate.

Members of the board and Scooter had contemplated the future of The Pub. The
new location would be an ideal opportunity to alter the business model that had been
in place for some time. The board had to evaluate The Pub’s ability to compete with
other bars targeting the student market in Sackville, as well as The Pub’s ability to attract
a broader scope of consumers, students and otherwise. It was clear that Scooter needed
to develop an explicit plan before the board met again.

NOTES

1. Mount Allison University’s Web site www.mta.ca.
2. 2008. “Trends in higher education. Backgrounder. Snapshot of Canadian universi-

ties.” Association of Universities and Colleges of Canada. Web site accessed March
19, 2009. http://www.aucc.ca/publications/media/2002/trendsback_e.html .

3. 2008. “The gap in achievement between boys and girls.” Statistics Canada. Web site
accessed March 19, 2009, http://www.statcan.gc.ca/pub/81-004-x/200410/7423-
eng.htm.
2004. “University enrolment.” The Daily. Statistics Canada. Web site accessed
March 19, 2009, http://www.statcan.gc.ca/daily-quotidien/040730/dq040730b-
eng.htm.

4. The Maclean’s magazine annual rankings assesses Canadian universities on a diverse
range of factors, from spending on student services and scholarships and bursaries,
to funding for libraries and faculty success in obtaining national research grants.
Maclean’s surveys universities with a focus on the undergraduate experience. The
intent is to offer an overview of the quality of instruction and services available to
students at public universities across the country.
Source. Dwyer, M. 2008. “Our 18th Annual Rankings.” Maclean’s, 19 December,
Web site accessed August 31, 2009, http://oncampus.macleans.ca/educa-
tion/2008/12/19/our-18th-annual-rankings/.

5. The Constitution of the Tantramarsh Club http://www.mta.ca/pub/constitu-
tion.html.

6. The Tantramarsh Disciplinary Policies and Procedures http://www.mta.ca/pub/dis-
cipline.html.

7. The Tantramarsh Club Web site http://www.mta.ca/pub.
8. Mount Allison University Liquor Policy

http://www.tantramarshclub.com/archives/liquorpolicy2008 .
9. 2008. Food Services and Drinking Places 2006 62-243-X, Service Industries

Division. Statistics Canada. Web site accessed March 2, 2009, http://www.stat-
can.gc.ca/pub/63-243-x/2008001/5206040-eng.htm.

The Pub: Survive, Thrive, or Die? 15

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.

10.CanWest News Service. 2007. Campus pubs going dry. November 10. Web
site accessed August 21, 2009, http://www.canada.com/topics/news/nation-
al/story.html?id=0be6aac4-24e1-445a-bfa2-c0e75bed9da2&k=90085.

11.Fex, S. 2008. Campus pubs: The end is not nigh. University Affairs, January 7. Web
site accessed August 31, 2009, http://www.universityaffairs.ca/campus-pubs-the-
end-is-not-nigh.aspx.

12.BACCHUS Canada Web site www.studentlifeeducation.com.
13.Gordon, A. 2007. Campus pubs hits dry spell. TheStar.com, October 27. Web site

accessed August 31, 2009, http://www.thestar.com/living/article/269627.
14.Mount Allison University’s Health Matters Society Web site

http://www.mta.ca/health/hms/index.html.
15.Mount Allison University’s Our Best Times Are Not Wasted Web site

http://www.mta.ca/departments/sss/timenotwasted/index.html.
16.Trotter, Kris. 2006. “Best Times” at Mount A. Campus Notebook. Mount Allison

University’s Communication Newsletter 27(2), Sackville: 8. Web site accessed
February 20, 2009, http://www.mta.ca/extrelations/notebooks/05-06/oct_06 .

17.The Tantramarsh Blues Society Web site http://www.mta.ca/tbs.

16 Case Research Journal • Volume 30 • Issue 1 • Winter 2010

For the exclusive use of S. Wang, 2023.

This document is authorized for use only by Si Yu Wang in BUS 690-Winter 2023 taught by Manely Sharifian, San Francisco State University from Dec 2022 to Jun 2023.