The Pub Survive, Thrive, or Die 1It was midnight on a Fr.docx

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 as
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.
NA0084
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.
2 Case Research Journal • Volume 30 • Issue 1 • Winter
2010
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 constituents
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
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.
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
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.
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.

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 2006–2007
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
2010

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.

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
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
E
xh
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56
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
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
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
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
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-
2010
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.pdf.
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.
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.pdf.
17.The Tantramarsh Blues Society Web site
http://www.mta.ca/tbs.
2010
www.hbrreprints.org
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
http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name
=itemdetail&referral=4320&id=R0801E
http://www.hbrreprints.org
The Five Competitive Forces That Shape
Strategy
page 1
The Idea in Brief The Idea in Practice
C

O
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L
P
U
B
LI
SH
IN
G
C
O
R
P
O
R
A
T
IO
N
. A
LL
R
IG

H
T
S
R
ES
ER
VE
D
.
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.

The Five Competitive
Forces That Shape
Strategy
by Michael E. Porter
harvard business review • january 2008 page 2
C
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©
2
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7
H

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ES
S
SC
H
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P
U
B
LI
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IN
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C

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R
P
O
R
A
T
IO
N
. A
LL
R
IG
H
T
S
R
ES
ER
VE
D
.
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

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).

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
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%
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.
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.

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
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.

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