1. Competitive Strategies
1.1 Porter, M. E. (1997) - Competitive strategy
Competitive strategy identifies the industry as the basic unit of analysis and the product
(incorporating the idea of service) as the basic unit of business. It consists out of three parts:
1. Identify the current business strategy (implicit or explicit) and define the industry
structure and company position that this strategy assumes.
2. Analyze the actual structure of the target industry and the position of the company
relative to this and its competitors.
3. Compare strategic assumptions with reality, evaluate the current strategy along with
feasible alternatives and choose the strategy that best reflects the industry structure
and the position of the company within it.
Structural Analysis of Industries
The generic industry structure results from a balance of five basic competitive forces.
● Potential entrants: the threat of new entrants is balanced by the barriers that must be
overcome to gain a foothold in the industry.
○ Economies of scale, where companies must enter at a high production
volume, research investment, or level of customer service (i.e. mainframe
computers).
○ Product differentiation, where new entrants must overcome existing brand
loyalties reinforced by substantial marketing and advertising (ie. cosmetics).
○ Capital requirements, where new entrants face large capital investments and
start-up costs (i.e. mining and mineral extraction).
○ Switching costs, where it is expensive for customers to switch from existing
products for reasons such as compatibility requirements or retaining costs
(i.e. business software).
○ Access to distribution channels, where new entrants must secure a
distribution network or where existing channels may be controlled by
competitors (i.e film industry)
○ Existing companies may have cost advantages not available to new entrants,
access to raw materials, favorable locations, government subsidies, or
technical expertise.
○ Government restrictions such as environmental requirements, quality
standards, or access to materials.
The sum of these factors determines the entry deterring price. The unit price equates
to the cost of overcoming these entry barriers. Several factors may change the
impact of entry barriers: patent expiration, vertical integration (increase importance of
economies of scale), or new technology (bypass the learning curve).
● Industry competitors: the intensity of rivalry between existing competitors results from
a number of interaction structural forces:
○ Numerous equally balanced competitors may have the resources for a
protracted struggle for market share or may be competing for insufficient
customer demand
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, ○ Industry growth may not be sufficient to sustain an acceptable level of
profitability.
○ High fixed or storage costs mean firms must operate close to capacity (i.e.
hazardous chemicals).
○ Lack of product differentiation or low switching costs leads to increased price
sensitivity on the part of the buyer (i.e. personal computers).
○ The rapid expansion of production in pursuit of economies of scale leads
eventually to over-capacity.
○ Profitability is depressed by competitors not interested in rapid growth.
○ Companies running high risk ventures tend to be more expansionary and as
such more willing to make sacrifices in return for rapid gains.
○ High exit barriers, whether financial, strategic, or emotional may prevent
unprofitable concerns from leaving the market or derive them to ever more
extreme business tactics.
● Substitutes: substitute products from other industries may compete directly on price
and performance. Competition will “cap” prices that individual companies can charge
and drive down profitability.
● Buyers: buyer influence determines the profit that can be extracted from a product
while meeting price and quality demands.
○ The presence of a small number of large volume buyers increases price and
service sensitivity (i.e. bulk chemical).
○ The larger the portion of buyer costs or consumer investment a product
represents the more likely they are to “shop around” (i.e. personal
computers).
○ Where quality and added value are unimportant the buyer will opt for the
cheapest alternative.
○ Low switching costs will counteract brand loyalty and increase the importance
of price or added value.
○ The threat of “backward integration” where the buyer has the capability to
make the product themselves will also restrict profitability (i.e. car parts).
● Suppliers: the bargaining power of the supplier regards the workforce of an industry
also as a supplier influences the inherent cost of a product.
○ A concentrated group of suppliers serves many purchasers.
○ The supplier is aware that there are no substitutes for their product or that the
cost of switching is prohibitively high.
○ The industry is not an important customer for the supplier group.
○ The supplier's product is essential to or constitutes an important part of the
buyer’s operations.
○ The supplier group threatens “forward-integration”.
2
1.1 Porter, M. E. (1997) - Competitive strategy
Competitive strategy identifies the industry as the basic unit of analysis and the product
(incorporating the idea of service) as the basic unit of business. It consists out of three parts:
1. Identify the current business strategy (implicit or explicit) and define the industry
structure and company position that this strategy assumes.
2. Analyze the actual structure of the target industry and the position of the company
relative to this and its competitors.
3. Compare strategic assumptions with reality, evaluate the current strategy along with
feasible alternatives and choose the strategy that best reflects the industry structure
and the position of the company within it.
Structural Analysis of Industries
The generic industry structure results from a balance of five basic competitive forces.
● Potential entrants: the threat of new entrants is balanced by the barriers that must be
overcome to gain a foothold in the industry.
○ Economies of scale, where companies must enter at a high production
volume, research investment, or level of customer service (i.e. mainframe
computers).
○ Product differentiation, where new entrants must overcome existing brand
loyalties reinforced by substantial marketing and advertising (ie. cosmetics).
○ Capital requirements, where new entrants face large capital investments and
start-up costs (i.e. mining and mineral extraction).
○ Switching costs, where it is expensive for customers to switch from existing
products for reasons such as compatibility requirements or retaining costs
(i.e. business software).
○ Access to distribution channels, where new entrants must secure a
distribution network or where existing channels may be controlled by
competitors (i.e film industry)
○ Existing companies may have cost advantages not available to new entrants,
access to raw materials, favorable locations, government subsidies, or
technical expertise.
○ Government restrictions such as environmental requirements, quality
standards, or access to materials.
The sum of these factors determines the entry deterring price. The unit price equates
to the cost of overcoming these entry barriers. Several factors may change the
impact of entry barriers: patent expiration, vertical integration (increase importance of
economies of scale), or new technology (bypass the learning curve).
● Industry competitors: the intensity of rivalry between existing competitors results from
a number of interaction structural forces:
○ Numerous equally balanced competitors may have the resources for a
protracted struggle for market share or may be competing for insufficient
customer demand
1
, ○ Industry growth may not be sufficient to sustain an acceptable level of
profitability.
○ High fixed or storage costs mean firms must operate close to capacity (i.e.
hazardous chemicals).
○ Lack of product differentiation or low switching costs leads to increased price
sensitivity on the part of the buyer (i.e. personal computers).
○ The rapid expansion of production in pursuit of economies of scale leads
eventually to over-capacity.
○ Profitability is depressed by competitors not interested in rapid growth.
○ Companies running high risk ventures tend to be more expansionary and as
such more willing to make sacrifices in return for rapid gains.
○ High exit barriers, whether financial, strategic, or emotional may prevent
unprofitable concerns from leaving the market or derive them to ever more
extreme business tactics.
● Substitutes: substitute products from other industries may compete directly on price
and performance. Competition will “cap” prices that individual companies can charge
and drive down profitability.
● Buyers: buyer influence determines the profit that can be extracted from a product
while meeting price and quality demands.
○ The presence of a small number of large volume buyers increases price and
service sensitivity (i.e. bulk chemical).
○ The larger the portion of buyer costs or consumer investment a product
represents the more likely they are to “shop around” (i.e. personal
computers).
○ Where quality and added value are unimportant the buyer will opt for the
cheapest alternative.
○ Low switching costs will counteract brand loyalty and increase the importance
of price or added value.
○ The threat of “backward integration” where the buyer has the capability to
make the product themselves will also restrict profitability (i.e. car parts).
● Suppliers: the bargaining power of the supplier regards the workforce of an industry
also as a supplier influences the inherent cost of a product.
○ A concentrated group of suppliers serves many purchasers.
○ The supplier is aware that there are no substitutes for their product or that the
cost of switching is prohibitively high.
○ The industry is not an important customer for the supplier group.
○ The supplier's product is essential to or constitutes an important part of the
buyer’s operations.
○ The supplier group threatens “forward-integration”.
2
