Theory of Competitive Advantage

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is

Structural Determinants of the Intensity of Competition

Let us adopt the working definition of an industry as the group of firms producing products that are close substitutes for each other. In practice there is often a great deal of controversy over the appro• priate definition, centering around how close substitutability needs to be in terms of product, process, or geographic market

Intensity of Competition: Threat of entry

New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitabili-ty. Companies diversifying through acquisition into the industry from other markets often use their resources to cause a shake-up, as Philip Morris did

Intensity of rivalry among existing competitors

Rivalry among existing competitors takes the familiar form of jockeying for position–using tactics like price competition, adver-tising battles, product introductions, and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. In most industries, competitive moves by one firm have noticeable

Intensity of Competition: Pressure from substitute products

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the poten-tial returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. The more attractive the price- performance alternative offered by substitutes, the firmer the lid on industry

Intensity of Competition: Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bar-gaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability. The power of each of the industry’s important buyer groups depends on a number of characteristics of its market situation and on the rel-ative importance of

Intensity of Competition: Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an in-dustry by threatening to raise prices or reduce the quality of pur-chased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, for example, chemical companies have contributed to

Government as a force in industry competition

Government has been discussed primarily in terms of its possi-ble impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence

Structural Analysis and Competitive Strategy

Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. From a strategic standpoint, the crucial strengths and weaknesses are the firm’s posture vis-à-vis the underlying causes of each competitive force. Where does

Structural Analysis and Industry Definition

A great deal of attention has been directed at defining the rele-vant industry as a crucial step in competitive strategy formulation. Numerous writers have also stressed the need to look beyond prod-uct to function in defining a business, beyond national boundaries to potential international competition, and beyond the ranks of one’s competitors today to

Three Generic Strategies

In coping with the five competitive forces, there are three poten-tially successful generic strategic approaches to outperforming other firms in an industry: overall cost leadership differentiation focus. Sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible as will be dis-cussed further. Effectively implementing any

Generic Strategies: Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions—a firm that is “stuck in the middle”—is in an extremely poor strategic situation. This firm lacks the

Risks of the Generic Strategies

Fundamentally, the risks in pursuing the generic strategies are two: first, failing to attain or sustain the strategy; second, for the value of the strategic advantage provided by the strategy to erode with industry evolution. More narrowly, the three strategies are predicated on erecting differing kinds of defenses against the com-petitive forces, and not

A framework for competitor analysis

Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. It follows that a central aspect of strategy formulation is perceptive competitor analysis. The objective of a competitor analysis is to de-velop a profile of the nature and success of the likely strategy changes each

The Components of Competitor Analysis

Before discussing each component of competitor analysis, it is important to define which competitors should be examined. Clearly all significant existing competitors must be analyzed. However, it also may be important to analyze the potential competitors that may come on the scene. Forecasting potential competitors is not an easy task, but they can often

Putting the Four Components Together—The Competitor Response Profile

Given an analysis of a competitor’s future goals, assumptions, current strategies, and capabilities, we can begin to ask the critical questions that will lead to a profile of how a competitor is likely to respond. 1. OFFENSIVE MOVES The first step is to predict the strategic changes the competitor might initiate. Satisfaction with current

Competitor Analysis and Industry Forecasting

An analysis of each significant existing and potential competi-tor can be used as an important input to forecasting future industry conditions. The knowledge of each competitor’s probable moves and capacity to respond to change can be summed up, and competi-tors can be seen as interacting with each other on a simulated basis to answer

The Need for a Competitor Intelligence System

Answering these questions about competitors creates enormous needs for data. Intelligence data on competitors can come from many sources: reports filed publicly, speeches by a competitor’s management to security analysts, the business press, the sales force, a firm‘s customers or suppliers that are common to competitors, in-spection of a competitor’s products, estimates by the

Types of Market Signals

Market signals can have two fundamentally different functions: they can be truthful indications of a competitor’s motives, inten-tions, or goals or they can be bluffs. Bluffs are signals designed to mislead other firms into taking or not taking an action to benefit the signaler. Discerning the difference between a bluff and a true signal

The Use of History in Identifying Market Signals

Studying the historical relationship between a firm‘s announce-ments and its moves, or between other varieties of potential signals and the subsequent outcomes, can greatly improve one‘s ability to read signals accurately. Searching for signs a competitor may have inadvertently given before making changes in the past can also help to uncover new types of