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 the firm stand against substitutes? Against the sources of entry barriers? In coping with rivalry from established competitors?
An effective competitive strategy takes offensive or defensive action in order to create a défendable position against the five com-petitive forces. Broadly, this involves a number of possible ap-proaches:
- positioning the firm so that its capabilities provide the best defense against the existing array of competitive forces;
- influencing the balance of forces through strategic moves, thereby improving the firm‘s relative position; or
- anticipating shifts in the factors underlying the forces and re-sponding to them, thereby exploiting change by choosing a strategy appropriate to the new competitive balance before rivals recognize it.
The first approach takes the structure of the industry as given and matches the company’s strengths and weaknesses to it. Strategy can be viewed as building defenses against the competitive forces or as finding positions in the industry where the forces are weakest.
Knowledge of the company’s capabilities and of the causes of the competitive forces will highlight the areas where the company should confront competition and where avoid it. If the company is a low-cost producer, for example, it may choose to sell to powerful buyers while it takes care to sell them only products not vulnerable to competition from substitutes.
2. INFLUENCING THE BALANCE
A company can devise a strategy that takes the offensive. This posture is designed to do more than merely cope with the forces themselves; it is meant to alter their causes.
Innovations in marketing can raise brand identification or otherwise differentiate the product. Capital investments in large- scale facilities or vertical integration affect entry barriers. The bal•ance of forces is partly a result of external factors and partly within a company’s control. Structural analysis can be used to identify the key factors driving competition in the particular industry and thus the places where strategic action to influence the balance will yield the greatest payoff.
3. EXPLOITING CHANGE
Industry evolution is important strategically because evolution, of course, brings with it changes in the structural sources of competi-tion. In the familiar product life-cycle pattern of industry develop-ment, for example, growth rates change, advertising is said to de-cline as the business becomes more mature, and the companies tend to integrate vertically.
These trends are not so important in themselves; what is critical is whether they affect the structural sources of competition. Con-sider vertical integration. In the maturing minicomputer industry, extensive vertical integration is taking place, both in manufacturing and in software development. This very significant trend is greatly raising economies of scale as well as the amount of capital necessary to compete in the industry. This in turn is raising barriers to entry and may drive some smaller competitors out of the industry once growth levels off.
Obviously, the trends holding the highest priority from a stra-tegic standpoint are those that affect the most important sources of competition in the industry and those that bring new structural fac-tors to the forefront. In contract aerosol packaging, for example, the trend toward less product differentiation is now dominant. This trend has increased buyers’ powers, lowered the barriers to entry, and intensified rivalry.
Structural analysis can be used to predict the eventual profit-ability of an industry. In long-range planning the task is to examine each competitive force, forecast the magnitude of each underlying cause, and then construct a composite picture of the probable profit potential of the industry.
The outcome of such an exercise may differ a great deal from the existing industry structure. Today, for example, the solar heating business is populated by dozens and perhaps hundreds of compa-nies, none with a major market position. Entry is easy, and competi-tors are battling to establish solar heating as a superior substitute for conventional heating methods.
The potential of solar heating will depend largely on the shape of the future barriers to entry, the improvement of the industry’s po-sition relative to substitutes, the ultimate intensity of competition, and the power captured by buyers and suppliers. These character-istics will, in turn, be influenced by such factors as the likelihood of establishment of brand identities, whether significant economies of scale or experience curves in equipment manufacture will be created by technological change, what will be the ultimate capital costs to enter, and the eventual extent of fixed costs in production facilities. (The process of industry structural evolution and the forces driving it will be explored in detail in Chapter 8.)
4. DIVERSIFICATION STRATEGY
The framework for analyzing industry competition can be used in setting diversification strategy. It provides a guide for answering the extremely difficult question inherent in diversification decisions:
“What is the potential of this business?” The framework may allow a company to spot an industry with a good future before this good future is reflected in the prices of acquisition candidates.
The framework can also help identify particularly valuable types of relatedness in diversification. For example, relatedness that allows the firm to overcome key entry barriers through shared func-tions or pre-existing relationships with distribution channels can be a fruitful basis for diversification. All these issues will be explored in more detail in Chapter 16.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.