Strategic frameworks for analyzing industry competition and developing winning strategies. Based on Michael Porter's seminal work on competitive advantage and industry analysis.
Techniques for Analyzing Industries and Competitors
Strategic frameworks for analyzing industry competition and developing winning strategies. Based on Michael Porter's seminal work on competitive advantage and industry analysis.
“Competitive Strategy: Techniques for Analyzing Industries and Competitors”
Author: Michael E. Porter | Free Press, 1980
Industry structure determines profitability potential through five competitive forces. Firms achieve sustainable competitive advantage by: (1) positioning to minimize force impact, (2) influencing force balance, or (3) exploiting structural change.
Competitive success requires systematic analysis of: industry structure, competitor goals/assumptions/strategies/capabilities, market signals, and strategic moves
Industry evolution follows predictable patterns creating strategic opportunities and threats
Industry profitability determined by collective strength of five competitive forces measuring long-run return on invested capital.
Potential Entrants
Threat of New Entry
Suppliers
Bargaining Power
Industry Rivalry
Competition
Buyers
Bargaining Power
Substitutes
Threat of Substitution
Economies of Scale
Cost advantages from large-scale production
Product Differentiation
Brand loyalty and customer switching costs
Capital Requirements
Need for large upfront investments
Switching Costs
One-time costs buyers face when changing suppliers
Access to Distribution
Difficulty securing distribution channels
Cost Advantages Independent of Scale
Proprietary tech, raw materials, locations, learning curve
Government Policy
Regulations, licensing, permits restricting entry
Three internally consistent strategies for creating defendable position: cost leadership, differentiation, focus.
(Differentiation or Cost)
Briggs & Stratton
50% share in small engines
Lincoln Electric
Arc welding equipment
Emerson Electric
Electric motors
Texas Instruments
Electronics
Black & Decker
Power tools
Position lacking clear competitive advantage; guaranteed low profitability
Example: Clark Equipment
33% U.S./18% worldwide lift trucks - squeezed by Japanese cost leaders below, Hyster differentiation above
Systematic diagnosis of competitor intentions, capabilities, and likely moves through four components.
Blind Spots: Areas where competitor won't see significance, perceives incorrectly, or perceives slowly
Key operating policies in each functional area and their interrelation
Is competitor satisfied with current position?
What likely moves/strategy shifts will competitor make?
Where is competitor vulnerable?
What will provoke greatest retaliation?
Actions by competitors providing direct/indirect indications of intentions, motives, goals, or internal situation. Can be truthful or bluffs.
Groups of firms in industry following same or similar strategy along key dimensions.
Finding: U-shaped profitability relationship
GE/Emerson
Large, low-cost
High Profitability
Baldor/Gould
Focused, specialty
High Profitability
Franklin
Middle-sized, no clear strategy
Low Profitability
Changes in industry structure over time driven by evolutionary processes.
Long-run growth changes
Most fundamental driver
Changes in buyer segments
Emergence, differential growth
Buyers' learning
Sophistication increases over time
Reduction of uncertainty
Technology, needs, rules clarify
Diffusion of proprietary knowledge
Patents expire, employees move, reverse engineering
Accumulation of experience
Learning curve effects
Expansion/contraction of scale
Efficient scale changes
Changes in input/currency costs
External shocks
Product innovation
Incremental/breakthrough/proliferation/standardization
Marketing innovation
Channels, promotion, segmentation
Process innovation
Production methods, automation, quality
Structural change in adjacent industries
Suppliers, buyers, substitutes, complements
Government policy changes
Regulation, deregulation, trade, antitrust
Entries and exits
Concentration changes, dynamics shifts
Industries where no firm has significant market share; many firms compete
Tightly managed decentralization
Standardized procedures, central training, local autonomy
Formula facilities
Replicable formats (Holiday Inn, H&R Block)
Increased value added
Backward/forward integration
Specialization
Product/customer/order/geography
Bare bones/no frills
Low cost, strip non-essentials
Example: McDonald's consolidated fragmented restaurants through standardization, centralized purchasing, national marketing
Briggs & Stratton
Cost leadership - 50% share
Caterpillar
Differentiation - dealer network + quality
Porter Paint
Focus - professional painters only
Clark Equipment
Stuck in middle - lift trucks
Harnischfeger
Cost revolution - cranes
Maxwell vs. Folger's
Cross-parry - coffee
Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.