Techniques for analyzing industries and competitors
The state of competition in an industry depends on five basic forces.
The first is the threat of entry, which occurs when new entrants vying for a market share within an industry, and thus drive competition. The threat of entry is dependent upon the various barriers to entry that exist within an industry.
The second force is the intensity of rivalry among existing competitors, that is, the existing struggle for market position. This takes into account things like price competition, advertising battles, product launches and quality of customer service and warranties.
Third, there’s the pressure from substitute products, that is, products from outside industries which vie for the same customers. Sugar producers, for example, are confronted with competing products like high fructose corn syrup, a sugar substitute.
The fourth force is the bargaining power of buyers. Buyers, in fact, stand in direct competition with the industry by forcing down prices, bargaining for higher quality services and pitting competitors against one another.
Finally, there is the bargaining power of suppliers, who threaten to raise prices or reduce the quality of goods and services in order to squeeze extra profitability out of an industry.
Competitive strategies can be broken down into three general types.
First, the pursuit of overall cost leadership, in which your firm has the lowest operational costs within your industry. This strategy requires vigorous efforts to reduce costs in areas like research and development, service, sales, advertising, and so on. This strategy is successful because a low-cost position defends firms against powerful buyers, who can only exert power by driving down prices to the level of the next competitor.
Another strategic approach is differentiation, whereby a company stands out by creating a product or service that is perceived to be unique in its industry. Differentiation can take many forms: design or brand image, technology, features, customer service or dealer network can all contribute to making a company unique.
A big advantage of differentiation is that it mitigates buyer power. Without comparable alternatives, buyers are thus less sensitive to prices. The disadvantage, however, is that differentiation often requires a perception of exclusivity that can be costly. Exclusivity might require extensive research, product design, higher quality materials or intensive customer support.
The third general approach is the focus, in which a company zeroes in on a particular buyer group, type of product or geographic market
There are three diagnostic components to competitor analysis.
The first component is assessing competitors’ future goals. Without knowing their goals, you simply cannot predict whether your competitor is satisfied with its current position, and thus how likely they are to change their strategy. Moreover, knowing your competitors’ goals can help you assess how serious their initiatives actually are.
The second component is identifying each competitor’s assumptions – about themselves, their competition and the industry itself.
The third component of competitor analysis is developing an understanding of your competitors’ current strategies. Ask yourself questions like: What are my competitors doing? What can they do?
Pay attention to competitors’ announcements and industry commentary.
Prior announcements, for example, are formal communications made by a competitor that suggest it either will or will not take some action, such as building a plant or adjusting their prices. These announcements sometimes attempt to preempt their competitors by committing themselves to a cause or action.
Exit barriers keep firms competing in declining industries, and strategic alternatives help firms survive.
Highly specialized assets are likely to be sold at a loss, meaning that continued production may be more profitable than selling everything off. The fixed costs of exit keep companies from doing things like breaking long-term contracts in order to leave a declining industry. A business might be so integrated into a larger strategy that leaving would diminish the impact of the strategy or obscure the firm’s identity or image.
A surviving strategy is a quick divestment, that is, selling the business early on in its decline, which usually maximizes the value the firm can earn from the sale. Another strategy is finding a niche. The idea here is to find a segment that will remain stable, and then invest in building your position in this segment. They can do this by gaining leadership, by becoming either the only company or one of few companies remaining in the industry, thus assuring their industry dominance.
Competition in global industries presents unique strategic issues and alternatives.
Another opposing option is to focus on a particular industry segment in which the company competes worldwide. This segment will be one where the barriers to global competition are low and where the company can more easily achieve an advantage over companies that try to compete across the full product line of the industry.
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About the book
Competitive Strategy presents a thorough examination of the nature of industry competition as well as the common strategies that successful businesses employ to get ahead. It not only offers valuable insights into how to compete in the market but also reveals how companies can use their competitors’ information to best them at their own game.
Michael E. Porter is a professor at the Institute for Strategy and Competitiveness at the Harvard Business School and a leading authority on competitive strategy and economic development. In addition, he has written 16 books, including The Competitive Advantage of Nations and Competitive Advantage: Creating and Sustaining Superior Performance.