Competitive Strategy

  • Title: Competitive Strategy
  • Author: Michael E. Porter
  • Paperback: 416 pages
  • Publisher: Free Press (January 19, 2004)
  • Language: English
  • ISBN-10: 0743260880
  • ISBN-13: 978-0743260886

I found this book used at Op Amp Bookstore in Los Angeles. I figured this would be a good one to read, as it should help connect some of my IT strategy thoughts with business strategy. And I’d never read a Michael Porter book, and I’d read that he has a lot of good things to say. Because I think it will be valuable I’ll be taking detailed notes here.

Forces driving industry competition (p. 4)

“The competitive floor, or “free market” return, is approximated by the yield on long-term government securities adjusted upward by the risk of capital loss.” (p. 5)

The barriers to entry of a new market are:

  • Economies of scale
  • Product differentiation
  • Capital requirements
  • Switching costs
  • Access to distribution channels
  • Cost disadvantages independent of scale
  • Government policy

There are three signals for strong retaliation:

  • a history of retaliation
  • established firms with substantial resource or strong commitment to the market
  • slow industry growth

The entry deterring price is the prevailing structure of prices which just balances the potential rewards from entry with the expected costs of overcoming structural entry barriers and risking retaliation. (p. 14)

Industry experience is often used as a barrier to entry, but its not generally very effective; in particular, its often of short-term value only.

When scale is used as a barrier to entry, look for new product differentiations, new technologies; don’t seek out the lowest cost alternative unless you can disrupt the market.

Intensity of rivalry among competitors: (p. 17 – 21)

  • Numerous or equally balanced competitors
  • Slow industry growth
  • High fixed or storage costs
  • Lack of differentiation or switching costs
  • Capacity augmented in large increments
  • Diverse competitors
  • High strategic stakes
  • High exit barriers

Entry and exit barriers are often related. In a simplified world where barriers are high or low: (p. 22)

Substitute products place a ceiling on the price that can be charged; the more attractive the performance of the alternative, the lower the price ceiling. Product that deserve the most attention:

  1. are subject to trends improving their price-performance tradeoff with the industry’s product, or
  2. are produced by industries earning high profits. (p. 24)

A buyer group is powerful if the following hold true:

  • It is concentrated or purchases large volumes relative to seller sales.
  • The products it purchases from the industry represent a significant fraction of the buyer’s costs or purchases.
  • The products it purchases from the industry are standard or undifferentiate.
  • It faces few switching costs.
  • It earns low profits.
  • It poses a credible threat of backward integration.
  • The industry’s product is unimportant to the quality of the buyer’s product or services.
  • The buyer has full information

Suppliers can also have power in pricing, in many similar ways that buyers gain power:

  • It is dominated by a few companies and is more concentrated than the industry it sells to
  • It is not obliged to contend with other substitute products for sale to the industry
  • The industry is not an important customer of the supplier group
  • The supplier’s product is an important input ot the buyer’s business
  • The supplier group’s products are differentiated or it has built up switching costs
  • The supplier group poses a credible threat of forward integration

It’s important to note that labor acts in many ways as a supplier.  The government is also at times a supplier as well as a buyer. (p.27 – 30)

There are three generic competitive strategies:

  • Overall cost leadership
  • Differentiation
  • Focus

One concern I have with overall cost leadership is the risk of low end disruption due to lack of R&D and the general rise of features in a given product set.

“Ideally, the firm differentiates itself along several dimensions.” (p. 37)

Hire to support your strategy!

Some risks of going after overall cost leadership are: (p. 45)

  • technological change that nullifies past investments or learning
  • low-cost learning by newcomers or followers
  • inability to see required changes due to focus on cost
  • inflation is costs narrow the firm’s ability to maintain its price differential in the market

Some risks of differentiation:

  • cost differential becomes too great to hold brand loyalty
  • buyer’s need for differentiation falls
  • imitation narrows perceived differentiation

Some risks of focus:

  • the cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus
  • the differences in products or services narrows
  • competitors find submarkets within the strategic target and outfocus the focuser

“The objective of a competitor analysis is to develop a profile of the nature and success of the likely strategy changes each competitor might make, each competitor’s probable response to the range of feasible strategic moves other firms could initiate, and each competitor’s probably reaction to the array of industry changes and broader environmental shifts that may occur.” (p. 47)

Potential competitors include:

  • Firms not in the industry but who could overcome the barriers to entry particularly cheaply
  • Firms for whom tehre is obvious synergy from being in the industry
  • Firms for whom competing in the industry is an obvious extension of corporate strategy
  • Customers or suppliers who may integrate backward or forward

“One approach in formulating strategy is to look for positions in the market where a firm can meet its objectives without threatening its competitors.” (p. 57)

Prior announcement of moves might include:

  • attempts to stake out a commitment to take an action for the purposes of preempting competitors
  • threats of actions taken if a competitor follows through with an action
  • tests of competitor sentiments
  • means of communicating pleasure or displeasure with competitive developments  in the industry
  • conciliatory steps aimed at minimizing the provocation of a forthcoming strategic adjustment
  • avoid costly simultaneous moves in an area like capacity addition
  • communication with the financial community

Efficiency in a market increases the correct understanding of signals.

The key questions to consider when considering a threatening move are:

  1. How likely is retaliation?
  2. How soon will retaliation come?
  3. How effective will retaliation probably be?
  4. How tough will retaliation be?
  5. Can retaliation be influences?

The rest of the book deals with a the special situations that affect strategy, for example where in the lifecycle of a market you are.

As you can tell from these extensive notes, this is a book I’m keeping, and I plan to use it off an on when I get involved in strategic conversations.


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