The Competitive Strategy provides a thorough analysis of the nature of competition in the industry, as well as general strategies that make successful businesses ahead. This book not only provides valuable information on how to compete in the market but also shows how companies can use information about their competitors to improve their position in their own game.
Michael Porter is a professor at the Institute for Strategy and Competitiveness at Harvard Business School and a leading specialist in competitive strategy and economic development. In addition, he wrote 16 books, including Competitive Advantages of Countries and Competitive Advantage: creating and maintaining high results.
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Help Your Company Soar Thanks to a Competitive Strategy
You have an excellent product, an effective team, and a well-designed sales plan.
So what else do you need to succeed in your business?
In Competitive Strategy, Michael Porter says that you must also have in-depth knowledge of industry competition in order to position yourself strategically as a company. This dogma was a real breakthrough when it was first introduced in 1980 and completely changed the way companies analyze themselves in relation to their competitors.
This post will explain the basics of a competitive strategy and how your firm can achieve superior returns with informed planning.
In addition, you will learn:
- – The strategic approach of Apple and Mercedes is based on blows to its competitors;
- – that business statements by companies can often be bluffs;
- – why vertical integration between firms has its own benefits and costs.
The State of Competition in the Industry Depends on Five Key Values
Companies within the industry compete with each other in winning customers and, therefore, in maintaining market positions. Therefore, companies need to have their own competitive strategy to gain greater chances to gain an advantage over their competitors.
But to formulate the most competitive strategy, we must first understand how competition works on its own.
Industry competition is driven by five fundamental values.
The first of these is the entry threat that arises when new entrants strive for market share in the industry and thus create competition. The threat of entry depends on the various barriers to entry that exist in the industry.
For example, if established firms have brand recognition and regular customers, thanks to their long history of advertising, new entrants will have to spend significant amounts of money to overcome these barriers.
The second value is the intensity of competition among existing competitors, i.e. the ongoing struggle for market position. It takes into account such nuances as price competition, advertising battles, new product launches and the quality of customer service.
Whenever one company takes a step in any of these areas, it, therefore, can set off the efforts of other firms to counter their movement.
Thirdly, there is also pressure from substitute products, that is, products from external industries that are fighting for the same customers. For example, sugar producers have been faced with competing foods such as high fructose corn syrup and sugar substitutes.
The fourth value is the market power of buyers. Buyers, in fact, are in direct competition with industry, forcing them to lower prices, bargaining for higher quality services and setting competitors against each other.
Finally, there is the bargaining power of suppliers that threaten to raise prices or lower the quality of goods and services in order to squeeze additional revenues from the industry. The combined strength of these values determines the state of competition in the industry.
Competitive Strategies Can Be Divided Into Three Main Types
We already know that the company must develop a competitive strategy in order to cope with the five competitive values and strengthen its market presence. Typically, these strategies can be divided into three different approaches.
First, the pursuit of leadership in total costs, where your company has the lowest operating costs in the industry. This strategy requires active efforts to reduce costs in areas such as research and development, service, sales, advertising and so on.
This strategy is successful because a favorable pricing position protects firms against powerful buyers who can exert power by lowering prices to the level of their next competitor.
Ford Motor Company provided a classic example of this in 1920 when it controlled its costs by limiting the number of models manufactured by their factories, thereby reducing their core costs.
Another strategic approach is differentiation, as a result of which a company stands out by creating a product or service that will be perceived as unique in its industry.
Differentiation can take various forms: design or brand image, technology, features, customer service or dealer network. All this can make a company unique.
Mercedes, for example, relies on the brand image as a manufacturer of luxury cars in order to maintain its market position. But Apple considers itself unique in terms of computer design.
The big advantage of differentiation is that it softens the power of the buyer. Without comparable alternatives, buyers will be less price-sensitive. However, the disadvantage is that differentiation often requires a sense of exclusivity, which can entail considerable costs. Exclusivity may require extensive analysis, product design, higher quality materials, or intensive customer support.
A third general approach is focusing, where a company zeroes out a specific group of customers, product type, or geographic market.
Howard Paper, for example, does this by creating a narrow range of industrial-grade papers and avoiding products that are prone to massive advertising battles and the rapid introduction of new developments.
There Are Four Diagnostic Components for Competitor Analysis.
Companies need to anticipate and respond to the actions of their competitors if they want to maintain their market position. They should ask themselves the following questions: what is the significance of our competitor and how seriously should it be taken? In order to answer these questions, they need to consider four components of competitor analysis.
The first component is an assessment of the future goals of competitors. Without knowing their goals, you simply cannot predict whether your competitor is satisfied with his current position and whether he will change his strategy. Also, knowing your competitors’ goals can help you gauge how serious their initiatives really are.
The second component is the identification of the assumptions of each competitor. For example, the juice company Innocent can see itself as a “socially conscious” company. On the other hand, Ikea may consider itself a leader in the low-cost furniture industry. Knowing these assumptions is crucial, as it provides an understanding of how these companies behave and respond to various circumstances.
The third component of competitor analysis is to develop an understanding of your competitors’ current strategies. Ask yourself: what are my competitors doing? What can they do?
The last component of the analysis is an adequate assessment of the capabilities of each competitor. A competitor’s goals, assumptions, and strategy will influence the essence and intensity of his next step.
Pay attention to the statements and industry comments of competitors. The behavior of your competitors presents you with yet another challenge: interpreting their market signals, that is, any actions that provide an idea of their intentions, motives, goals, or internal situation.
Some of these signals are bluffs, others are warnings, and some are accurate mandatory actions on the new course. So you need to find out what these signals mean.
Competitor applications may have several features. Priority statements, for example, formal contacts, which provide information on whether or not some measures will be taken, such as the construction of a new plant or price cuts.
Sometimes such statements can be made in order to preempt their competitors by committing themselves to action.
For example, this strategy is typical of IBM, which will announce its product long before it enters the market. The idea behind this is for customers to expect their new product, rather than buy it from a competitor in the interim.
Companies also announce growth rates, sales figures, and other results or actions so that other firms take note of these data and change their behavior.
In addition, industry comments from competitors are also loaded with signals. Companies often comment on the state of the industry, making forecasts on demand, price or future potential.
They can also use these statements to influence competitors. For example, if a company wants to drop prices in the industry, it can make its competitors’ prices appear too high.
New Industries Are Characterized by Common Structural Factors.
New industries are constantly emerging due to new technological innovations, new consumer needs or due to any other economic and social changes. In the 1970s, for example, changes in technological and social conditions led to the introduction of solar energy for heating, video games, fiber optics, personal computers, and fire alarms.
In addition, it takes time for the rules of the competitive game in the new industry to be established. As a result, developing industries must have some structural uncertainties that already established industries will not even take into account.
In developing industries, companies often try a wide range of competitive strategies, and at the same time, they cannot clearly define some kind of “right” strategy. During this time, various firms test many approaches regarding product positioning, marketing, service, etc.
For example, while this book was written, solar heating companies took a wide range of approaches to supplying components or creating systems. This problem is compounded by the fact that companies in developing industries have only limited information about competitors, customer characteristics and general conditions.
In addition, companies should puzzle over issues related to technologies for their implementation. They ask themselves: what is the best product configuration? And which production technology will be most effective?
But there are some things about emerging industries that we can say with confidence.
We know, for example, that developing industries have high upfront costs. The small volume of production and novelty often lead to high cost in relation to the real potential of the industry.
New employees, for example, are less productive than they might be, but they become more productive when they become more familiar with work.
We also know that these industries must first lure customers into buying their products.
Exit barriers keep a firm competitive in a fading industry, and strategic alternatives help them survive
It is almost impossible to avoid the fact that at some point, industries may collapse. In the end, they will experience a time when profitability will shrink, product mixes will become less diverse, research will slow down, and competitors will begin to dwindle. But what exactly leads to the decline of industries?
There is a presentation of a new product that has arisen through technical innovation.
Do you remember the slide rule?
Probably not, since you have an electronic calculator that made the slide rule obsolete.
The second reason is sociological in nature when the needs or tastes of customers change and demand weakens. Just think about cigarettes and cigars, for example. A growing awareness of their health hazards has led to a decrease in social acceptability, and thus the demand for this product has decreased. Even when companies know that the industry is in decline, they cannot get off the ship because exit barriers keep them in competition.
They can arise from various sources. Firstly, highly specialized assets are likely to be at a loss, which means that continuing production can be more profitable than selling it.
The next factor is that a fixed exit cost keeps companies from things like breaking long-term contracts.
There is also a problem of interdependence: business should be so integrated into some kind of large strategy that an exit would mean a decrease in the influence of the strategy or an eclipse of the authenticity and image of the company.
Fortunately, companies in industries that are in decline can take strategic alternatives in order to survive.
They can do this by gaining leadership, becoming either the only one or one of the few companies that remain in the industry. Thus, they will ensure their industry domination.
Another strategy is to find a niche. The idea is to find a segment that will be stable, and then invest in developing your position in this segment. However, there is also a quick exit strategy when a business is sold at an early stage of decline.
Competition in global industries presents unique strategic issues and alternatives
In today’s closely interconnected world, many companies compete in the global market. Therefore, these companies must put up with a much greater variety of competitors within their industry.
In fact, global competition is an opportunity for all industries.
Global industries raise strategic issues that are not in the national industry. This is partly because foreign firms may have different organizational aspects in relation to competition in the domestic market. These may be aspects such as labor methods or management structure.
In addition, companies involved in global industries should begin a thorough study of the relationships between competing for foreign firms and their home countries.
Foreign governments could, for example, negotiate on behalf of their domestic firms in global markets and help finance sales through central banks.
The industry policies of each country should be carefully studied when companies want to compete successfully.
Companies have a number of ways to compete in the global industry. One strategy is to compete with a complete line of products in a particular industry, with an emphasis on relations with governments. The main purpose of this is to reduce barriers to global competition such as import or export duties.
Another opposite option is to focus on a specific industry segment in which the company competes around the world.
Another strategy is to search for countries where government restrictions exclude global competitors, requiring a high level of local participation in the production of the product or putting forward high import duties.
Vertical integration has important benefits and costs.
Successful companies are constantly on the lookout for new ways to increase efficiency and reduce costs. That is why many companies find it useful to carry out all the necessary processes inside, instead of concluding a contract with third parties.
This arrangement is called vertical integration, that is, as a result of which all the unique and technological aspects of production, distribution, sales, etc., occur in one firm.
Oil companies are a good example. Not only do they own oil rigs, they also own the land in which oil lies, oil refineries, tankers and gas stations.
Vertical integration provides many strategic benefits, the most common of which is cost savings. This savings is achieved by the efficiency obtained from conducting all technological operations together under one roof.
In manufacturing, for example, vertical integration can reduce the number of steps in the manufacturing process, thereby increasing efficiency and lowering processing costs.
In metalworking, companies can skip part of the manufacturing process through vertical integration. As a rule, metal should be processed with a finish in order to avoid oxidation during transportation. However, if production equipment is nearby, this step can be easily avoided.
Vertical integration can also reduce planning and coordination costs by streamlining workflows within the enterprise. However, vertical integration also entails strategic costs. Changes in technology or product design can create a situation in which an internal supplier will offer a poor-quality or inappropriate product or service.
However, vertically integrated production will not allow companies to simply abandon their supplier for the better.
The Final Words
If you want to be a winner in your industry, then you should take the time to analyze and understand your competitors. Everything that they do, and everything that they say, can give you knowledge about the next steps you can expect from them and help you gain an advantage in the competition.
Why You Should Read “The Competitive Strategy”
- To lead in your industry;
- To become a recognizable director, investor, and entrepreneur.
- To be able to outperform your competitors
This book is available as: