Competition Demystified: A Radically Simplified Approach to Business Strategy

“Everything should be made as simple as possible, but not simpler.”

competitive advantage in general (position 1 in figure 1.3). There are only a few types of competitive advantage (demand, supply, and economies of scale) and two straightforward tests (market-share stability and high return on capital) to confirm their existence.

Taken together, these three approaches—application of knowledge about specific games (prisoner’s dilemma, entry/preemption), simulation, and cooperative analysis—produce a balanced and comprehensive treatment of the problems of formulating strategy in markets with a few genuine competitors, all mutually capable and conscious of one another.

Most companies that manage to grow and still achieve a high level of profitability do it in one of three ways. They replicate their local advantages in multiple markets, like Coca-Cola. They continue to focus within their product space as that space itself becomes larger, like Intel. Or, like Wal-Mart and Microsoft, they gradually expand their acti

Competitive advantages that lead to market dominance, either by a single company or by a small number of essentially equivalent firms, are much more likely to be found when the arena is local—bounded either geographically or in product space—than when it is large and scattered. That is because the sources of competitive advantage, as we will see, t

that competitive advantages are almost always grounded in what are essentially “local” circumstances.

Operational effectiveness can be the single most important factor in the success,

Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible.

With a universe of companies seeking profitable opportunities for investment, the returns in an unprotected industry will be driven down to levels where there is no “economic profit,” that is, no returns above the costs of the invested capital. If demand conditions enable any single firm to earn unusually high returns, other companies will notice t