Strategies are indeed plans for achieving and sustaining success. But they are not just any ideas for how to make a product or service and sell it profitably to customers. Rather, strategies are those plans that specifically focus on the actions and responses of competitors.

It is so dominant that leaders seeking to develop and pursue winning strategies should begin by ignoring the others and focus only on it. That force is barriers to entry—the force that underlies Porter’s “Potential Entrants.”

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

Either the existing firms within the market are protected by barriers to entry (or to expansion), or they are not. No other feature of the competitive landscape has as much influence on a company’s success as where it stands in regard to these barriers.

The existence or absence of competitive advantages forms a kind of continental divide when it comes to strategy. On one side are the markets in which no firms benefit from significant competitive advantages. In these markets, strategy is not much of an issue. Lots of competitors have essentially equal access to customers, to technologies, and to

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

the approach we recommend here, the central question is whether, in the market in which the firm operates or is considering entering, competitive advantages exist. If they are present, what are they and who has them? We have described two tests for their existence: stable market shares and a high return on investment for the dominant incumbent

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.