Competitive Strategy: Techniques for Analyzing Industries and Competitors

Achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which is incompatible with high market share.

Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price.

The state of competition in an industry depends on five basic competitive forces, which are shown in Figure 1-1. The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital.

Access to Distribution Channels. A barrier to entry can be created by the new entrant’s need to secure distribution for its product.

Cost Disadvantages Independent of Scale. Established firms may have cost advantages not replicable by potential entrants no matter what their size and attained economies of scale. The most critical advantages are factors such as the following: • Proprietary product technology: product know-how or design characteristics that are kept proprietary thr

Economies of Scale. Economies of scale refer to declines in unit costs of a product (or operation or function that goes into producing a product) as the absolute volume per period increases.

The five competitive forces—entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors—reflect the fact that competition in an industry goes well beyond the established players.

1. How likely is retaliation? 2. How soon will retaliation come? 3. How effective will retaliation potentially be? 4. How tough will retaliation be, where toughness refers to the willingness of the competitor to retaliate strongly even at its own expense? 5. Can retaliation be influenced?

The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor.