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Competitive Strategy
Management >Competitive Strategy

Table of Contents Overview

In the dynamic environment of the business world, a firm needs
Abstract to constantly focus on improving its competitive strategy. Com-
petitive strategy refers to the way a firm can gain advantage over
Overview others operating in a similar market. Rivalry drives improve-
Industry Analysis ment and innovation. Without competition, strategy would be
irrelevant.
Threat of New Entry
Bargaining Power of Suppliers Strategy goes beyond operational improvement. Tactics that
are easily imitated do not constitute a strategy. Simply improv-
Bargaining Power of Customers ing operations or quality cannot lead to a competitive strategy.
Threat of Substitutes A competitive strategy utilizes analysis of the structure of an
industry and its competitors in order to identify an optimal posi-
Rivalry among Existing Competitors tion. A competitive strategy will also integrate the strengths and
resources of the firm to develop a competitive advantage. A sus-
Applications tainable competitive strategy involves continuous improvement
with strategic continuity.
Issues
Company Analysis This article will focus on the process by which a successful com-
petitive strategy can be developed. The first step to creating a
Strategic Development competitive strategy is to analyze the structure of the industry
SWOT Matrix and the nature of competition. Next, we will discuss how to
assess the firm's internal environment. Once a clear picture of
Issues the industry structure and firm attributes are identified, we can
consider the options for achieving goals and sustaining a com-
Conclusion petitive advantage.

Terms & Concepts Industry Analysis

Bibliography
Suggested Reading
Abstract
This article focuses on strategic analysis and strategic develop-
ment for companies operating in today's dynamic, competitive
business environment. This article will introduce tools for analyz-
ing the external and internal factors that a firm faces. We will then
apply that insight to the formulation of a competitive strategy.
In 1979, Michael Porter introduced the business world to a
framework for analyzing the structure of an industry. His model,
commonly referred to as Porters Five Forces, takes a broad
approach to competitive analysis. He moves beyond focusing on
direct competitors in the market and expands his scope to all
players in the value chain. Customers, suppliers, potential new
entrants and substitute products are all taken into account in shap-
ing the competition of an industry. Porter's Five Forces model is
internationally recognized as the foundation for a thorough com-
petitive analysis. This framework can assess the attractiveness
of an industry and help clarify how value is divided among dif-
ferent players in the value chain. According to Porter, the nature
and degree of competition is influenced by the five major forces
that will be discussed in detail below.

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 Competitive Strategy
Figure 1: Porters Five Forces
Threat of New
Entry
Bargaining Power
Rivalry Among
Bargaining Power
Existing
of Suppliers of Customers
Competitors
Threat of
Substitutes
Threat of New Entry
New entrants into a market can really shake up an industry. A firm
can lose market share, enter a costly battle to defend territory or
lose leverage with customers and suppliers. When assessing the
attractiveness of an industry with respect to new entrants, we
look to mitigating factors called barriers to entry. These charac-
teristics can help protect an industry from new entrants. There
are nine major barriers to entry that we will discuss:
1. Economies of scale Economic efficiencies are vital
to successfully competition in many industries. In many
cases, the higher the production volume, the lower the
unit cost of production. This increased efficiency provides
an advantage to firms that can produce large volumes. If
economies of scale come into play in the industry, then a
new entrant would either have to match the scale of the
large producers or accept a cost disadvantage.
2. Brand Identity Recognition in the marketplace can be
hard for a new entrant to overcome. Brand loyalty takes
time and money to build. A new entrant may need to
spend heavily on advertising and in other areas such as
customer service to displace the entrenched players.
3. Proprietary Product Differences Companies which
have patents or other proprietary knowledge can hamper
a new entrant's success in the marketplace.
4. Capital Requirements The requirement to invest sig-
nificant financial resources to enter an industry can also
inhibit new entrants. Whether it is manufacturing equip-
ment, research and development, or advertising expendi-
tures, any large capital outlay will make a new firm think
twice about market entry.
5. Absolute Cost Advantages Independent of the size of
a company, there are some advantages that come with a
track record in the industry. These advantages can arise
from the effects of the experience curve, access to a su-
perior supplier, favorable location, etc. New entrants may
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not be able to match established firms when it comes to
these advantages.
6. Switching Costs In some cases, consumers will incur
additional expenses for switching from a product or service.
Monetary penalties, such as an exit fee for breaking a con-
tractual obligation, are employed in many industries. There
can also be psychological switching costs that must be
overcome to get consumers to change from the status quo.
7. Government Policy The government can curb compe-
tition in an industry through policies and regulations. The
government may have a limited number of licenses that
can be given out to set up operations in a certain industry.
Environmental regulations and granting of monopolies
can also prevent a new firm from entering the market.
8. Access to Distribution In many industries, there is a fi-
nite number of products that can be offered to consumers.
Wholesalers and retailers do not have unlimited capacity.
Therefore, there will always be a fight for shelf space. Ex-
isting players can lock up the distribution, making it hard
for new entrants to get their products to the market. The
more constrained the distribution outlet, the more limited
the pool of players.
9. Expected Retaliation The threat of new entrants can
also be influenced by the expected reaction of exist-
ing players. If the existing players possess substantial
resources to mount a fight or cut prices, new entrants are
less likely.
Bargaining Power of Suppliers
The relationship between a supplier and buyer is one of the most
important aspects in business. Procurement of raw materials,
labor and other supplies is vital to ongoing operations. Profits
of a firm can be squeezed by suppliers exerting their power.
Suppliers can raise prices, reduce quality, limit supply or even
sign exclusive contracts with competitors. In general, powerful
supplier groups possess one or several of the following charac-
teristics.
1. Supplier Concentration If the industry is dominated by
a few suppliers, this provides little choice for the buyer.
2. High Switching Costs As discussed in the previous
section, switching costs can prevent buyers from taking
advantage of alternatives. In the case of a supplier-buyer
arrangement, there may also be product specifications that
tie a buyer to a particular supplier or the buyer could have
invested in expensive equipment to process a particular
supplier's raw materials. If the buyer will incur switching
costs, then the supplier has more strength.
3. Unique Product When there are few viable substitutes
for the materials a firm is trying to procure, the supplier
gains more power in the relationship. For example, the
buyer could require a special component that has propri-
etary technology.
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 Competitive Strategy
4. Viable Forward Integration Threat When a supplier
has the ability to enter the business themselves, it will
prevent the buyer from getting too greedy.
5. Serves Multiple Industries If a supplier's product can
be used for many purposes in several different industries,
then the supplier can be picky about whom they do busi-
ness with.
6. Marginal Customer A buyer may be an insignificant
customer to the supplier because they do not purchase
enough volume. In that case, the buyer may be the first
to experience price increase, material shortages or lower
quality products.
Bargaining Power of Customers
Customers can also negatively impact an industry's profitability.
Customers can push price down, require higher service and force
competitors into costly battles for their patronage. In general,
powerful customer groups possess one or several of the follow-
ing characteristics.
1. Concentrated or Large-Volume Buyer These big
customers generally can make or break a company. These
buyers are courted by many competitors in the industry
and can usually capture concessions because of their
power over the firm.
2. Standardized Product These are undifferentiated
products with ample alternatives. Because there is little
brand identity and no switching costs, these are the most
vulnerable to manipulation by customers.
3. High Price to Total Purchase Ratio If what the buyer is
purchasing constitutes a significant portion of total costs
or total budget, the buyer is more likely to scrutinize the
product and its price.
4. Low Buyer Profits If a firm earns low profits, it is
much more price sensitive than a firm that has a lot of
cushion.
5. Viable Backward Integration Threat If the buyer has
the ability to acquire a similar company or build the
product themselves, then they will have significant power
over the firm.
Threat of Substitutes
Substitutes can come in many forms. Threats can come from
within the industry in the form of technology advances. They
can also come from outside of the industry with a product that
has a similar application. For example, plastic pallets could
be a significant threat to a cardboard box manufacturer. The
theory of supply and demand can be applied to this threat.
The more viable substitutes there are in the market, the less
demand and therefore the lower the price may be. If there are
no switching costs and no brand loyalty, the threat of substi-
tutes is considerable.
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Rivalry among Existing Competitors
Competition between direct competitors in the marketplace will
always be present. Firms can wage intense battles to try to steal
market share from one another. Common tactics include price
wars, new/improved product introduction, and escalation of
advertising campaigns. Intense rivalry is characterized by one or
several of the following factors:
1. Slow Industry Growth An industry that is not ex-
panding at fast enough rate to accommodate all players'
growth ambitions, can set the stage for fierce competition.
This is particularly true of mature industries where profits
are on the decline. This scenario generally results in a
shakeout of competitors with only a few surviving.
2. High Exit Barriers Significant investment in custom-
ized equipment or assets may make it hard for a firm to
exit a business. This may cause a company to continue
to compete even after returns have been marginalized.
Direct competition with these firms should be avoided
because they will have incentive to cut costs to the point
of razor thin margins or negative returns.
3. Significant Fixed Costs This concept relates back to
our discussion of economies of scale. When high volume
production is necessary in order to maintain lower per
units costs, there is a significant incentive to capture more
market share. Market share battles usually involve price
slashing and are quite damaging to profits.
4. High Concentration and Balance When there are
numerous competitors of relatively the same size, com-
petition can be exaggerated. Competition in this kind of
fragmented industry is intensified because they are all on
relatively equal footing, competing for the same supplies
and customers.
5. Product Lacks Differentiation or Switching Costs Cus-
tomers in this case can be very fickle and easily substitute
one firm's product for another. The temptation to undercut
competitors on price can lead to an unattractive proposi-
tion for all in the industry.
6. High Diversity of Competitors When rivals differ in
their strategies, philosophies and cultures, it is hard to
predict what your competitors will do next. This instabil-
ity can cause irrational, intense competition.
Applications
The five forces will impact every market differently. In some
markets, the threat of new entrants is particularly heightened.
In others, the bargaining power of suppliers can be disastrous
for profits. The weaker these forces are, the greater the opportu-
nity for high returns on investment. An industry that experiences
intense threats on all fronts is not very attractive and most likely
has diminished profit opportunities.
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 Competitive Strategy

2. Substitute Products
A competitive strategy can use these forces to find optimal posi-
tioning. Analysis of the five forces can indicate where the firm 3. Changing Consumer Tastes
can best defend itself. It can also help anticipate change so that
a firm is not caught off guard. Finally, the company should use 4. New Entrants
what it knows about the industry to influence the forces in their
favor. Understanding these forces can also highlight whether Opportunities
diversification or integration (vertical or horizontal) makes
1. New Technology
sense. We will further expand on the applications of Porters
model whecuss strategy formulation. 2. New Customer Segments
3. International Expansion
Issues 4. New Distribution Channels

Porter's Five Forces model has been criticized because some

believe it does not consider the complete picture. Some academ-
ics have argued a sixth or even seventh force should be added. A
possible sixth force could be stakeholders such as governments,
employees, shareholders, creditors, etc. Another force that is not
addressed in Porter's framework is the cooperative effect. The
concept of complementors may explain the rationale behind the
prevalence of strategic alliances.
Company Analysis
Once the industry and competitors have been analyzed, we move
on to looking at the particular firm. The next step in strategy
formulation is to take stock of what resources the company has
available and what the strengths and weaknesses are.
One tool that can help organize the examination of a firm is
the SWOT analysis. This framework was developed by Albert
Humphrey, who led research projects on Fortune 500 compa-
nies at Stanford University in the 1960s and 1970s. This model
considers four key areas; (S) strengths, (W) weaknesses, (O)
opportunities and (T) threats. A strategist must perform a com-
prehensive examination of each one of these categories. Some
factors to consider in a SWOT analysis are listed below.
The firm analysis builds on the industry analysis and helps to
explain why the company may be over performing or underper-
forming. It will also help clarify what strategic direction should
be pursued.
Strategic Development
Once a comprehensive analysis has been performed on the
industry and the company, we can start to build a strategic plan.
This article will discuss two common tools to help formulate a
competitive strategy.
Competitive Positioning Matrix The first framework we will
look at follows Porter's Five Forces model. This matrix lays out
four different strategic positions based on the scope of the target
consumer and the level of product differentiation. The theory is
built on the assumption that there are four basic ways to provide
customers with greater value: either through lower cost, special
benefits that justify a higher price, or taking each of these ele-
ments and tailoring it to a narrow target. Below is an illustration
of the positioning strategies.
Figure 2: Competitive Positioning Matrix

Strengths
1. Brand Identity/Loyalty Broad Target Cost Leadership Differentiation
2. Patents/Proprietary Knowledge
Competitive
3. Exclusive Access to Distribution Scope

Differentiation
4. Management Narrow Target Cost Focus
Focus

Weaknesses
Low High
1. High Cost Structure
Product
2. Unstable Suppliers Differentiation

3. Poor Reputation
4. Management Cost Leadership This strategy focuses on low-cost production.
Often this price advantage can be gained through economies of
Threats scale. If too many firms try to pursue this strategy, it can result
in price wars and suboptimal profits for all firms in the industry.
1. Government Regulations

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 Competitive Strategy
Differentiation A strategy based on differentiation would
highlight a product's unique attributes. It focuses on providing
additional value to the customer so that they are willing to pay
more. This unique characteristic could be along many different
lines (e.g., service, distribution, marketing, image, etc.).
Cost Focus This strategy chooses a particular market segment
and tailors its product to that narrow target with the lowest costs.
This competitive strategy takes the aspects of the Cost Leader-
ship strategy and applies it to a particular target.
Differentiation Focus Just as with Cost Focus, this strategy
goes after a particular market segment and caters to that niche.
The basis of this strategy lies in the differentiated product that
can serve the narrow target. It takes the aspects of the Differen-
tiation strategy and applies it to a particular target.
A lack of strategy is seen when a firm attempts to pursue more
than one of these positions. The straddling of several positions
should be avoided. It can lead to suboptimal profits compared to
others in the industry.
SWOT Matrix
After completing the competitive positioning matrix, strategists
might use a SWOT analysis to identify strategies. The SWOT
matrix takes into account the particular characteristics of the firm
to build a strategy that responds to the opportunities and threats
in the industry. Below is an illustration of how the factors com-
bine to form strategies.
Figure 3: SWOT Matrix
Opportunities S/O Strategies W/O Strategies
Threats S/T Strategies W/T Strategies
Strengths Weaknesses
S/O Strategies Uses strengths to exploit opportunities.
S/T Strategies Uses strengths to avoid threats or help defend
against them.
W/O Strategies Highlights weaknesses that must be over-
come in order to take advantage of opportunities.
W/T Strategies Highlights weaknesses that must be overcome
to defend against threats and areas where the company is particu-
larly vulnerable.
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Issues
There are four threats to competitive advantage that a firm should
guard against. Threats to the industry include substitution and
holdup. Threats to a firm include imitation and slack.
Substitution As we discussed previously in the article, the
threat of substitution can make an industry extremely unattract-
ive. The same holds true for a specific firm. Substitution reduces
the demand for what a firm provides and can sometimes be
subtle and unexpected. Monitoring the competitive landscape
can help a firm anticipate this threat. Responses to substitution
could include fighting it directly with either cost reductions, or
incorporating the substitute's benefits into the existing product.
When the product life cycle is on the decline or the when indus-
try competition is too intense, the appropriate strategy might be
to do nothing and harvest.
Holdup This danger occurs when value is diverted to a cus-
tomer or supplier who has some bargaining leverage over the
firm. If the firm has invested in assets that are specific to a par-
ticular relationship, they can be held up as a result. Cooperation
can be an essential element of strategy, but over time it can lead
to issues. Firms must constantly consider the impact of coopera-
tive relationships. To guard against holdup, a firm can maintain
multiple sources, enter into contractual arrangements or verti-
cally integrate.
Imitation One of the biggest risks to a firm's competitive
advantage is the threat of imitation. When a company is doing
well, others will take notice. For strategies to be sustainable, the
firm should make sure its point of differentiation and activities
are not easily copied.
Slack Threats to competitive advantage can also come from
within the company. Slack occurs when there is waste or com-
placency within a firm. To guard against slack, a firm must take
a hard look at itself. Outside board members and management
incentives tied to shareholder value creation can help impose
discipline on the company.
Conclusion
Competitive strategy should be a constant process for all firms.
Before the firm can move in any direction, it should take stock of
where it is and how industry factors are shaping the competitive
landscape.
When a company decides on a strategic position, all activities
in the firm must be consistent with this goal. A competitive
strategy is not a single, discrete action, but rather an entire
activity system that fits together in chorus. There should be an
emphasis on trade-offs. Each decision the firm makes should be
tested against the chosen strategies to make sure it fits. When
a firm is tightly aligned in this matter, it is harder for competi-
Page 5
 Competitive Strategy
tors to match them. Inconsistencies in activities, image, internal
coordination, measurement or controls can cause the firm to be
disadvantaged.
As the business world moves to competition on a global level,
the concepts discussed in this article become even more impor-
tant. A firm may need to craft individual strategies for each new
market it enters, making the strategists job more complex.
Terms & Concepts
Bargaining Power of Customers: One of Porter's five forces
that examines how much leverage the customers in a particular
industry wield.
Bargaining Power of Suppliers: One of Porter's five forces
that examines how much leverage the suppliers in a particular
industry wield.
Barriers to Entry: Obstacles that prevent new players from
entering industry.
Cost Leadership: A competitive strategy that concentrates on
producing a product at the lowest possible price.
Differentiation: A competitive strategy that concentrates on
producing unique products with attributes that improve the value
proposition for consumers (e.g., service, technology, image,
marketing, etc.)
Porters Five Forces: Strategic framework developed by
Michael Porter for assessing the attractiveness of an industry.
Areas of analysis include: 1) New Entrants 2) Suppliers 3) Cus-
tomers 4) Substitutes and 5) Existing Competitors.
Focus: A competitive strategy that focuses on a very narrow
target. A firm can either choose to compete in this niche segment
with low costs or with a differentiated product.
Holdup: Bargaining leverage one player has over another that
can reduce profits or options the firm can pursue.
Threat of New Entrants: One of Porter's five forces that exam-
ines the likelihood of new competition entering the marketplace.
Threat of Substitutes: One of Porter's five forces that exam-
ines how easily a product can be replaced.
Rivalry Among Existing Competitors: One of Porter's five
forces that examines the intensity of competition among existing
players in an industry.
Slack: Waste or complacency within a firm that threatens its
competitive advantage.
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SWOT Analysis: Strategic assessment framework that outlines
a company's strengths (S), weaknesses (W), opportunities (O)
and threats (T).
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Essay by Heather Wall Beckham, MBA

Heather Wall Beckham is the former vice president of strategic planning for the Turner Division of Time Warner. She has also served as
a strategic consultant with Bain & Company, a financial analyst with Ford Motor Company, and an adjunct professor in the Economics
and Business Department of Agnes Scott College. She holds an undergraduate degree from Duke University and an MBA from Harvard
Business School.

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Copyright of Competitive Strategy -- Research Starters Business is the property of Great
Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder's express written permission. However, users may print,
download, or email articles for individual use.
Copyright of Competitive Strategy -- Research Starters Business is the property of Great
Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder's express written permission. However, users may print,
download, or email articles for individual use.
Copyright of Competitive Strategy -- Research Starters Business is the property of Great
Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder's express written permission. However, users may print,
download, or email articles for individual use.