Competitive Strategy: Techniques for Analyzing Industries and Competitors

Posted: 4 Nov 2009

See all articles by Michael E. Porter

Michael E. Porter

Harvard University - Strategy Unit

Date Written: 1980

Abstract

Michael Porter presents a comprehensive structural framework and analytical techniques to help a firm to analyze its industry and evolution, understand its competitors and its own position, and translate this understanding into a competitive strategy to allow the firm to compete more effectively to strengthen its market position. The introduction reviews a classic approach to strategy formulation, one that comprises a combination of ends and means (policies), factors that limit what a company can accomplish, tests of consistency, and an approach for developing competitive strategy. A competitive strategy articulates a firm's goals, how it will compete, and its policies for achieving those goals. Competitive advantage is defined in terms of cost and differentiation while linking it to profitability. Part I, "General Analytical Techniques," provides a general framework for analyzing the structure of an industry and understanding the underlying forces of competition (and hence profitability). Five competitive forces act on an industry: (1) threat of new entrants, (2) intensity of rivalry among existing firms, (3) threat of substitute products or services, (4) bargaining power of buyers, and (5) bargaining power of suppliers. Looking at industry structure provides a way to consider how value is created and divided among existing and potential industry participants. One competitive force always captures essential issues in the division of value.There are three generic competitive strategies for coping with the five competitive forces: (1) overall cost leadership, (2) differentiation, and (3) focus. There are risks with each strategy. A firm without a strategy is "stuck in the middle." This framework for examining competition transcends particular industry, technology, or management theories. Building on this framework, techniques are presented for industry forecasting, analysis of competitors, predicting their behavior, and building a response profile. Essential for a competitive strategy are techniques for recognizing and accurately reading market signals. Implications of structural analysis for buyer selection and purchasing strategy are presented. Game theory provides concepts for responding to competitive moves. Using the concept of strategic groups, structural analysis can also explain differences in firm performance (profitability), provide a guide for competitive strategy, and predict industry evolution. Part II, "Generic Industry Environments," shows how firms can use the analytical framework to develop a competitive strategy in industry environments, which reflect differences in industry concentration, state of industry maturity, and exposure to international competition. These environments determine a business's competitive strategic context, available alternatives, and common strategic errors. Five generic industry environments are examined: fragmented industries (where level of industrial concentration is low), emerging industries, transition to industry maturity, declining industries, and global industries. In each, the crucial aspects of industry structure, key strategic issues, characteristic strategic alternatives (including divestment), and strategic pitfalls are identified. Part III, "Strategic Decisions," draws on the analytical framework to examine important types of strategic decisions confronting firms that compete in a single industry: vertical integration, major capacity expansion, and new business entry. Additional use of economic theory and administrative consideration of management and motivation helps a company to make key decisions, and gives insight into how competitors, customers, suppliers, and potential entrants might make them. Appendix A discusses use of techniques for portfolio analysis applied to competitor analysis. Appendix B provides approaches to conducting an industry study, including sources of field and published dat

Keywords: Industry structure, Structural analysis, Strategic planning, Competitive advantages, Firm strategies, Market strategies, Business intelligence, Market competition

Suggested Citation

Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1496175

Michael E. Porter (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
(617) 495-6309 (Phone)
(617) 547-8543 (Fax)

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