You, therefore, need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route.
The Structural Analysis of Industries The essence of formulating competitive strategy is relating a company to its environment.
Industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm. Forces outside the industry are significant primarily in a relative sense; since outside forces usually affect all firms in the industry, the key is found in the differing abilities of firms to deal with them.
The intensity of competition in an industry is neither a matter of coincidence nor bad luck.
Rather, competition in an industry is rooted in its underlying economic structure and goes well beyond the behavior of current competitors. The state of competition in an industry depends on five basic competitive forces.
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.
Not all industries have the same potential. They differ fundamentally in their ultimate profit potential as the collective strength of the forces differs; the forces range from intense in industries like tires, paper, and steel -- where no firm earns spectacular returns -- to relatively mild in industries like oil-field equipment and services, cosmetics, and toiletries -- where high returns are quite common.
This chapter will be concerned with identifying the key structural features of industries that determine the strength of the competitive forces and hence industry profitability. 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 Competitive strategy paper influence them in its favor.
Since the collective strength of the forces may well be painfully apparent to all competitors, the key for developing strategy is to delve below Competitive strategy paper surface and analyze the sources of each.
Knowledge of these underlying sources of competitive pressure highlights the critical strengths and weaknesses of the company, animates its positioning in its industry, clarifies the areas where strategic changes may yield the greatest payoff, and highlights the areas where industry trends promise to hold the greatest significance as either opportunities or threats.
Understanding these sources will also prove to be useful in considering areas for diversification, though the primary focus here is on strategy in individual industries.
Structural analysis is the fundamental underpinning for formulating competitive strategy and a key building block for most of the concepts in this book.
To avoid needless repetition, the term "product" rather than "product or service" will be used to refer to the output of an industry, even though the principles of structural analysis developed here apply equally to product and service businesses.
Structural analysis also applies to diagnosing industry competition in any country or in an international market, though some of the institutional circumstances may differ.
Structural Determinants of the Intensity of Competition Let us adopt the working definition of an industry as the group of firms producing products that are close substitutes for each other. In practice there is often a great deal of controversy over the appropriate definition, centering around how close substitutability needs to be in terms of product, process, or geographic market boundaries.
Because we will be in a better position to treat these issues once the basic concept of structural analysis has been introduced, we will assume initially that industry boundaries have already been drawn.
This competitive floor, or "free market" return, is approximated by the yield on long-term government securities adjusted upward by the risk of capital loss. Investors will not tolerate returns below this rate in the long run because of their alternative of investing in other industries, and firms habitually earning less than this return will eventually go out of business.
The presence of rates of return higher than the adjusted free market return serves to stimulate the inflow of capital into an industry either through new entry or through additional investment by existing competitors. The strength of the competitive forces in an industry determines the degree to which this inflow of investment occurs and drives the return to the free market level, and thus the ability of firms to sustain above-average returns.
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.
Customers, suppliers, substitutes, and potential entrants are all "competitors" to firms in the industry and may be more or less prominent depending on the particular circumstances.
Competition in this broader sense might be termed extended rivalry. All five competitive forces jointly determine the intensity of industry competition and profitability, and the strongest force or forces are governing and become crucial from the point of view of strategy formulation.
For example, even a company with a very strong market position in an industry where potential entrants are no threat will earn low returns if it faces a superior, lower-cost substitute. Even with no substitutes and blocked entry, intense rivalry among existing competitors will limit potential returns.
Different forces take on prominence, of course, in shaping competition in each industry. In the ocean-going tanker industry the key force is probably the buyers the major oil companieswhereas in tires it is powerful original equipment OEM buyers coupled with tough competitors. In the steel industry the key forces are foreign competitors and substitute materials.
The underlying structure of an industry, reflected in the strength of the forces, should be distinguished from the many short-run factors that can affect competition and profitability in a transient way.
For example, fluctuations in economic conditions over the business cycle influence the short-run profitability of nearly all firms in many industries, as can material shortages, strikes, spurts in demand, and the like.
Although such factors may have tactical significance, the focus of the analysis of industry structure, or "structural analysis," is on identifying the basic, underlying characteristics of an industry rooted in its economics and technology that shape the arena in which competitive strategy must be set.
Firms will each have unique strengths and weaknesses in dealing with industry structure, and industry structure can and does shift gradually over time. Yet understanding industry structure must be the starting point for strategic analysis.
A number of important economic and technical characteristics of an industry are critical to the strength of each competitive force.
These will be discussed in turn. Companies diversifying through acquisition into the industry from other markets often use their resources to cause a shake-up, as Philip Morris did with Miller beer.
Thus acquisition into an industry with intent to build market position should probably be viewed as entry even though no entirely new entity is created. The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect.
Barriers To Entry There are six major sources of barriers to entry:How to Write a Strategic Plan By Erica Olsen. Sustainable competitive advantage: A sustainable competitive advantage explains what your are best at compared to your competitors.
Each company strives to create an advantage that continues to be competitive over time. What can you be best at? Strategy: Strategy establishes a way to match. SWOT Matrix and Organizational Strategic Plan Paper Example 1: Chipotle TOWS Matrix Strengths Weaknesses that the company must continue to strive to evolve in order to remain competitive and maintain its edge over competitors.
While considering such priorities, I have developed strategies that the Strategy 1: Retain staff such as. Introduction - Competitive Advantage.
According to Daft, "strategy" is the plan of action that allocates resources and activities and aims at dealing with the environment, achieving a competitive advantage and attaining the organisation's goals.
paper is to contribute to this literature by presenting an integrative framework to distinguish and relate the concepts of business model, strategy, and tactics.
Put succinctly, business model refers to the logic of the firm, the way it operates and how it. Chapter 1: The Structural Analysis of Industries The essence of formulating competitive strategy is relating a company to its environment.
Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm's environment is the industry or industries in which it ph-vs.comed on: June 01, STRATEGIES FOR COMPETITIVE ADVANTAGE IN ELECTRONIC COMMERCE Namchul Shin Department of Information Systems, School of Computer Science and Information Systems, Keywords: E-Business, Business Strategy, Marketing Mix, Competitive Forces, Profitability, Competitive Advantage 1.