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Competitive Strategy, Techniques for Analyzing Industries and Competitors, with a New Introduction (Hardcover)
by Michael E. Porter
| Category:
Strategy, Competition, Management |
| Market price: ¥ 408.00
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| MSL Pointer Review:
Written more than 20 years ago, Porter's masterpiece is the most important work on competitive strategy to date. |
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Author: Michael E. Porter
Publisher: The Free Press
Pub. in: June, 1998
ISBN: 0684841487
Pages: 397
Measurements: 9.5 x 6.6 x 1.4 inches
Origin of product: USA
Order code: BA00176
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- MSL Picks -
Michael Porter has been the leading figure in development of strategic foresight. His work in multiple corporations, industries, and geographies enables him to provide a unique insight and insider trading secrets on what drives strategic decisions within corporate America and ultimately what drives success. His work is must have in the arsenal of strategic tools of any professional geared towards strategy.
As Michael Porter writes in Harvard Business Review, Nov-Dec 1996, "Today's dynamic markets and technologies have called into question the sustainability of competitive advantage. Under pressure to improve productivity, quality, and speed, managers have embraced tools such as TQM, benchmarking, and reengineering. Dramatic operational improvements have resulted, but rarely have these gains translated into sustainable profitability. And gradually, the tools have taken the place of strategy. As managers push to improve on all fronts, they move further away from viable competitive positions. Michael Porter argues that operational effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate. In contrast, the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match."
Anyone would agree that this book is the best overview of competitive strategy analysis ever written. The strength of the book is a solid outline of subjects and questions to improve your thinking, and get to be a step ahead of the competition. In highly-competitive, commodity businesses, that's usually what strategies focus on.
On the other hand, the rapid advances of knowledge and technology mean that the relevant benchmark is perfection, not the competitor, in defining an ideal best practice. In that world, this book has serious limitations, because the competitive dimension is often less important than the customer and user dimension these days.
Any business arena begins, as Peter Drucker so aptly put it, with the task "to create a customer." That reminder is especially relevant today when they are so many new ways to serve a customer's needs that no one has ever considered before. The strategic point of 'Blown to Bits' for example is that almost every business will see its vertical value chain (moving from resources through to the customer) broken apart into tiny segments each served by specialists. If you did not begin with that perspective in analyzing the impact of electronically-based business practices, you could easily focus on the wrong tasks using this book to create an over-broad strategy focus, rather than concentrating on just a few areas.
I suspect that the applications of Moore's Law and Metcalfe's Law need to be explicitly considered as part of the analysis that Professor Porter is recommending.
A more general weakness in this book is that it assumes that future conditions will be stable enough to draw conclusions about which conditions will be favorable, without giving enough guidance on how to deal with the increasing frequencies and degrees of volatility that we see (in areas like financial markets, commodity prices, the weather, changing customer preferences, and so forth).
Although no book that takes such a narrow focus can help but have weaknesses (like having the podiatrist not notice that you have kidney problems), if you want a good start of how to think about competitors, this is the book for you. Just be sure you keep developing yours strategy with additional dimensions after you finish using this analysis.
If you have read none of Professor Porter's works, this is the one book you should read. (From quoting Donald Mitchell, USA)
Target readers:
Executives, managers, corporate strategists, entrepreneurs, government and nonprofit leaders, and MBAs.
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Michael E. Porter, one of the world's leading authorities on competitive strategy and international competitiveness, is the C. Roland Christensen Professor of Business Administration at the Harvard Business School. In 1983, Professor Porter was appointed to President Reagan's Commission on Industrial Competitiveness, the initiative that triggered the competitiveness debate in America. He serves as an advisor to heads of state, governors, mayors, and CEOs throughout the world.
The recipient of the Wells Prize in Economics, the Adam Smith Award, three McKinsey Awards, and honorary doctorates from the Stockholm School of Economics and six other universities, Porter is the author of fourteen books, among them Competitive Strategy, The Competitive Advantage of Nations, and Cases in Competitive Strategy, all published by The Free Press. He lives in Brookline, Massachusetts.
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From the Publisher:
Now nearing its 60th printing in English and translated into 19 languages, Michael E. Porter's Competitive Strategy has transformed the theory, practice, and teaching of business strategy throughout the world. Electrifying in its simplicity – like all great breakthroughs – Porter's analysis of industries captures the complexity of industry competition in 5 underlying forces. Porter introduces one of the most powerful competitive tools yet developed: his 3 generic strategies – lowest cost, differentiation, and focus – which bring structure to the task of strategic positioning. He shows how competitive advantage can be defined in terms of relative cost and relative prices, thus linking it directly to profitability, and presents a whole new perspective on how profit is created and divided. In the almost 2 decades since publication, Porter's framework for predicting competitor behavior has transformed the way in which companies look at their rivals and has given rise to the new discipline of competitor assessment.
More than a million managers in both large and small companies, investment analysts, consultants, students, and scholars throughout the world have internalized Porter's ideas and applied them to assess industries, understand competitors, and choose competitive positions. The ideas in the book address the underlying fundamentals of competition in a way that is independent of the specifics of the companies go about competing.
Competitive strategy has filled a void in management thinking. It provides an enduring foundation and grounding point on which all subsequent work can be built. By bringing a disciplined structure to the question of how firms achieve superior profitability, Porter's rich frameworks and deep insights comprise a sophisticated view of competition unsurpassed in the last quarter-century.
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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 competes. 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 can 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 the 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.
Competition in an industry continually works to drive down the rate of return on invested capital toward the competitive floor rate of return, or the return that would be earned by the economist's "perfectly competitive" industry. 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. The extreme case of competitive intensity is the economist's perfectly competitive industry, where entry is free, existing firms have no bargaining power against suppliers and customers, and rivalry is unbridled because the numerous firms and products are all alike.
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 companies), whereas 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.
THREAT OF ENTRY
New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents' costs inflated as a result, reducing profitability. 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. If barriers are high and/or the newcomer can expect sharp retaliation from entrenched competitors, the threat of entry is low.
Barriers To Entry
There are six major sources of barriers to entry:
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. Economies of scale deter entry by forcing the entrant to come in at large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage, both undesirable options. Scale economies can be present in nearly every function of a business, including manufacturing, purchasing, research and development, marketing, service network, sales force utilization, and distribution. For example, scale economies in production, research, marketing, and service are probably the key barriers to entry in the mainframe computer industry, as Xerox and General Electric sadly discovered.
Scale economies may relate to an entire functional area, as in the case of a sales force, or they may stem from particular operations or activities that are part of a functional area. For example, in the manufacture of television sets, economies of scale are large in color tube production, and they are less significant in cabinetmaking and set assembly. It is important to examine each component of costs separately for its particular relationship between unit cost and scale.
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(About price-sensitive buyers) The buyer competes with a high-quality strategy to which the purchased product is perceived to contribute. Those buyers competing with a high-quality strategy are often quite sensitive about the inputs they purchase. If they perceive that the input enhances the performance o their product or if the brand of the input carries prestige value which will reinforce their high-quality strategy, they will tend to be insensitive to the price of inputs. For these reasons manufacturers of costly machinery often will pay a premium for electric motors or generators made by the prestige supplier. (MSL: The other examples include Windows software, Intel chips and YKK zips).
The buyer seeks a custom designed or differentiated variety. If the buyer wants a specially designed product, then this desire is often (though not always) accompanied by the willingness to pay a premium price for it. This situation can lock the buyer into a particular supplier or suppliers, and it may be willing to pay a premium to keep those suppliers happy. Such buyers may also believe that such extra effort deserves compensation. A good example of a company built on such a strategy is Illinois Tool Works, who goes to elaborate lengths to custom design its fasteners to specific customer’s needs. This policy has led to high margins and great customer loyalty.
A buyer with high intrinsic bargaining power, however, may demand unique or custom products but not be willing to pay extra for them. Serving these buyers puts the seller in the worst of situations, because it elevates costs without elevating margins.
The buyer is very profitable and/or can readily pass on the cost of inputs. Highly profitable buyers tend to be less price sensitive than those in marginal financial condition, unless the purchased product is a major cost item. Some of this attitude may be based on the fact that the highly profitable buyers fall into one of the categories listed above, and part may be attributable to a higher propensity to assure the seller a fair return. Although it could be argued that highly profitable buyers are that way because they are good bargainers, in practice it seems that the priorities of such buyers are placed less on aggressive bargaining over price and more in other areas.
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| View all 12 comments |
Avinash Shama (MSL quote), USA
<2006-12-25 00:00>
Professor Porter is best known for his landmark books that defined the field of Strategy - Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980) and Competitive Advantage: Creating and Sustaining Superior Performance (1985). These books are must reads at the leading business schools.
I read Competitive Strategy (1980) for a Strategy course. It starts with a bang. On the very second page of the first chapter you will find the figure for the famous Five Forces Driving Industry Competition. While Porter did not intend this framework to be used for case interviews, in reality, this is a very important framework to know for the case interviews conducted by leading strategy and management consultancy firms. All top MBAs and anybody who has ever been hired by the best strategy and management consultancy firms knows this framework, and has probably read this book. The first chapter immediately proceeds to explaining each of the five forces:
1. Threat of new entrants
2. Intensity of rivalry among existing competitors
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of suppliers
While the first chapter alone is worth the cost of this book, I recommend it for the wisdom contained in the rest of the book. The chapters are organized under three parts (General Analytical Techniques, Generic Industry Environments, and Strategic Decisions). There are several thought provoking discussions on concepts such as A Framework for Competitor Analysis (Future goals, Assumptions, Current strategy, Capabilities), Market Signals and a Strategic Analysis of Vertical Integration.
This book was perhaps the most important work on strategy since Sun Tzu's The Art of The War. It is a classic - like the management classics of Peter Drucker. As with every classic, the examples are out of date. But, the competition HP faced for electronic calculators in the 70s, it still faces for computers today. There have been several changes in the players, technology, industries, globalization, etc, but the foundation built by Porter's masterpieces are still relevant today.
Porter's second book Competitive Advantage (1985) introduced another important tool - The Value Chain. This analyzes primary activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales, Services) and support activities (Procurement, Technology development, Human resource management, Firm infrastructure) that firms must analyze to create value and competitive advantage.
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An American reader (MSL quote), USA
<2006-12-25 00:00>
Much has been written about Porter in these reviews and elsewhere, so I won't repeat that information. Instead, I will focus on what drew me to this book, and from that, what its strengths and weeknesses are.
I heard about "Competitive Strategy" because it was referenced by a number of stock analysts seeking to determine or project earnings of a particular company going forward. Read with that position alone in mind, "Competitive Strategy" is fairly esoteric. The book itself is written more from the perspective of a consultant or "big picture" thinker than it is from, say, the view of a financer or investor. While that was somewhat of a drawback for me for my purposes, it certainly does not detract from the overall value of the book.
The book itself is quite readable, despite the academic credentials of the author and much of its audience and its theoretical bent. However, readers seeking quantifiable information will not find formulas or other information of a comparable nature to guide them. This is not unexpected, yet Porter's book is cited or referenced by a fair number of stock market analysts seeking support a variety of conclusions they've reached. After reading the book myself, I am forced to conclude that (i) there is no crystal ball for anyone to determine the future, and (ii) while Porter's book is an invaluable tool for management of a particular entity to use in assessing its competitive environment and strategy, it does not provide the individual investor with the ability to read future events.
In all, Porter's book is a great read, and should add greatly to any person's ability to analyze the environment in which a particular corporation exists. However, investors might wish to supplement it with methods from other disciplines (such as Benjamin Graham, Mary Buffett, Marty Whitman, etc.) |
Strategic Management Journal (MSL quote), USA
<2006-12-25 00:00>
Represents a quantum leap …may well be one of the most important contributions to the disciplines of strategic management. |
Fortune (MSL quote), USA
<2006-12-25 00:00>
Three overarching game plans that work in one industry after another explain how thousands of real-world competitors come out on top. |
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