November 28, 2014

Competitive Strategy
Techniques for Analyzing Industries and
Competitors
Michael E. Porter
©1980 by The Free Press
Adapted by permission of The Free Press, a division of Simon & Schuster, Inc.
ISBN: 978-0-68484-148-9

Key Concepts
• Gauge the intensity of the forces driving an industry’s competition. A firm must determine its potential for prof-
itability by measuring the strength of the five competitive forces in its industry: the threat of new industry
entrants, the intensity of existing rivalry, pressure from substitute products, bargaining power of buyers,
and bargaining power of suppliers.

• Pick a generic strategy—and stick to it. To develop a competitive advantage within an industry, a firm must
commit to a strategy of low-cost leadership, product differentiation, or narrow customer target focus.

• Predict a competitor’s future moves. A firm can gain competitive advantage by conducting competitor analy-
sis to determine how likely competitors are to enact aggressive strategies in the future and then developing
a plan to counter these strategies.

• Execute the appropriate competitive move. A firm can choose to improve its own position or worsen its com-
petitor’s by choosing a cooperative, threatening, or defensive competitive move to enact.

• Determine a firm’s relative profitability by mapping the industry out into strategic groups. To conduct an indus-
try analysis, a company must divide all of an industry’s firms up into “strategic groups” and then assess each
group’s susceptibility to every one of the five competitive forces.

• Look to common “evolutionary processes” to forecast the nature of an industry’s evolution. To anticipate neces-
sary strategic adjustments, a firm must consider the likelihood of its industry being affected by “evolutionary
processes” like new entrants, innovations, and customer segments.

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 1
Competitive Strategy Michael E. Porter

• Enter unstable industries only with a thoroughly developed competitive strategy. While emerging, fragmented,
and declining industries can be lucrative, they are also highly unstable and require firms to carefully con-
struct strategies in order to outperform competitors and succeed.

• Compete in global industries when impediments are minimal. It is worthwhile for a firm to compete in a global
industry when there are limited economic, managerial, and institutional impediments to overcome.

• Expand capacity only when an analysis determines it will improve market returns. A firm should expand its pro-
duction capacity when it can increase its cash flow without the risk of overbuilding.

• Enter a new business through the strategies of either internal development or acquisition. When entering a new
business, firms should opt for internal development in industries where retaliation is unlikely, and choose
the strategy of acquisition when it is affordable and it does not eliminate above-average returns through
the bidding process.

Introduction
In Competitive Strategy, world-renowned strategy consultant and author Michael E. Porter provides readers
with a groundbreaking framework to conduct in-depth industry and competitor analysis. Through a series of
tools and techniques, Porter illustrates how this analysis can be utilized to develop effective strategies to both
improve a firm’s position among its competitors and increase overall profitability. Competitive Strategy is the
essential guide to developing and sustaining a firm’s success in the world’s most competitive industries.

The Structural Analysis of Industries The goal of competi-

The more competitive the industry, the less likely its firms are to have high tive strategy for a
returns. According to Porter, there are five basic competitive forces respon- business unit in an
sible for the state of competition in an industry. To develop an effective
industry is to find a
competitive strategy, a firm must first measure the level of each competitive
force in its industry.
position in the indus-
try where the com-
The five competitive forces are: pany can best defend
1. The threat of new entrants. New industry entrants threaten incumbent itself against these
firms’ market shares and access to resources. Industries are susceptible competitive forces or
to this threat when “entry barriers,” like large capital requirements and can influence them in
strict government policies, are low and the retaliation of incumbent firms
its favor.
against newcomers is unlikely.

2. Intensity of rivalry among existing competitors. Intense rivalry is the result of structural factors like numerous
competitors of equal power or slow industry growth. High “exit barriers,” or the economic and strategic fac-
tors that keep companies in an industry even with low ROI, can also intensify rivalry.

3. The threat of substitute products. The more attractive the prices of substitute products from industry com-
petitors, the more limited the industry’s potential profitability.

4. The bargaining power of buyers. The more powerful an industry’s buyer groups are, the less profitable the
industry. Powerful buyers are typically responsible for a large portion of sales.

5. The bargaining power of suppliers. By threatening to raise prices or reduce the quality of purchased goods
and services, suppliers can greatly reduce the profitability of an industry. The less dependent a supplier is on
a particular buyer or industry, the more powerful it is.
Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 2
Competitive Strategy Michael E. Porter

Generic Competitive Strategies

To cope with the five competitive forces and outperform its competitors, a firm must completely commit to one
of the following three “generic strategies”:

1. The Overall Cost Leadership Strategy. Firms attain a low-cost position relative to their competitors and
above-average returns through the vigorous pursuit of production and sales cost reductions while never
compromising quality.

2. The Differentiation Strategy. Firms create something unique within the industry in the form of design, brand
image, or a new technology. Differentiation cultivates a sense of exclusivity, brand loyalty, and high profit
margins.

3. The Focus Strategy. Firms earn above-average industry returns by focusing on a specific buyer group, seg-
ment of the product line, or geographic market. This strategy requires a firm to take a low-cost position with
its strategic target, a high differentiation position, or both.

A Framework for Competitor Analysis

By conducting competitor analysis, it becomes possible for a firm to predict the strategies a competitor is likely
to enact in the future. Consequently, this process allows a firm to determine which industry competitors to go
up against and which ones to avoid.

Competitor analysis is comprised of the following four diagnostic components:

1. Future Goals. An analysis of a competitor’s goals reveals its satisfaction with

its current position and subsequent likelihood of changing strategies. To
A market signal is identify a competitor’s goals, it is necessary to ask diagnostic questions
any action by a com- about its financial objectives, attitude towards risk, incentive systems, and
petitor that provides whether it has a corporate parent imposing additional goals.
a direct or indirect 2. Assumptions. Every firm operates on a set of assumptions about its role in
indication of its the industry it competes within. Assumptions are exploitable blind spots
intentions, motives, and can be identified by questioning the competitor’s history, organiza-
goals, or internal sit- tional values, and leadership.
uation. 3. Current Strategy. To understand the current strategy of a competitor, it is
necessary to examine both its key operating policies in each functional area
of business and how it connects each function to one another.

4. Capabilities. To assess a competitor’s capabilities, it is necessary to measure its performance in each func-
tional area. By identifying what the competitor is best and worst at, and if it has the ability to grow, it becomes
possible to predict which strategic moves it will make.

A competitor response profile combines all four components of competitive analysis and defines two types of
possible action:

1. Offensive Moves. Predict the strategic changes the competitor might initiate considering its satisfaction with
its current position, goals, assumptions, and capabilities.

2. Defensive Capabilities. Consider what strategic moves or industry changes the competitor would be most
vulnerable to, which ones would cause them to retaliate, and what actions could impede it from reacting
too quickly and effectively.

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 3
Competitive Strategy Michael E. Porter

Market Signals
A firm’s ability to recognize and read market signals is essential to developing an effective competitive strategy.
A market signal is any action by a competitor that reveals its intentions, motives, or goals. Market signals can be
truthful indications of a competitor’s motives, or bluffs. Examples include:

• Prior announcement of moves. Prior public announcements can act as a signal that a firm is staking out indus-
try territory or coalescing internal support for a move.

• Public discussions of the industry. Competitors’ comments on industry conditions can forecast demand and
production prices and reveal the industry assumptions the competitors may be constructing their strategies
around.

• Explanation of moves. When a competitor seeks to explain its moves, it is usually done to discuss its logic,
deter other firms from making the same move, or communicate commitment.

Competitive Moves
In industries dominated by numerous competitors, a firm is faced with the The actual profitabil-
decision of making offensive moves to improve its own position or defensive ity of particular firms
moves to derail its competitors’ success. The decision to execute an offensive
in the industry should
or defensive competitive move depends on the structure of the industry—
industries with high levels of competition, for example, may require soft
differ in the long run
treading to prevent outright warfare. only insofar as they
differ in their abil-
After conducting an analysis to determine an industry’s nature, a firm must
ity to implement the
execute one of the following:
common strategy.
• Cooperative move. A nonthreatening move that increases a firm’s profits
but does not negatively affect the performance of its competitors.

• Threatening move. A move that significantly improves a firm’s position while threatening its competitors’.
This move’s success depends on slow or weak competitor retaliation.

• Defensive move. A firm can successfully retaliate against a competitor by preventing the competitor from
meeting its sales goals. This can be accomplished by publicly attacking the competitor’s new products or by
having a deal that steals their customers away.

Strategy Towards Buyers and Suppliers

At its core, the basic strategic principle in “buyer selection” is for a firm to seek out the most favorable wholesaler
or retailer groups by using the following four criteria to help guide the process:

1. Purchasing needs relative to a firm’s capabilities. The firm’s production capabilities fit the target buyer’s pur-
chasing needs.

2. Good growth potential. Buyer group growth potential is a combination of the growth rate of the industry, the
growth rate of its primary market segments, and its industry and key target market share.

3. Structural position. A buyer group’s structural position is the result of its intrinsic bargaining power and its
propensity to exercise this bargaining power. Ideal buyer groups have limited bargaining power.

4. Cost of servicing. Cost of servicing is affected by a buyer’s order size, required lead times, selling cost, and the
need for customization or modification.

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 4
Competitive Strategy Michael E. Porter

An effective purchasing strategy is one that offsets suppliers’ power. Firms can accomplish this by spreading
their purchases among alternate suppliers, avoiding switching costs, and acquiring bargaining leverage with
suppliers through the threat of backward integration, or the purchase of suppliers.

Structural Analysis Within Industries

Structural analysis of an industry is comprised of the following steps:

1. Organize the industry competitors into strategic groups, or groups of firms divided among the same stra-
tegic dimensions. Examples of strategic dimensions include specialization, technological leadership, and
price policy. Strategic groups should be written out into an industry map to make it easier to identify each
group’s level of sustainable profitability.

2. Assess and note the height and composition of the mobility barriers protecting each strategic group. Strate-
gic groups with high mobility barriers are more protected against new entrants and therefore have a higher
level of profitability.

3. Assess and note the relative bargaining power of each strategic group with its suppliers and buyers. Some
will have strategies that make them more vulnerable to common suppliers and buyers.

4. Assess and note how vulnerable different strategic groups are to the threat of substitute products.

5. Assess and note the pattern of strategic groups’ market interdependence,

or the degree to which different strategic groups are competing for cus-
Industry evolution tomers, and identify how vulnerable each strategic group is to warfare
takes on critical impor- initiated by other groups.
tance for formula-
Once an industry analysis has been conducted, the following factors should
tion of strategy. It can be considered to determine a specific firm’s profitability within its industry:
increase or decrease
the basic attractive- • Common industry characteristics—The relative strength of the five forces
in that particular industry.
ness of an industry as
an investment oppor- • Characteristics of strategic group—The relative levels of each of the five
tunity, and it often forces in the firm’s strategic group.
requires the firm to • Firm’s position within its strategic group—The firm’s position within its stra-
make strategic adjust- tegic group is determined by the degree of competition within the strategic
ments. group, the scale of the firm relative to others in its group, costs of entry into
the group, and the ability of the firm to implement its chosen strategy.

Industry Evolution
As industry structures often evolve over time, a firm must be able to make strategic adjustments in order to sur-
vive. This requires an understanding of evolutionary processes, or the forces that create pressures and incentives
for industry change. Although every industry is different, common evolutionary processes should be consid-
ered to forecast industry change. Some examples include:

• Changes in buyer segments served. The addition of new buyer segments or the elimination of obsolete seg-
ments can fundamentally transform an industry’s structure.

• Expansion (or contraction) in scale. As the size of an industry changes, so does the size of its leading firms and
the types of new entrants.

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 5
Competitive Strategy Michael E. Porter

• Product, marketing, and process innovation. These types of innovations can widen the market, increase
demand, and make the process more or less capital intensive.

• Government policy change. New government policies can affect an industry’s competitive practices or profit-
ability.

• Entries and exits. New entrants can transform the structure of an industry while the exit of existing firms can
increase the dominance of leading ones.

Competitive Strategy in Fragmented Industries When it occurs, the

A fragmented industry is one in which no single firm has enough market share
transition to maturity
to truly influence the industry’s outcome. Overcoming a fragmented industry is nearly always a criti-
can be an excellent strategic opportunity for a firm thanks to low entry barriers cal period for compa-
and the unlikelihood of competitor retaliation. Firms can consolidate a frag- nies in an industry. It is
mented industry for significant market share by introducing new products or a period during which
marketing innovations, standardizing the industry’s diverse market needs, or
fundamental changes
by recognizing and harnessing industry trends early on. To formulate an effec-
tive competitive strategy for a fragmented industry, Porter recommends the
often take place in
following steps: companies’ competi-
tive environments,
1. Conduct a full industry and competitor analysis.
requiring difficult stra-
2. Identify the causes of fragmentation in the industry. tegic responses.
3. Examine the causes of industry fragmentation in the context of the indus-
try and determine if any of these sources can be overcome with innovation or strategic change.

4. If fragmentation can be overcome, assess whether or not the implied future structure will yield attractive
returns by predicting the new structural equilibrium in the industry once consolidation occurs, and then
conduct another structural analysis.

5. If fragmentation cannot be overcome, select the best alternative for coping with the fragmented structure,
like tightly managing decentralization or specializing in a product or customer segment.

Competitive Strategy in Emerging Markets

Emerging industries are industries that have been formed or reformed thanks to the introduction of forces like
new technological innovations or customer needs. Although emerging industries can be lucrative, they are
also subject to problems like an absence of infrastructure, customers’ confusion, and erratic product quality.
To succeed in an emerging industry, a firm must make the crucial strategic choice about when to enter. While
early entry often comes with high returns, it should only be considered if the firm can develop a reputation as
a pioneer and absolute cost advantages can be gained. The best emerging industries to enter have structures
that allow a firm to achieve above-average returns and create a long-term defendable position. To determine if
an emerging industry has these qualities, it is necessary to forecast the industry’s potential “scenarios,” or inter-
nally consistent views of how the world will look in the future, and what the industry’s size, characteristics, and
competitors will subsequently be like.

The Transition to Industry Maturity

Industry maturity occurs when an industry passes from a period of rapid growth to a period of modest growth.
Transition to maturity can happen at any time in an industry’s development and is critical to recognize, as it

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 6
Competitive Strategy Michael E. Porter
typically signals that an important change in an industry’s competitive environment has occurred. Examples of
environmental changes include more competition for market share and a decline in industry profits.

The transition into maturity is a time when firms must commit to one of the three generic strategies and intro-
duce process innovations for smoother, more affordable manufacturing and delivery. To succeed in a period of
industry maturity, firms must avoid pitfalls like giving up too easily in favor of a short-run profit, resentment and
irrational reaction toward price competition and industry practices, and clinging to the excuse of “higher qual-
ity” instead of meeting aggressive pricing and marketing moves of competitors. To lead effectively in mature,
competitive environments, managers must scale down their firms’ financial performance expectations and
adhere more strictly to their chosen strategies.

Competitive Strategy in Declining Industries

The strategic issue in A declining industry is one that has experienced a significant drop in unit sales
capacity expansion is over a sustained period of time. High levels of competition occur in the decline
how to add capacity phase when there is dwindling customer demand, high exit barriers, and a
to further the objec- volatile rivalry among competing firms. When faced with a declining industry,
tives of the firm, in firms have the option to enact one of the following strategies:
the hope of improv- • Leadership—Seek a market share leadership position.
ing its competitive
• Niche—Create or defend a strong position in a particular segment.
position or market
share, while avoiding • Harvest—Manage a controlled disinvestment, and take advantage of
industry over-capac- strengths.

ity. Undercapacity in • Quick Divestment—Liquidate the investment as early in the phase as pos-
an industry is rarely a sible.
problem, except tem- It is important that firms try to prepare for decline as much as possible by avoid-
porarily, since it will ing pitfalls like a failure to recognize decline, engaging in competitor warfare,
usually attract new or harvesting without any clear strengths. If a firm can successfully forecast
investment. the decline phase, it can improve its position by minimizing investments and
actions that could heighten exit barriers.

Competition in Global Industries

A global industry can be a source of competitive advantage to a firm when the cost of production in foreign sites
facilitates affordable exports to other parts of the world or when it provides a firm with the opportunity to build
its reputation and credibility. Conversely, a global industry may be a competitive disadvantage to a firm when
the following factors are in place:

• Economic Impediments. Factors that prohibit the profitability of a global industry like high transportation
and storage costs and a lack of world demand.

• Managerial Impediments. Culturally unique marketing and distribution channels can be difficult to manage.

• Institutional Impediments. Local tariffs, duties, and bribery laws can dampen global competition.

The Strategic Analysis of Vertical Integration

Vertical integration is when technologically distinct economic processes like R&D, production, and distribution
all take place within a single firm. Vertical integration can have many strategic benefits. For example, it can make

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 7
Competitive Strategy Michael E. Porter

production more efficient, improve a firm’s ability to differentiate itself from competitors, and even increase a
firm’s overall ROI. The strategic costs of vertical integration, however, can include higher exit barriers and capital
requirements, dull incentives that reduce performance, and a need for different management throughout the
chain. A firm must weigh its relative potential advantages against its costs before deciding to vertically integrate.

Capacity Expansion
Capacity expansion is a significant strategic decision every firm must consider at some point in time. To make an
effective capacity expansion decision, Porter recommends for firms to follow these seven steps:

1. Determine the options for the size and type of capacity additions.

2. Assess probable future additions’ demands and costs.

3. Assess probable technological changes and the likelihood of additions’ obsolescence.

4. Predict the capacity additions of each competitor based on the competitor’s expectations about the indus-
try.

5. Determine the industry’s supply-and-demand balance and resulting industry prices and costs.

6. Determine expected market returns from the capacity addition.

7. Test the analysis for consistency.

Many firms, especially those in the commodity business, have a tendency to overbuild. The risks of overbuilding
can be severe if factors like the following are in place: significant exit barriers that prevent excess capacity from
leaving the market, high levels of competition, and government policies that encourage overinvestment.

Entry into New Businesses The economics of

According to Porter, entering a new industry is not easy—even when a entry rests on some
business is well managed and the industry environment is favorable. Firms fundamental market
considering entry into new businesses must therefore carefully consider the forces that are oper-
viability of the following strategies:
ating whenever entry
• Internal development. This approach involves the creation of an entirely occurs.
new business entity in an industry. The best industries for internal devel-
opment are those in disequilibrium and those where retaliation is unlikely. To facilitate the success of internal
development, firms can find a way to produce products at lower cost than incumbents, offer superior prod-
ucts, or cater to new market segments.

• Acquisition. The strategy of entering a market by buying an incumbent firm is profitable if:

1. The incumbent’s cost of keeping the business is low.

2. The market for companies is imperfect and does not eliminate above-average returns through the bid-
ding process.

3. The buyer has the unique ability to operate the acquired business.

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 8
Competitive Strategy Michael E. Porter

Features of the Book

Estimated Reading Time: 7–8 hours, 397 pages

In Competitive Strategy, Michael E. Porter reveals how a company of any size can conduct a thorough analysis
of its industry to develop a strategy to improve its position among competitors. Porter breaks down the struc-
tures that comprise industry competition along with the tools and techniques companies can use to overcome
competition and gain profitability. Competitive Strategy is an ideal read for executives and entrepreneurs. The
chapters are best read in order.

Contents
Introduction

Preface

Part I: General Analytical Techniques

Chapter 1: The Structural Analysis of Industries

Chapter 2: Generic Competitive Strategies

Chapter 3: A Framework for Competitor Analysis

Chapter 4: Market Signals

Chapter 5: Competitive Moves

Chapter 6: Strategy Toward Buyers and Suppliers

Chapter 7: Structural Analysis Within Industries

Chapter 8: Industry Evolution

Part II: Generic Industry Environments

Chapter 9: Competitive Strategy in Fragmented Industries

Chapter 10: Competitive Strategy in Emerging Industries

Chapter 11: The Transition to Industry Maturity

Chapter 12: Competitive Strategy in Declining Industries

Chapter 13: Competition in Global Industries

Part III: Strategic Decisions

Chapter 14: The Strategic Analysis of Vertical Integration

Chapter 15: Capacity Expansion

Chapter 16: Entry into New Businesses

Appendix A: Portfolio Techniques in Competitor Analysis

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 9
Competitive Strategy Michael E. Porter

Appendix B: How to Conduct an Industry Analysis

Bibliography

Index

About the Author

Further Information
Information about this book and other business titles:
www.simonandschuster.com

Click Here to Purchase the Book

Related summaries in the BBS Library:

Understanding Michael Porter
The Essential Guide to Competition and Strategy
By Joan Magretta

Blue Ocean Strategy

How to Create Uncontested Market Space and
Make the Competition Irrelevant
By W. Chan Kim and Renée Mauborgne

About the Author

Michael E. Porter, one of the world’s leading authorities on competitive strategy and international competitive-
ness, 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, and
CEOs throughout the world. The recipient of the Wells Prize in Economics, the Adam Smith Award, three McKin-
sey Awards, and honorary doctorates from the Stockholm School of Economics and six other universities, Porter
is the author of 14 books, among them Competitive Advantage, The Competitive Advantage of Nations, and Cases
in Competitive Strategy, all published by the Free Press. He lives in Brookline, Massachusetts.

Copyright of Business Book Summaries, Business Book Review, BusinessSummaries and BizSum is property of EBSCO
Publishing Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copy-
right holder’s express written permission. However, users may print, download or email summaries for individual use.
Business Book Summaries® is a service of EBSCO Publishing, Inc. For more information about BBS, to subscribe to BBS, or
to provide us feedback, visit our Web site.
www.ebscohost.com
EBSCO Publishing Inc.
10 Estes Street
Ipswich, MA 01938 USA

Business Book Summaries® • November 28, 2014 • Copyright © 2014 EBSCO Publishing Inc. • www.ebscohost.com • All Rights Reserved 10
Copyright of Competitive Strategy 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.