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Competitive Strategy
by Michael Porter


Central Theme: A firm can build a competitive advantage and develop competitive strategy.
  1. OVERAL COST LEADERSHIP
    • Required Skills & Resources

    • Sustained capital investment and access to capital
    • Process engineering skills
    • Intensive supervision of labor
    • Products designed for ease of manufacture
    • Low-cost distribution system
    • Organizational Elements

    • Tight cost control with frequent, detailed reports
    • Structured organization and responsibilities
    • Incentives based on meeting strict quantitative targets
    • Associated Risks

    • Technological change that nullifies past investments or learning
    • Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities
    • Inability to see required product or marketing change because of the attention placed on cost
    • Inflation in costs that narrow the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation
  2. DIFFERENTIATION
    • Required Skills & Resources

    • Strong marketing abilities
    • Product engineering
    • Creative flair
    • Strong capability in basic research
    • Corporate reputation for quality or technological leadership
    • Long tradition in the industry or unique combination of skills drawn from other businesses
    • Strong cooperation from channels
    • Organizational Elements

    • Strong coordination among functions in R&D, product development, and marketing
    • Subjective measurement and incentives instead of quantitative measures
    • Amenities to attract highly skilled labor, scientists, or creative people
    • Associated Risks

    • The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings.
    • Buyers’ need for the differentiating factor falls. This can occur as buyers become more sophisticated.
    • Imitation narrows perceived differentiation, a common occurrence as industries mature.
  3. FOCUS
    • Required Skills & Resources

    • Combination of the above policies directed at the particular strategic target
    • Organizational Elements

    • Combination of the above policies directed at the particular strategic target
    • Associated Risks

    • The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus.
    • The differences in desired products or services between the strategic target and the market as a whole narrows.
    • Competitors find submarkets within the strategic target and outfocus the focuser.

Diagram of Porter's 5 Forces

 
SUPPLIER POWER
  1. Supplier concentration
  2. Importance of volume to supplier
  3. Differentiation of inputs
  4. Impact of inputs on cost or differentiation
  5. Switching costs of firms in the industry
  6. Presence of substitute inputs
  7. Threat of forward integration
  8. Cost relative to total purchases in industry
 
THREAT OF
SUBSTITUTES
  1. Switching costs
  2. Buyer inclination to substitute
  3. Price-performance trade-off of substitutes
BARRIERS
TO ENTRY
  1. Absolute cost advantages
  2. Proprietary learning curve
  3. Access to inputs
  4. Government policy
  5. Economies of scale
  6. Capital requirements
  7. Brand identity
  8. Switching costs
  9. Access to distribution
  10. Expected retaliation
  11. Proprietary products
RIVALRY
DEGREE
OF RIVALRY
  1. Exit barriers
  2. Industry concentration
  3. Fixed costs/Value added
  4. Industry growth
  5. Intermittent overcapacity
  6. Product differences
  7. Switching costs
  8. Brand identity
  9. Diversity of rivals
  10. Corporate stakes
 
BUYER POWER
  1. Bargaining leverage
  2. Buyer volume
  3. Buyer information
  4. Brand identity
  5. Price sensitivity
  6. Threat of backward integration
  7. Product differentiation
  8. Buyer concentration vs. industry
  9. Substitutes available
  10. Buyers' incentives