Marketing Information Services
Spring 2000

Competitive Forces and Strategy - Feb. 16, 2000

How Competitive Forces Shape Strategy
According to Michael Porter

(Reference: Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, 1980)

Porter poses four contending forces that affect the competitive situation. These are:
New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that the entrant can expect. The six major entry barriers are:
  1. Economies of scale. This may force an aspirant either to come in on a large scale or to accept a cost disadvantage.

  2. Product differentiation. Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty.

  3. Capital requirements. The need to invest large financial resources in order to compete creates a barrier to entry, especially if the capital is required for unrecoverable expenditures in up-front advertising or R&D.

  4. Cost disadvantages independent of size. Entrenched companies may have cost advantages not available to potential rivals, such as effects of the learning curve (and the experience curve), proprietary technology, access to the best raw materials sources, assets purchased at preinflation prices, government subsidies, or favorable locations.

  5. Access to distribution channels. The more limited the wholesale or retail channels are and the more that existing competitors have those tied up, the tougher that entry into the industry will be.

  6. Government policy. The government can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw materials.

The power of each important supplier or buyer group depends on a number of characteristics of its market situation and on the relative importance of its sales or purchases to the industry when compared with its overall business.

A supplier group is powerful if:

A buyer group is powerful if:

Many of these attributes are attributable to consumers as well. Consumers tend to be more price sensitive if they are purchasing products that are undifferentiated, expensive relative to their incomes, and of a sort where quality is not particularly important.

By placing a ceiling on prices it can charge, substitute products or services limit the potential of an industry. Substitute products that deserve the most attention strategically are those that are (1) subject to trends improving their price-performance trade-off with the industry's product, or (2) produced by industries earning high profits. Substitutes often come rapidly into play if some development increases competition in the industries and causes price reduction or performance improvement.

Determinants of substitute threat include:

Rivalry among existing competitors takes the form of jockeying for position - using tactics like price competition, product introduction, and advertising. Intense rivalry is related to the presence of a number of factors:

We will discuss in class some of the generic strategies companies can take when re-positioning and re-thinking strategy.

Page revised Feb. 15, 2000.