Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter
Michael Porter's Competitive Strategy was originally published in 1980 and has since become a classic of MBA programs and graduate economics courses in game theory. Porter’s book reads like a textbook—each chapter begins with a paragraph introduction but then follows with an outline of the relevant ideas, Porter is careful to exhaust all possibilities. Porter supports his theories with examples from the manufacturing sector. His micro case studies range from industries like construction machinery (Caterpillar and John Deere); to American car manufacturing (GM and Ford); “minicomputers” (Hewlett-Packard and Texas Instruments); and consumer watches (Timex and Swiss manufacturers). While Porter’s examples are a bit dated (he discusses “recent” legislation from before 1980), and while he admits in the updated introduction that “more service examples could be added” (xiii), he very thoroughly presents a framework for analyzing competition in any industry.
Porter posits the existence of five competitive forces within an industry:
Threat of Entry: “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” (7).
Intensity of Rivalry among Existing Competitors: “Rivalry among existing competitors takes the familiar form of jockeying for position—using tactics like price competition, advertising battles, product introductions, and increased customer service or warranties” (17).
Pressure from Substitute Products: “All firms in an industry are competing, in a broad sense, with industries producing substitute products” (23); the threat of substitute products comes from outside the industry.
Bargaining Power of Buyers: “Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other” (24).
Bargaining Power of Suppliers: “Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods” (27).
In Porter’s view, competition plays out like a game of chess; he discusses “Competitive Warfare” in terms of “offensive or defensive moves” (89), and he frequently refers to the “battle” (189). Firms have three generic strategies that they can take:
Overall cost leadership: “Low cost relative to competitors becomes the theme running through the entire strategy” (35). This is a strong position to hold because it “protects the firm against all five competitive forces” (36) (“bargaining can only continue to erode profits until those of the next most efficient competitor are eliminated” (36)).
Differentiation: “Approaches to differentiating can take many forms: design or brand image . . . , technology . . . , features . . . , customer service . . . , dealer network . . . , or other dimensions” (37). Differentiation courts customers with “lower sensitivity to price” (37) and it “avoids the need for a low-cost position” (38).
Focus: “The final generic strategy is focusing on a particular buyer group, segment of the product line, or geographic market” (38). The firm following the focus strategy may strive for cost leadership, differentiation, or both, but only for “its narrow market target” (39).
Porter then offers a sophisticated framework for analyzing competitors and inferring their strategic standings (Chapters 3 and 7). Firms communicate their “pleasure or displeasure” as well as information about themselves through a variety of market signals (Chapter 4) (89). Porter discusses industry evolution and how the five competitive forces play out during different stages of “the product life cycle” (Chapter 8) (158). He follows with a detailed Part II that analyzes and recommends strategies to follow in fragmented, highly-competitive industries (Chapter 9); emerging industries in which a new product has just been introduced (Chapter 10); mature industries (Chapter 11); and declining industries (Chapter 12). He concludes by analyzing globalization in Chapter 13.