BSML’s Summary of Principles from:


By Michael E Porter


From the BSML Business Wisdom Series


Michael Porter is a long-time Harvard Business School professor and world
authority on competitive strategy and international competitiveness. His
other books include Competitive Advantage (1985) and The Competitive
Advantage of Nations (1990).

Competitive Strategy was a breakthrough book in 1980, bringing for the first
time a disciplined structure to the question of how firms achieve superior
profitability in competitive environments. It also provides frameworks for
industry and competitor analysis and strategic decision making.

BSML’s intention in compiling this summary is to share the wisdom of this great
thinker with our clients and prospective clients, to encourage them to read
the full work, and to help them use its principles to improve management
practices and business performance. We welcome your feedback.

Please feel free to share this document with your colleagues and friends, who
have an interest in the topic.

Nick Bentley, Managing Director, BSML

Porter Quote



1. Context
2. Research basis and audience
3. Strategy formulation
4. Analysis tools
4.1 Structural analysis
4.2 Generic competitive strategies
4.3 Competitor analysis
4.4 Strategic groups
4.5 Company positioning
4.6 Industry evolution
5. Generic Industry Environments
6. Strategic Decisions

1. Context

By 1980, whilst strategic planning had become widely accepted as the

important task of charting long term direction for an enterprise, prior to

Competitive Strategy there were no systematic tools to :


– Assess a company’s industry

– Understand competitors; and

– Choose a competitive position


The book provided new frameworks to understand :


– The underlying forces of competition in industries (5 forces model)

– Different groupings within the same industry (strategic group mapping)

– Generic strategy (the 3 generic strategies)

– How industries evolve (5 types)

– The drivers of high profits and causes of low profitability

– Competitive positioning

2. Research basis and audience

Competitive Strategy was written based on :


  • Porter’s research in industrial economics and business strategy
  • Teaching experience in the MBA and executive programmes at


  • Detailed studies of hundreds of industries with all varieties of

structures and at widely different states of maturity


Its audience is stated as “practitioners”, comprising :


  • Managers seeking to improve the performance of their businesses
  • Advisors, teachers of management, government policy makers
  • Security analysts
  • Observers of business success or failure

3.1 Strategy formulation - the wheel of competitive strategy

3.2 Defining the context and limits on what a company can achieve

3.3 The process for formulating competitive strategy

1. What is the business doing now?

Identification – what is the implicit or explicit current strategy?

Implied assumptions – what assumptions about the company’s relative position, strengths and weaknesses, competitors, and industry trends must be made for the current strategy to make sense?

2. What is happening in the environment?

Industry analysis – what are the key factors for competitive success and the important industry opportunities and threats?

Competitor analysis – what are the capabilities and limitations of existing and potential competitors and their probable future moves? Societal analysis – what important governmental, social and political factors will present opportunities and threats?

Strengths and weaknesses – what are the company’s strengths and weaknesses relative to current and future competitors?

3. What should the business be doing?

Tests of assumptions and strategy – how do the assumptions embodied in the current strategy compare with the analysis in 2 above?

Strategic alternatives – what are the feasible alternatives? Is the current strategy one of these?

Strategic choice – what alternative best relates the company’s situation to external opportunities and threats?

4.1.1 Structural analysis of industries (the 5 forces model)

4.1.2 Threat of new entrants

  • The strength of competitive forces in a industry determines the inflow of investment and drives the return down to free market level
  • Barriers to entry and the reaction of existing competitors can reduce/delay this risk
  • Barriers to entry come from 8 sources :
  1. Economies of scale and resultant cost advantages
  2. Product differentiation giving brand identification and customer loyalty
  3. Capital requirements driving significant investment in plant, R&D, advertising, inventories, customer credit, start up losses etc
  4. Switching costs such as employee retraining, new ancillary equipment, testing, psychological costs of severing a relationship
  5. Access to distribution channels through price breaks, co-operative advertising allowances
  6. Government policy such as licensing, regulation, limits on access to raw materials, product testing, pollution or safety standards
  7. Cost disadvantages independent of scale

    – Proprietary product technology, patents, know-how, secrecy 

    – Government subsidies

    – Raw material sources 

    – Learning or experience curve 

    – Locations

  1. Competitor reaction through commitment of resources, price, advertising, relationships

4.1.3 Rivalry amongst existing competitors

Intense rivalry can force profits down through price competition and actions which drain resources from all sides without any advantage being gained

Intense rivalry is driven by 7 structural factors :

  1. Numerous, equally balanced competitors, including mavericks seeking advantage and no clear leader bringing stability
  2. Slow industry growth resulting in competition for market share
  3. High fixed or storage costs driving pressure to maintain capacity
  4. Lack of differentiation or switching costs driving price and service competition
  5. Diverse competitors, with different origins, personalities and profit drivers, no consistent rules of the game and therefore inconsistent profits (dumping, low pricing, discounting)
  6. High strategic stakes and willingness to sacrifice profits for prestige, other synergies or credibility
  7. High exit barriers including specialised assets with low liquidation values, labour agreements, spare part obligations, strategic inter-relationships, image, shared facilities, emotional barriers, loyalty to employees, pride, government and social restrictions, regional effects

Rivalry shifts over time as industries grow, mature and decline and new entrants bring new innovations

The ideal situation for high stable profits is to have high entry and low exit barriers

4.1.4 Pressure from substitute products

  • Substitute products provide the same function in a different way

  • Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms can profitably charge (the industry’s overall elasticity of demand)

  • The more attractive the price/performance comparison of the substitute the lower industry profits will be driven

  • Substitute products deserving the most attention fall into two categories :

    1. Those where the price/performance trend is narrowing compared to the industry

    2. Those produced by high profit industries, where price competition or full entry could result

  • The best competitive response to substitutes is normally collective industry-wide action

4.1.5 Bargaining power of buyers

  • Buyers compete with industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other – all at the expense of industry profitability

  • A buyer group is powerful if :

    1. It is concentrated or purchases large volumes relative to seller sales i.e. it is a key customer

    2. The products it purchases from the industry are significant to its business and it therefore has strong incentives to shop for favourable prices

    3. The products it buys are undifferentiated and there are many alternative sources

    4. There are few switching costs

    5. It earns low profits and is sensitive to price

    6. They pose a credible threat of backward integration, or practice tapered integration making some lines themselves and thereby having detailed knowledge of costs

    7. The industry product is unimportant to the quality of their own

    8. The buyer has full information

    9. The buyer is a distributer or retailer and can influence end-consumer demand for the product

  • Strategies to reduce buyer power include buyer selection, differentiation and increasing switching costs

4.1.6 Opportunities through competitive strategy

An effective competitive strategy takes offensive or defensive action in order to create a defendable position against the 5 competitive forces. This is done by a number of possible approaches :

  1. Positioning the firm so that its capabilities provide the best defence against the largest risks

  2. Finding positions where the forces are weakest

  3. Influencing the balance of forces through strategic moves, thereby improving relative position

  4. Taking the offensive to identify and alter the causes of the forces which will yield the greatest pay-back

  5. Anticipating shifts in the underlying forces and responding to them before competitors

  6. Understanding industry evolution and its impacts on operations and profitability

  7. Considering diversification and ultimately exit

4.1.6 Optimal (high profit) industry structure

New entrant barriers
  • Economies of scale/low cost
  • Product differentiation/loyalty
  • High capital requirements
  • High switching costs
  • Captive distribution
  • Government rules
  • Technological, geographic, raw material, patents, learning
  • Retaliation
Existing rivalry
  • Few large players
  • Stable market shares
  • Established rules
  • Aligned marketing
  • Consistent growth
  • Differentiation/loyalty
  • Full capacity
  • High switching costs
  • Few substitutes
  • Low profit substitute industry
  • Low price/performance gap
  • Stable price performance gap
  • High switching costs
  • High barriers to entry
Buyer power
  • Many buyers/fragmentation
  • No key customers
  • Product differentiation
  • Product importance to buyer
  • No threat of forward integration
  • Low price sensitivity
  • High switching costs
  • No substitutes
  • Low information access
  • Low influence on end consumer
Supplier power
  • No key suppliers
  • Low product differentiation
  • Company importance to supplier
  • No threat of backward integration
  • Low switching costs
  • Available substitutes
  • High information access
  • Low influence on labour
  • Low government restrictions

4.2.1 The 3 Generic Strategies to cope with the 5 competitive forces

4.2.2 Strategy 1 - Low cost leadership

  • State of the art, efficient scale facilities
  • High capital investment
  • Requires high market share
  • Wide product line/all customer segments
  • Aggressive pricing/start up losses
  • Vigorous pursuit of cost reductions
  • Tight cost and overhead control
  • Avoidance of marginal customers
  • Cost minimisation in R&D, service, sales, advertising etc
  • Process re-engineering
  • Intense staff supervision & reports
  • Products designed for ease of production
  • Structured organisation and responsibilities
  • Failure to attain the strategy
  • Erosion of value with industry evolution
  • Technological change
  • Imitation of processes, which nullifies past investment or learning
  • Blindness to marketing and product changes because of low cost focus
  • High costs of re-investment
  • Not ruthlessly scrapping obsolete lines or assets
  • Failure to re-invest to maintain leadership
  • Rigidity

4.2.3 Strategy 2 - Differentiation

  • Industry-wide uniqueness in design, brand image, quality, technology, features, service, distribution (ideally more than one)
  • Strong marketing abilities, product engineering and creative flair
  • Strong co-ordination in R&D, product development and marketing
  • Subjective measurement and incentives
  • Amenities to attract highly skilled labour scientists or creative people
  • Strong co-operation from channels
  • Engenders loyalty, lower price sensitivity

and sense of exclusivity and excitement

  • Failure to attain the strategy
  • Erosion of value with industry evolution
  • Cost differential with low cost providers becomes too great to hold loyalty
  • Buyers become more sophisticated and differentiation factor falls
  • Imitation narrows perceived differentiation
  • Loss of intensity over time

4.2.4 Strategy 3 - Focus

  • Focus on a particular niche – buyer group, segment of the product line or geographic market
  • Can be either low cost and/or differentiated
  • Strategy built around serving the customer type very well and better than competitors with a broader focus
  • Involves a trade off between profitability and volume
  • Can achieve above average returns for the industry
  • May choose positions less vulnerable to substitutes or where competitors are weaker
  • Failure to attain the strategy
  • Erosion of value with industry evolution
  • Cost differential with low cost providers becomes too great to hold loyalty
  • Broad range competitors eliminate cost advantages or differentiation
  • Differences narrow
  • Loss of intensity over time
  • Competitors identify sub-markets below focus segments and out-focus the focuser

4.2.5 Full list of levers of competitive strategy

  • Specialisation through line width, segmentation or geography
  • Brand identification via advertising, sales force etc
  • Push versus pull – relationship with the ultimate consumer and distribution channels
  • Channel selection – specialty or broad
  • Product quality – features, materials, specification, design
  • Technological leadership
  • Vertical integration backwards or forwards
  • Cost position
  • Service – engineering assistance, warranties, credit etc
  • Price policy
  • Leverage – financial and operating
  • Relationship to parent
  • Relationship to government

4.3.1 Competitor analysis framework (current, potential and merged competitors)

4.3.2 Competitor future goals

Drivers at business unit level
  • Financial goals – short/long-term, profits or market share growth, share value or dividends
  • Attitude towards risk
  • Values – leader, maverick, design,

quality, location

  • Organisational structure – relative status

of different functions, power, rewards, focus

  • Accounting system – costs , pricing, performance measures
  • Managers – background and experience, leadership style, succession
  • Unanimity or lack – on future direction
  • Board composition – orientation, posture, risk profile, preferred strategies
  • Contractual commitments – debt, joint ventures, licensing, key relationships
  • Government, social or regulatory constraints, legal cases, major disputes
Drivers at parent level
  • Current results of the parent
  • Overall goals of the parent
  • Strategic importance of the unit
  • Reason for getting into the industry
  • Economic relationship – sharing, vertical integration, dividends
  • Values
  • Generic strategy and competency
  • Performance of other units and investment requirements
  • Diversification plans
  • Organisational structure
  • Management style and rewards
  • Executive behaviour and rewards
  • Recruitment and promotion
  • Anti-trust, regulatory and social sensitivities
  • Emotional attachment to the unit
  • Portfolio and industry positioning

4.3.3 Assumptions (about itself and the industry)

  • Its relative position, strengths and weaknesses
  • Historical or emotional identification with particular products, approaches or functional policies, which it will likely hold strongly to
  • Cultural ,regional or national differences
  • Organisational values which are strongly institutionalised and may affect how events are viewed
  • Beliefs about future demand and significant industry trends
  • Goals and capabilities of its competitors
  • Conventional wisdom and industry rules of thumb
  • Current strategic assumptions
  • Historical indicators and performance over time
  • Past successes and failure, what worked and didn’t
  • Past competitive reactions and approaches – fast/slow, rational/emotional
  • Manager and advisor backgrounds, expertise, other businesses worked in, major events lived through, speeches, styles
  • Blind spots

4.3.4 Current strategy – drives the likelihood, timing, nature, and intensity of competitor reactions

4.3.5 Capabilities

Core capabilities
  • What are the competitors capabilities in • each of the functional areas?
  • What is it best and worst at?
  • Is its strategy consistent? 
  • What are the likely changes as the competitor matures?
Ability to Growl
  • Will capabilities increase or diminish with growth? Where? Can it grow market share?
  • What is its capacity to grow – people skills, plant, finance, other constraints?
Quick Response
  • What capacity does it have to respond to competitive moves? – cash reserves, borrowing power, excess plant capacity, un-introduced new products
Ability to adapt and changes
  • Fixed versus variable costs, unused capacity. Their influence on probable responses to change
  • Changed conditions in internal functional areas – competing costs, complex product lines, adding new products, competing on service, escalation in marketing activity
  • External events – high inflation, technological changes, plant obsolescence, recession, wage pressure, government regulations
  • Exit barriers which will prevent it scaling down operations
  • Shared facilities, sales force or personnel
Staying Power
  • What is its ability to sustain a protracted battle? – cash reserves, unanimity, long horizon, lack of stock market pressure

4.3.6 Competitor response profile

Drivers of Offensive Moves
  • Dissatisfaction with the current position
  • Goals, assumptions and capabilities
  • Relative strengths and vulnerabilities of competitors
  • External performance pressures
  • First mover incentives
  • Leadership style and history
  • Past successes
  • Capacity to move or to be filled
  • External growth opportunities or threats
  • Attitudes towards risk
  • Executive changes
  • Maverick behaviour
  • Quick response capability
  • Staying power
  • High exit barriers
Drivers of Defensive Moves
  • The vulnerability of competitors to external events
  • Provocation and emotional hot buttons
  • Effectiveness of retaliation
  • Picking the battleground
  • Least comfortable
  • Cost-based
  • The high or low end of the product line
  • Legacy of past failures
  • Conflicting goals
  • Affect broader position
  • Undermine parent, image or credibility
  • Forecasting
  • Probable moves
  • Areas of convergence and clash
  • Gaps inviting entry
  • Mergers and acquisitions
  • Combination factors

4.4.1 Strategic groups

  • A strategic group in an industry is made up of companies following the same or similar strategy. Companies in a group major on the same dimensions and customers.
  • Different profitability within a group is due to ability to implement, since other factors are similar, except possibly time of entry, initial strengths and weaknesses and historical accidents
  • They are subject to the same 5 competitive forces. Other groups will be subject to different forces, which create mobility barriers
  • Changes in groups are slowed by mobility barriers. The higher the mobility barriers, the higher the profits
  • Rivalry is increased where customers overlap, products are undifferentiated, the size and number of groups and the extent to which strategies diverge


Determinants of Profitability
  • Industry structural characteristics and:
  • Rate of growth
  • Potential for differentiation
  • Supplier industry structure
  • Technology
  • Characteristics of the group :
  • Mobility barriers
  • Bargaining power with customers and suppliers
  • Vulnerability to substitutes
  • Rivalry with other groups
  • Firm’s position in its group :
  • Extent of rivalry within the group
  • Scale of the firm relative to others
  • Costs of entry into the group
  • The firms ability to implement its strategy operationally

4.4.2 Strategic group mapping

4.4.3 Group mapping and strategic options

Strategic opportunities
  • Create new group
  • Shift to more favourably situated group
  • Strengthen existing group
  • Shift to new group and strengthen that group’s structural position
Strategic risks
  • New entrants
  • Reduction in mobility barriers of group or power with customers or suppliers
  • Worsening position with substitutes
  • Greater rivalry
  • Investment risk in improv- ing firm/group’s position
  • Mobility barriers if shifting groups

4.5 Company positioning and strategy grid

4.6.1 Classical industry evolution model

  • Duration of stages varies widely
  • Industries sometimes skip stages
    e.g. growth straight to decline
  • Companies can affect the shape
    of their curve
  • The nature of competition is
    different in different industries
  • Actual evolution can take many
    different paths
  • It is better to see what drives the
    process and to predict the potential structure from the initial stage

4.6.2 Causes of evolutionary change

  • Long run changes in growth driven by changes in demographics, needs, relative position of substitutes, income elasticity, complementary products, segment penetration or products
  • Changes in buyer segments served
  • Buyers’ learnings
  • Reduction of uncertainty
  • Diffusion of proprietary knowledge
  • Accumulation of experience
  • Expansion or contraction in scale
  • Changes in input and currency costs
  • Product innovation
  • Marketing innovation
  • Process innovation
  • Structural changes in adjacent industries
  • Government policy changes
  • Entries and exits

5.1 Generic industry environments

Industry environments differ along three primary dimensions :

– Industry consolidation

– State of industry maturity

– Exposure to international competition

From this follows 5 main generic environments :

  1. Fragmented industries
  2. Emerging industries
  3. Transition to industry maturity
  4. Declining industries
  5. Global industries

Each of these environments is considered on the pages that follow

5.2 Fragmented industries

  • Absence of market leaders – no firm has a significant market share
  • Low overall barriers to entry
  • Absence of economies of scale or experience curve
  • High transportation costs
  • High inventory costs or erratic sales fluctuations
  • No size advantages in dealing with buyers or suppliers
  • Diseconomies of scale – frequent new products, style changes, low overheads, diverse product lines, heavy creative content, close local control, image and contacts
  • Diverse market needs
  • High product differentiation, based on image
  • Exit barriers, lack of profitability
  • Local regulation, government restrictions
  • Futile search for dominance/ economies
  • Lack of strategic discipline
  • Over centralisation
  • Assuming competitors have the same objectives
  • Over-reaction to new products
  • Lack of resources/skills/capital
  • Inability to see opportunities for change/identify trends early
  • Consolidation by acquisition/franchise
  • Automation, modularisation, design
  • Local management/central support
  • Formula facilities – McDonalds
  • Increased value added/service/advice
  • Specialisation by product, customer, type, order or geography
  • No frills, forward/backward integration

5.3 Emerging industries

  • Newly formed/re-formed
  • Created by technological innovations, shifts in relative costs, new consumer needs, economic or social changes
  • No rules of the game, so …
  • Technological uncertainty, no standards
  • Strategic uncertainty/different approaches
  • High initial costs, followed by steep reductions
  • Embryonic companies and spin-offs
  • First time buyers/leaps of faith
  • Short time horizons to success or failure
  • Speed of action and re-action to problems
  • Subsidies
  • Early mobility barriers – proprietary technology, access to distribution channels, raw materials, cost advantages due to experience, risk and costs of capital
  • Inability to obtain supply of materials and components
  • Rapid escalation of supply prices
  • Absence of infrastructure – channels, skills, service facilities
  • Absence of industry standards
  • Perceived likelihood of obsolescence
  • Customer confusion
  • Erratic product quality
  • Poor image/credibility with financiers
  • High costs/regulation/retaliation
  • Timing of entry
  • Later markets and positioning for evolution, failures and standardisation
  • Shaping industry structure and anticipating trends and competition
  • External threats from competitors, buyers, suppliers, govt. and society
  • Shifting mobility barriers, new entrants

5.4 Transition to industry maturity

  • Moving from rapid to more modest growth driving need to change strategy, structure and management style
  • More competition for market share
  • Selling to experienced repeat buyers
  • Greater emphasis on costs and service
  • Capacity and personnel over-supply
  • Changes in methods to differentiate
  • Fewer new products / less innovation /energy
  • International competition increases
  • Profits often decline
  • Dealers margins decline, power increases
  • High focus on cost reduction and pricing
  • Design and manufacturing process improvements
  • Focus on keeping existing customers, not gaining new ones
  • Opportunities to buy cheap assets from distressed companies and reduce costs
  • Disinvestment and re-investment may be better approach to profit decline/risk
  • Self-perception may cloud judgement and actions and slow response
  • Company may become caught in the middle, all things to all people
  • Investment to build share may be wasted/ people management needed
  • Lost market share in favour of short term profitability/reduced investment
  • Price competition/lower $ expectations
  • Lack of response to industry changes and competitive moves
  • Over-emphasis on new products, rather than improving/selling existing ones
  • Retaining excess capacity too long
  • Management not adjusting thinking, approaches, style and skill sets

5.5 Declining industries

  • Permanent decline in unit sales over a sustained period, requiring end-game strategies
  • Causes include technological substitution, demographics, shifts in buyer needs and tastes
  • Rivalry driven by : product seen as a commodity, high fixed costs and exit barriers, balanced market shares, emotional attachment to the industry, uncertainty of rate of decline
  • Exit barriers include : low liquidation values due to specialised assets and inventories, labour settlement costs, spare part availability for past customers, breaking of long term contracts, environmental rectification, social costs
  • Lost productivity and morale prior to exit, accelerated customer switching
Decline strategies
1. Leadership in market share
  • Aggressive pricing, marketing to speed exit by other firms
  • Reducing competitor exit barriers by acquisition at better than market
  • Purchasing retiring firm capacity
  • Taking over obligations – spares, contracts, staff
  • Demonstrating strength/commitment
2. Niche
  • Identifying a segment or stable demand pocket to slow decline and returns, then investing to protect its position
3. Harvest/cashflow optimisation
  • Reducing investment models, channels, customers, service then sale or liquidation
4. Quick divestment
  • Selling early to maximise value

5.6 Global industries

  • Competition on a world-wide co-ordinated basis (as opposed to competition through autonomous subsidiaries, country by country) • Other approaches include :
  • Global focus – targeted segments
  • Focus on certain national markets
  • Protected niche – based on govt restrictions e.g. tariffs or local content
  • Coalitions
  • 5 competitive forces remain the same
  • Sources of global competitive advantage :
  • Comparative advantage (factor costs and quality)
  • Production economies of scale
  • Global experience
  • Logistical economies of scale
  • Marketing economies of scale
  • Purchasing economies of scale
  • Product differentiation
  • Proprietary product technology
Decline strategies
1. Structural
  • Factor cost differences across countries 
  • Differing market circumstances
  • Different government policy/attitudes
  • Different goals, resources and ability to manage foreign competitors
2. Operational
  • Transportation and storage costs
  • Need for different product varieties
  • Distribution channels/sales force
  • Local repair
  • Lead time sensitivity
  • Complex segmentation, price trade-offs 
  • Lack of world demand
3. Managerial
  • Differing marketing requirements
  • Requirement for intensive local service
  • Rapidly changing technology
  • Governmental impediments

6.1 Strategic decisions

The major strategic decisions, that face a company in relation to an industry, centre around the following topics :

  1. Vertical integration (forward or backwards)
  2. Major capacity expansion
  3. New business entry
  4. Divestment (already covered in 5.5)

6.2 Vertical integration

Strategic Benefits
  • Competition on a world-wide co-ordinated basis (as opposed to competition through autonomous subsidiaries, country by country) • Other approaches include :
  • Global focus – targeted segments
  • Focus on certain national markets
  • Protected niche – based on govt restrictions e.g. tariffs or local content
  • Coalitions
  • 5 competitive forces remain the same
  • Sources of global competitive advantage :
  • Comparative advantage (factor costs and quality)
  • Production economies of scale
  • Global experience
  • Logistical economies of scale
  • Marketing economies of scale
  • Purchasing economies of scale
  • Product differentiation
  • Proprietary product technology
  • Tapered (partial) integration
  • Quasi integration (long term contracts)
Strategic Costs
  • Overcoming mobility barriers
  • Increased operating leverage/fixed costs
  • Reduced flexibility to change partners
  • Higher overall exit barriers
  • Capital investment requirement
  • Foreclosure of access to supplier or consumer research and know-how
  • Maintaining balance
  • Dulled incentives
  • Differing managerial requirements
  • A strong market position in one stage can automatically be extended into another
  • It is always cheaper to do things internally
  • It often makes sense to integrate into a competitive business
  • Vertical integration can save a strategically sick business
  • Experience in one part automatically qualifies management elsewhere in the chain

6.3 Capacity expansion


To improve the competitive position or market share whilst avoiding industry over-capacity

  • Future demand
  • Competitor behaviour
  • Degree of uncertainty and risk
  • Pre-emption
  • Determine the firm’s options for size and type of capacity additions
  • Assess probable future demand and input costs
  • Assess probable technological changes and probability of obsolescence
  • Predict competitor capacity additions
  • Assess impacts on supply and demand, prices and costs
  • Determine cash flows/sensitivity


Causes of Over-building Capacity
  • Cyclical demand changes, many firms
  • Non-differentiation and fragmentation
  • Long lead times/large lumps at once
  • Economies of scale/ minimum efficient scale
  • Changes in production technology
  • Exit barriers, integrated competitors
  • Age, type and share of capacity
  • New entrants, first mover advantage
  • Over optimistic demand forecasts, stock market or supplier pressures
  • Production, pre-emptive culture
  • Tax incentives, subsidies, indigenous incentives, employment/social pressures
  • Poor market signals
  • Competitors with goals other than economic
  • Competitors with longer time horizons, willing to trade profits for share
  • Competitors viewing the industry as a key part of their portfolio

6.4 Entry into new businesses

  • Entry is generally driven by the prospect of above average returns, target attractiveness and the company skills and capabilities to enter successfully
  • Economic theory suggests that no entry decision can ever yield above average returns unless the market is imperfect
Options for Entry
  • Internal development
  • Acquisition
Factors affecting internal development
  • Structural barriers
  • Likelihood of retaliation by existing firms
  • Investment required to overcome these
  • Effects of new capacity, balanced against cash flows from being in the industry
  • Ability of the firm to influence the industry structure
  • Pre-existing synergies of the business
Common approaches to entry
  • Reduce product costs – new process technology, larger plant, more modern facilities, shared activities
  • Buy share with lower price
  • Superior product to differentiate
  • Discover a new niche
  • Introduce a marketing innovation
  • Piggyback distribution relationships
Successful acquisitions
Low price
  • Buyer has superior information
  • Few bidders
  • Economy is bad
  • Seller is sick or recognises its weaknesses
  • Non-economic drivers of seller requirements
Unique ability to operate the seller
  • Assets or skills
  • Industry blind spots
  • Synergies

7. Afterword

  • “Competitive Strategy” is a gold mine of tools, frameworks and ideas to position a business within its market place and to defend and grow its market share
  • Whilst this is not for everyone, we hope those of you in competitive industries, will gain some useful insights
  • Porter’s later works focus on such topics as competitive advantage, value chain analysis and the competitive advantage of nations
  • The principles from these research studies will form the basis of a future edition of the BSML Business Wisdom Series
  • We welcome your thoughts and feedback


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