Title: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter

Q: Forces Driving Industry Competition
A: Threat of new entrants
Bargaining power of buyers
Threat of substitute products or services
Bargaining power of suppliers
Rivalry among existing firms

Q: Threat of Entry
A: The threat of entry depends on barriers to entry and reactions from current competitors.
Barriers to entry include six types:
1. Economies of scale - The benefits of economies of scale can be obtained from large scale operations, multiple business units where joint products and by-products are involved, and through vertical integration.
2. Product differentiation - Product differentiation refers to where a firm has brand identification and customer loyalties obtained from advertising and customer service.
3. Capital requirements - Capital requirements are a barrier in many industries where large investments are required for production facilities, inventory, and research and development.
4. Switching costs - Switching costs refers to the buyer's costs of switching from one product to another.
5. Access to distribution channels - Access to distribution channels refers mainly to wholesale and retail channels for a product.
6. Government policy - Various government policies such as licensing requirements, and regulations can present barriers to entry.

Q: Intensity of Rivalry Among Existing Competitors
A: Rivalry among competitors takes the form of price competition, advertising battles, product introductions, and increased customer service or warranties. Price wars tend to be detrimental to an industry. Advertising battles may increase demand or enhance the level of product differentiation in an industry.
Intensity of rivalry is influenced by a number of interacting structural factors including:
1. When there are numerous or equally balanced competitors,
2. slow industry growth,
3. high fixed or storage costs in the industry,
4. a lack of differentiation or switching costs,
5. situations where capacity must be added in large increments (resulting in overcapacity and price cutting),
6. diverse competitors with differing strategic choices,
7. where strategy for some firms is based on achieving global prestige or technical credibility, and
8. where there are high exit barriers caused by the requirement for specialized assets, high fixed costs to exit, strategic interrelationships, emotional barriers and government and social restrictions.
Most of these factors can change.
Entry and exit barriers work together to affect the returns in an industry as illustrated in the simple case below where both entry and exit barriers are either high or low.

Q: Pressure From Substitute Products
A: Substitute products are other products that can perform the same function as the product of the industry and limit returns in an industry by limiting prices. Products that are improving in terms of price vs. performance, and those that are produced by high profit industries deserve the most attention for analysis.

Q: Bargaining Power of Buyers
A: A buyer group's bargaining power is enhanced when the following characteristics exist in an industry:
1. A buyer group is concentrated, or purchases relatively large volumes in terms of the seller's total sales,
2. the products purchased by a buyer group represent a large percentage of the buyer's costs,
3. the products purchased by a buyer group are standard or undifferentiated,
4. a buyer group faces switching costs,
5. a buyer group earns low profits,
6. a buyer group poses a credible threat of backward integration (e.g., self manufacture),
7. the industry's product is unimportant to the buyer's product quality, and
8. the buyer has full information about demand, market prices, and supplier costs.

Q: Bargaining Power of Suppliers
A: A supplier group's bargaining power is enhanced when the following characteristics exist in an industry:
1. A supplier group is dominated by a few companies and more concentrated than the buyer's industry,
2. a supplier group does not have to contend with substitute products for sale to the industry,
3. the industry is not an important customer group of the supplier,
4. the supplier's product is an important input to the buyer's business,
5. the supplier group's products are differentiated or have switching costs,
6. the supplier group poses the threat of forward integration.
Labor is also a supplier, and the power of labor is influenced by the degree to which labor is organized, and whether scarce types of labor in an industry can be expanded.
Government is also a supplier and a buyer, and can influence the structure of an industry in many ways through regulation, subsidies, and other means. Government, in some cases is an actor to be influenced.

Q: Structural Analysis and Competitive Strategy
A: An effective competitive strategy can be developed in different ways including:
1. Positioning - building defenses against the competitive forces or establishing a position where the forces are weakest.
2. Influencing the balance of forces - strategic moves to alter the forces.
3. Exploiting change - recognizing trends that affect the most important sources of competition in the industry and acting on them before competitors recognize them and take action.

Q: Three Generic Strategies
A: Overall Cost Leadership
A low cost position protects the firm against all five basic competitive forces. The scale economies associated with a low cost position also provide a barrier to entry into the industry, and more flexibility in dealing with supplier cost increases. However, achieving cost leadership may require heavy capital investment and perhaps start-up losses to build market share, but once achieved cost leadership can provide high margins to support reinvestment to sustain the firm's low cost position.
Differentiation
A differentiation strategy can be achieved in various ways including differences in design or brand image, technology, features, customer service, dealer network, or other dimensions. Although differentiation does not allow a firm to ignore costs, it provides a defense against the five competitive forces through brand loyalty, the difficulty for competitors to overcome the firm's unique position, the lack of buyer alternatives, and the firm's enhanced ability to compete with substitute products. Customer's lower sensitivity to price may help the firm achieve higher margins and avoid the need for a cost leadership position. On the other hand, higher prices may prevent the firm from gaining a high market share.
Focus
The focus strategy is based on serving a narrow specific target group better than competitors who serve the market as a whole. The strategy is to achieve a form of differentiation, or low cost in serving a particular market, or both differentiation and low cost. A focused position in an industry provides defenses to the five competitive forces similar to those discussed above, but  there is a clear limitation to achieving a high market share in the industry.

Q: Risks of the Generic Strategies
A: Risks of Overall Cost Leadership
Technological changes that eliminates the advantage of past investments or learning.
Newcomers or followers learn to produce to match the leader's low cost advantage.
Changes in the industry take place without the firm's awareness.
Cost inflation narrows the firm's ability to maintain a sufficient price differential.
Risks of Differentiation
Cost differences between the differentiated firm and the low cost leader become too great to hold brand loyalty.
Buyer's needs change and the differentiated product no longer provides a strategic advantage.
Imitation narrows the brand and strategic advantage of the differentiated product.
Risks of Focus
Cost differences become to great to maintain a focused strategy.
Differences between the strategy target and the general market products become to narrow to maintain a focus strategy.
Competitors out focus the focuser in submarkets.

The Components of Competitor Analysis

Q: Market Signals
A: Market signals are actions taken by competitors that indicate directly or indirectly its intentions, motives, goals, or internal situation. Signals include commitments to a course of action, bluffs, warnings, and other communications to the market. Interpreting market signals is a second-order form of competitor analysis.
Two types of signals include truthful indicators of a competitor's intention, and bluffs that are intended to mislead other firms. Various types of important market signals include prior announcements of moves, announcements of results or actions after the fact, competitive discussions and explanations of their moves, competitive tactics relative to what they could have done, the manner in which strategic changes are initially implemented, actions divergence from past goals, actions divergence from industry precedent, cross-parries, fighting brands, and private antitrust suits.

Q: Competitive Moves
A: An effective competitive move is one with a quick outcome that is favorable to the firm's interest and doesn't destabilize the industry or create a competitive war. One approach is to use brute force with superior resources and capabilities. But this may create a war of attrition that is costly for everyone in the industry. A second approach is to use finesse that avoids retaliation by other firms. The typical competitive move in an oligopoly usually involves both approaches.

Q: Cooperative or Non-threating Moves
A: 1. moves that improve the firm's position as well as competitors' positions.
2. moves that improve the firm's position as well as competitors' positions only if a significant number of competitors match the move.
3. moves that improve the firm's position because competitors will not match the move.

Q: Threatening and Defensive Moves
A: Threatening Moves
The key involved in threatening moves is to predict and influence retaliation. Questions to be considered are: How likely is retaliation?, how soon with it occur?, how effective will it be?, how strong will it be?, and can it be influenced?
Lags in Retaliation
A lag before competitors retaliate is preferable and may occur when competitors do not perceive the initial strategic move, it takes considerable time to retaliate, the competitor's inability to pinpoint retaliation, and when a competitor has conflicting goals or mixed motives.
Defensive Moves
Defensive moves either create a situation where the competitor initiating the move decides to back down, or where the move is prevented by making it clear that there will be retaliation.
Discipline as a Form of Defense
A fighting brand is mentioned as a way to aim the retaliation at a specific firm. A generalized response, is more likely to result in a chain reaction.
Denying a Base
Techniques for denying a base for the competitor to meet their goals include strong price competition, research, or advertising etc., and using special deals to load customers up with inventory.

Q: Commitment
A: Commitment refers to how a firm communicates its intentions related to competitive moves.
Three types of commitment include: A commitment that the firm is unequivocally making a move (to deter retaliation), a commitment that the firm will retaliate if the competitor makes certain moves (to deter threatening moves), and a commitment that the firm will take no action (to create trust).
Communicating Commitment
Communicating a credible commitment requires the resources and other mechanisms needed to act on the commitment in a timely fashion, a clear intention to act on the commitment, either the inability to back down or the resolve not to do so, and the ability to detect compliance when a competitor acts in a way that triggers the commitment.
Trust as a Commitment
Since competitors tend to be wary of a competitor's conciliatory gestures, a persuasive way to communicate trustworthiness is needed. One way to gain trust is to act in a way that provides a benefit to competitors.

Q: Buyer Selection and Strategy
A: Some firms have a buyer selection option to seek buyers based on the favorable characteristics outlined above. In such cases the choice of the best buyer is one that balances the four criteria against the firm's capabilities.
Other strategic implications of buyer selection include:
Firms with a low-cost position can still be successful by selling to price sensitive buyers because they can meet price cuts by competitors.
Firms without a cost advantage must be more selective in choosing buyers to achieve an above-average return and not get stuck in the middle.
Good buyers can be created or improved, e.g., by persuading the buyer to include the seller's product in the buyer's product design,
The buyers choice can be broadened by increasing the value the firm provides to the buyer, and by redefining the way the buyer views the product's function,
High cost buyers can be eliminated from the customer base in some cases, although they may be insensitive to price and in some cases needed for a firm to achieve economies of scale,
The factors that determine buyer quality can change over time, and
Switching costs need to be considered when making strategic moves.

Q: Dimensions of Competitive Strategy
A: There are many different dimensions of a firm's competitive strategy within an industry including the following:
Specialization
Brand identification
Push vs. pull
Channel selection
Product quality
Technological leadership
Vertical integration
Cost position
Service
Price policy
Levarage
Relationship with parent company
Relationship to home or host government in foreign countries

Q: What Makes and Industry Fragmented?
A: The main causes of industry fragmentation include the following:
Low overall entry barriers - Nearly all fragmented industries have low entry barriers, but fragmentation usually includes one or more other causes.
The absence of economies of scale or the benefits of an experience curve.
High transportation costs.
High inventory costs or erratic sales - i.e., where small scale operations are more flexible.
No advantages of size when dealing with buyers or suppliers.
Diseconomies of scale in some aspect - e.g., requirements for success in the industry include a quick response to rapid style changes, low overhead, heavy creative content, close local control, and personal service etc.
Diverse market needs - Where buyers are willing to pay a premium for special varieties.
High product differentiation - Where large size doesn't convey the desired image.
Exit barriers - Management goals are not necessarily profit.
Local regulation.
Government prohibition of concentration.
Newness - Where no firm has developed the necessary skill and resources to gain a large market share.

Formulating Competitive Strategy in Fragmented Industries

Q: Industry Change During Transition
A: Many changes occur as an industry transitions to maturity. Some of the changes include the following:
1. Slowing growth means more competition for market share - Competitor analysis should be repeated as building market share becomes more difficult. Competition turns to outbreaks of price, service, and marketing warfare.
2. Firms in the industry increasingly are selling to experienced repeat buyers - The buyer's focus shifts to choosing among brands.
3. Competition often shifts towards a greater emphasis on cost and service - As an industry matures, the greater emphasis on lower cost and customer service may require capital investments in the latest equipment and facilities.
4. There is a topping-out problem in adding industry capacity and personnel - Building overcapacity is common and becomes more difficult to cover as industry growth slows. This toping-out adds to the motivation for price wars.
5. Manufacturing, marketing, distribution, selling, and research methods are often undergoing change - Changes may require new skills, and new methods in manufacturing, marketing, and distribution.
6. New products and applications are harder to come by - As product innovations become more difficult, the orientation shifts to research and new product development.
7. International competition increases - Product standardization and more emphasis on cost leads to international competition.
8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently - Lower profits reduces cash flow, lowers the firms stock price, and makes it more difficult to obtain debt financing.
9. Dealers' margins fall, but their power increases - As some dealers drop out, the ones that are left become more powerful.

Framework for Choosing a Strategy in a Declining Industry