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Techniques for Analyzing Industries and Competitors
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Competitive Strategy presents a thorough examination of the nature of industry competition as well as the common strategies that successful businesses employ to get ahead. It not only offers valuable insights into how to compete in the market, but also reveals how companies can use their competitors’ information to best them at their own game.
Key idea 1 of 9
The state of competition in an industry depends on five basic forces.
Companies within an industry all compete with one another to score customers, and thus maintain or improve their position within the market. Companies therefore need to have their own competitive strategy in order to improve their chances of getting an edge over their rivals. But to formulate the best competitive strategy, we must first understand how competition itself works.
Industry competition is driven by five fundamental forces.
The first is the threat of entry, which occurs when new entrants vie for a market share within an industry, and thus drive competition. Threat of entry is dependent upon the various barriers to entry that exist within an industry.
For example, if established firms have brand identification and loyal customers stemming from their long history of advertising, then new entrants will need to spend heavily in order to overcome these barriers.
The second force is the intensity of rivalry among existing competitors, that is, the existing struggle for market position. This takes into account things like price competition, advertising battles, product launches and quality of customer service and warranties.
Whenever one company makes a move in any of these areas, they may consequently incite efforts by other firms to counter their move.
Third, there’s the pressure from substitute products, that is, products from outside industries which vie for the same customers. Sugar producers, for example, are confronted with competing products like high fructose corn syrup, a sugar substitute.
The fourth force is the bargaining power of buyers. Buyers, in fact, stand in direct competition with industry by forcing down prices, bargaining for higher quality services and pitting competitors against one another.
Finally, there is the bargaining power of suppliers, who threaten to raise prices or reduce the quality of goods and services in order to squeeze extra profitability out of an industry.
The combined strength of these forces determines the state of competition in an industry.