Book review: Competitive Strategy by Michael E. Porter

Competitive Strategy is written in 1998 and is a classic book for learning analytical techniques. Although it’s an old book written over 30 years ago, I think it’s still practical. Especially we can use the frameworks and analyses in this book now.

5 basic competitive forces

5 basic competitive forces are one of the major takeaways of this book.

1. Industry competitors: Rivalry Among Existing Firms
2. Buyers: Bargaining power of buyers
3. Suppliers: Bargaining power of suppliers
4. Substitutes: Threat of substitute products or services
5. Potential Entrants: Threat of new entrants

As a marketing manager, I usually think about “Industry Competitors” and “Buyers” means customers. We always face the bargaining power of buyers with competing with competitors.

1. Industry competitors: Rivalry Among Existing Firms

Needless to say, I think all marketers should have a benchmark perspective with their competitors.  But a question is how to make a benchmark with competitors.

I think “Framework for Competitive Analysis” is an answer. There are 4 components of a Competitor Analysis.

• Future Goals
• Current Strategy
• Assumptions
• Capabilities

From my experience, I understand the current situation and predict the future movement of our competitors by investigating and considering based on those components. Even if my prediction is not correct, I think we can well prepare for competitors’ moves by thinking about various scenarios in advance.

2. Buyers: Bargaining power of buyers

We always face the bargaining power of buyers and are forced to offer competitive prices to our competitors. And the lack of price competitiveness always leads to losing our business. Especially the bigger the business, the more likely we lose. To overcome this bargaining power, it is necessary to understand the buyer’s point of view and think from their standpoint.

For example, price sensitivity is one of the standpoints and depends on the products or services. In addition, several buyer strategies are written in this book.

From my experience, some buyers want to buy from an industry leader, while others want to buy from the existing suppliers they buy all the time, not from new suppliers. Also sometimes the engineer’s opinion is stronger than the buyer’s, and vice versa.

Suppliers: Bargaining power of suppliers

Honestly speaking, I’m not familiar with the strategy for suppliers. Therefore it is good to know about purchasing strategy written in this book to understand the buyer-side perspective.

Substitutes: Threat of substitute products or services

If I pick up an example of substitutes, the smartphone could be a substitute for many things such as

• Watch and alarm
• Camera
• Newspaper
• Wallet, Credit card, Coupon, Membership card
• Phone
• Car navigation
• Calculator
• Calendar
• Notes
• TV, etc.

From my experience, there is always the threat of a substantive of our product or service, but the actual replacement is not done so frequently, like once every several years. However, once it will happen, the substitute may replace many things. So it’s important to monitor potential substitutes all the time.

Potential Entrants: Threat of new entrants

Regarding the threat of new entrants, 6 major sources of barriers are described.

1. Economies of scale
2. Product differentiation
3. Capital requirement
4. Switching cost
5. Access to distribution channels
6. Government policy

And solutions are also introduced.

1. Copying
2. Hiring a competitor’s employees
3. Buy equipment from suppliers or know-how from consultants

From my experience, I think those are actually major solutions. I was surprised that this book was written 30 years ago and the solutions are still effectively used.

3 generic strategies

1. Overall cost leadership
2. Differentiation
3. Focus

And the author also pointed out 3 generic strategies. Basically, big companies try to take their position by cost leadership or differentiation. And small companies may focus on the area or segment to be No.1 in the niche market.

Thank you for reading this post.

I think the 5 forces and 4 components of competitor analysis are a good reference when we think about competitive strategy.

Please check this page for Micheal E Porter in Harvard Business School.