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1-Page Summary of Competitive Strategy

Overview

This book explains how to build a winning strategy. It will teach you how to choose the right strategy for your company and ensure that it becomes market leader. You will learn about five questions that are at the heart of every winning strategy, based on examples from Procter & Gamble (P&G).

You have a great product, an effective team and a well-thought out sales plan. So, what else do you need to succeed?

In Competitive Strategy, Michael Porter argues that you also need to understand your industry in order to compete. This is a breakthrough idea because it completely changed the way companies analyze themselves relative to their competition.

This passage will cover the fundamentals of competitive strategy and how your firm can achieve superior profitability with informed planning. Furthermore, you’ll learn that a firm’s business announcements might often be bluffs; as well as how vertical integration within a firm has both benefits and costs.

Big Idea #1: The five forces that determine the state of competition in an industry are:

Companies in the same industry compete with each other to get customers and maintain their position. To do that, they need a competitive strategy. The best way to formulate that strategy is by understanding how competition itself works.

The competition in an industry is driven by five fundamental forces. The first force is the threat of entry, which occurs when new entrants try to compete for a portion of the market share within that industry. This happens because the barriers to entry are so high (for example, if established firms have brand identification and loyal customers stemming from their long history of advertising).

The second force is the intensity of competition among existing competitors. This includes things like price wars, advertising battles, product launches and quality customer service and warranties. Whenever any one company makes a move in any of these areas, they may incite efforts by other companies to counter their move.

Third, there’s the pressure from substitute products. These are products that compete with sugar for customers. For example, high fructose corn syrup is a substitute for sugar.

The fourth force affecting the industry is the bargaining power of buyers. Buyers can affect prices, quality and services in order to get better deals. Suppliers are another factor that affects an industry’s state of competition. They threaten to raise prices or reduce service if they aren’t paid a higher price for their goods or services. The strength of these forces determines how competitive an industry is overall.

Big Idea #2: There are three general types of competitive strategies.

We learned that companies must develop strategies to cope with the five competitive forces. There are three ways to do this:

Companies should focus on having the lowest operational costs in their industry. This means they have to cut costs by reducing research and development, service, sales, advertising and so forth.

This strategy is successful because it allows firms to defend themselves from powerful buyers who can only exert their power by driving down prices.

Ford Motor Company showed how to be cost-effective by limiting the number of car models they produced, which reduced their underlying expenses.

Another way to be competitive is by differentiating. To do that, a company can create something unique in the industry. That could be design or brand image, technology, features, customer service or dealer network. Mercedes relies on its reputation as a luxury car maker and Apple considers itself unique because of computer design.