How Competitive Forces Shape Strategy

Topics: Barriers to entry, Barriers to exit, Strategic management / Pages: 18 (4290 words) / Published: May 14th, 2011
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How Competitive Forces Shape Strategy*

The essence of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears execu-tives complaining to the contrary, intense competition in an industry is neither coinci-dence nor bad luck.
Moreover, in the fight for market share, competition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a partic-ular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry.
The state of competition in an industry depends on five basic forces, which are di-agrammed in Figure 1. The collective strength of these forces determines the ultimate Figure 1
Elements of Industry Structure Entry Barriers Rivalry Determinants Economies of scale Industry growth Proprietary product differences Fixes (or storage) costs/value added Brand identity Intermittent overcapacity Switching costs Product differences Capital requirements Brand identity Access to distribution Switching costs Absolute cost advantage Concentration and balance Proprietary learning curve Informational complexity Access to necessary inputs Diversity of competitors Proprietary low-cost product design Corporate stakes Government Policy Exit barriers Expected retaliation

Determinants of Supplier Power Determinants of Buyer Power Differentiation of inputs Bargaining Leverage Price Sensitivity Switching costs of suppliers and firms in Buyer concentration

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