BCO University Strategies for SBA Communications Services Discussion Paper

  

In the four documents below. I provided detailed information. I only need Phase 1 and 2 completed in the strategy outline. on the guideline doc I have detail informations on what needs to be on there. The other two are resources.

Strategy Memorandum
Client Company (Industry Group)
Prepared by Team Members
Executive Summary
Part 1. The Company
1.
2.
3.
4.
Brief Recent History and Key Executives
Business and Product/Service Offerings
Markets (Customer Segments and Geography)
Business-level and Corporate Strategies
Part 2. The Industry and Competition
1.
2.
3.
4.
Industry Trends and Environmental Trends
Industry Five Forces and Strategic Position
Competitor Analysis and Critical Success Factors
Strategic Growth Opportunities and Potential Threats
Part 3. The Internal Organization
1.
2.
3.
4.
Strategic Financial Analysis (Trends and Implications)
Value Chain Analysis (Buyer Willingness to Pay and Costs)
Business Model Analysis (Buyer Value Creation Opportunities)
Relative Major Strengths and Challenges vs. Principal Competitors
Part 4. The Strategy
1.
2.
3.
4.
Current Strategy Assessment (Threats to Competitive Advantage)
Evaluate Strategic Options (Advantages and Disadvantages)
Evaluate Competitor Retaliation (Motivation and Capabilities)
Strategy Recommendation and Implementation (Who, When, and How)
Value Chain Analysis
1. Catalog value chain activities that the company performs differently from its competitors.
Value chain activities are broadly classified into two categories, namely primary activities
and support activities. Primary activities are how the company creates and delivers products
and services. In each stage of value activity, a product’s value is enhanced. Support activities
make the primary activities more effective.
Primary activities vary by the nature of business and industry. Primary activities are grouped
under activity classes such as sourcing and supply chain, operations, distribution, marketing
and sales, and after-sale services. Support activities include activity classes such as research
and development, human resource management, information systems, and administration
including finance, legal, and other infrastructure. Catalog the value chain activities that the
company performs differently from their principal competitors. The value chain activities
must be consistent with the company’s product market position.
2. Analyze the impact of activities on the buyer willingness to pay (buyer WTP) and the cost to
serve. The buyer WTP is the maximum amount a customer is willing to pay (price) to obtain
the product. Thee buyer WTP is less than the buyer value added (perceived by buyers). The
buyer WTP depends on the market segments served (buyer criteria) and the buyer’s available
alternatives (competitive products). The cost to serve includes the cost of inputs such as raw
material, operations, selling and marketing, distribution, customer support, R&D, and other
operating expenses. The wedge between the buyer WTP and the cost to serve is the added
value. The purpose of the value chain analysis is to explore strategic options to widen this
wedge.
1
3. Identify cost drivers (levers) associated with each activity in the value chain. Cost drivers are
the factors that make the cost of an activity rise or fall. Trace the resources that are employed
to perform the activities. Consider the factors that influence resource utilization. Cost drivers
are levers that management can employ to control costs of activities.
Similarly, identify revenue drivers, that is, the factors that influence the buyer WTP. Revenue
drivers include product features, ease of purchase, speed of delivery, channels, advertising to
increase brand awareness, quality of after-sale service, terms of credit, product samples and
demonstration, and other factors that raise buyer satisfaction and lower buyer risk and costs.
Consider buyer criteria and the stages of the buying process (buyer value chain). Revenue
drivers enhance the buyer value-add (perceived).
4. Eliminate activities that incur cost without commensurate increase in the buyer WTP. Search
for ways to increase the buyer WTP with a reasonable increase in the cost. Search for ways to
widen the wedge between the buyer WTP and the cost to serve. Consider options that reduce
the cost to serve without significant drop in the buyer WTP. Consider the cost drivers (levers)
to reduce the cost to serve and the revenue drivers (levers) to boost the buyer WTP.
When generating strategic options to widen the wedge between the buyer WTP and the cost
to serve, it is crucial to consider competitor reactions. Do not fixate only on product features
but consider the full range of ways that improve buyer performance (satisfaction) and lower
buyer costs (risks). Similarly, consider the ways to improve supplier performance and lower
supplier costs. Consider the scope of products that can be offered and the market segments
that are not currently served.
2
It is often more practical to start with a set of strategic options and then determine how each
option influences the change in the current activities. Analyze the impact of each alternative
activity configuration on the wedge between the buyer WTP and the cost to serve. Check the
activities are consistent with the product market position. Consider if product market position
can be altered to be consistent with activity configuration without losing existing customers.
Consider reallocation of the resources, which may require acquisitions, divestitures, strategic
alliances, internal startups, outsourcing, and partnerships. Finally, check for consistency of
activity configuration, resource configuration, and product market position.
3
How Competitive Forces Shape Strategy
STRATEGIC PLANNING
by Michael E. Porter
From the March 1979 Issue
T
he essence of strategy formulation is coping with competition. Yet it is easy to view
competition too narrowly and too pessimistically. While one sometimes hears
executives complaining to the contrary, intense competition in an industry is neither
coincidence 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 particular
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 diagrammed in
the Exhibit. The collective strength of these forces determines the ultimate profit potential of
an industry. It ranges from intense in industries like tires, metal cans, and steel, where no
company earns spectacular returns on investment, to mild in industries like oil field services
and equipment, soft drinks, and toiletries, where there is room for quite high returns.
Find this and other HBR graphics in our Visual Library 
In the economists’ “perfectly competitive” industry, jockeying for position is unbridled and
entry to the industry very easy. This kind of industry structure, of course, offers the worst
prospect for long-run profitability. The weaker the forces collectively, however, the greater the
opportunity for superior performance.
Whatever their collective strength, the corporate strategist’s goal is to find a position in the
industry where his or her company can best defend itself against these forces or can influence
them in its favor. The collective strength of the forces may be painfully apparent to all the
antagonists; but to cope with them, the strategist must delve below the surface and analyze the
sources of each. For example, what makes the industry vulnerable to entry, What determines
the bargaining power of suppliers?
Knowledge of these underlying sources of competitive pressure provides the groundwork for a
strategic agenda of action. They highlight the critical strengths and weaknesses of the
company, animate the positioning of the company in its industry, clarify the areas where
strategic changes may yield the greatest payoff, and highlight the places where industry trends
promise to hold the greatest significance as either opportunities or threats. Understanding
these sources also proves to be of help in considering areas for diversification.
Contending Forces
The strongest competitive force or forces determine the profitability of an industry and so are
of greatest importance in strategy formulation. For example, even a company with a strong
position in an industry unthreatened by potential entrants will earn low returns if it faces a
superior or a lower-cost substitute product—as the leading manufacturers of vacuum tubes
and coffee percolators have learned to their sorrow. In such a situation, coping with the
substitute product becomes the number one strategic priority.
Different forces take on prominence, of course, in shaping competition in each industry. In the
ocean-going tanker industry the key force is probably the buyers (the major oil companies),
while in tires it is powerful OEM buyers coupled with tough competitors. In the steel industry
the key forces are foreign competitors and substitute materials.
Every industry has an underlying structure, or a set of fundamental economic and technical
characteristics, that gives rise to these competitive forces. The strategist, wanting to position
his or her company to cope best with its industry environment or to influence that
environment in the company’s favor, must learn what makes the environment tick.
This view of competition pertains equally to industries dealing in services and to those selling
products. To avoid monotony in this article, I refer to both products and services as “products.”
The same general principles apply to all types of business.
A few characteristics are critical to the strength of each competitive force. I shall discuss them
in this section.
Threat of entry
New entrants to an industry bring new capacity, the desire to gain market share, and often
substantial resources. Companies diversifying through acquisition into the industry from other
markets often leverage their resources to cause a shake-up, as Philip Morris did with Miller
beer.
The seriousness of the threat of entry depends on the barriers present and on the reaction from
existing competitors that entrants can expect. If barriers to entry are high and newcomers can
expect sharp retaliation from the entrenched competitors, obviously the newcomers will not
pose a serious threat of entering.
There are six major sources of barriers to entry:
1. Economies of scale
These economies deter entry by forcing the aspirant either to come in on a large scale or to
accept a cost disadvantage. Scale economies in production, research, marketing, and service
are probably the key barriers to entry in the mainframe computer industry, as Xerox and GE
sadly discovered. Economies of scale can also act as hurdles in distribution, utilization of the
sales force, financing, and nearly any other part of a business.
2. Product differentiation
Brand identification creates a barrier by forcing entrants to spend heavily to overcome
customer loyalty. Advertising, customer service, being first in the industry, and product
differences are among the factors fostering brand identification. It is perhaps the most
important entry barrier in soft drinks, over-the-counter drugs, cosmetics, investment banking,
and public accounting. To create high fences around their businesses, brewers couple brand
identification with economies of scale in production, distribution, and marketing.
3. Capital requirements
The need to invest large financial resources in order to compete creates a barrier to entry,
particularly if the capital is required for unrecoverable expenditures in up-front advertising or
R&D. Capital is necessary not only for fixed facilities but also for customer credit, inventories,
and absorbing start-up losses. While major corporations have the financial resources to invade
almost any industry, the huge capital requirements in certain fields, such as computer
manufacturing and mineral extraction, limit the pool of likely entrants.
4. Cost disadvantages independent of size
Entrenched companies may have cost advantages not available to potential rivals, no matter
what their size and attainable economies of scale. These advantages can stem from the effects
of the learning curve (and of its first cousin, the experience curve), proprietary technology,
access to the best raw materials sources, assets purchased at preinflation prices, government
subsidies, or favorable locations. Sometimes cost advantages are legally enforceable, as they
are through patents. (For an analysis of the much-discussed experience curve as a barrier to
entry, see the insert.)
The Experience Curve as an
Entry Barrier
In recent years, the experience curve has
become widely discussed as a key element
of industry structure. According to this
concept, unit costs in many manufacturing
industries (some dogmatic adherents say in
all manufacturing industries) as well as in
some service industries decline with
“experience,” or a particular company’s
cumulative volume of production. (The
experience curve, which encompasses
many factors, is a broader concept than the
5. Access to distribution channels
The newcomer on the block must, of course,
secure distribution of its product or service. A
new food product, for example, must displace
others from the supermarket shelf via price
breaks, promotions, intense selling efforts, or
some other means. The more limited the
wholesale or retail channels are and the more
that existing competitors have these tied up,
obviously the tougher that entry into the
industry will be. Sometimes this barrier is so
better known learning curve, which refers
to the efficiency achieved over a period of
time by workers through much repetition.)
high that, to surmount it, a new contestant
must create its own distribution channels, as
Timex did in the watch industry in the 1950s.
The causes of the decline in unit costs are
a combination of elements, including
economies of scale, the learning curve for
labor, and capital-labor substitution. The
cost decline creates a barrier to entry
because new competitors with no
“experience” face higher costs than
established ones, particularly the producer
with the largest market share, and have
difficulty catching up with the entrenched
competitors.
6. Government policy
Adherents of the experience curve concept
stress the importance of achieving market
leadership to maximize this barrier to entry,
and they recommend aggressive action to
achieve it, such as price cutting in
anticipation of falling costs in order to build
volume. For the combatant that cannot
achieve a healthy market share, the
prescription is usually, “Get out.”
Is the experience curve an entry barrier on
which strategies should be built? The
answer is: not in every industry. In fact, in
some industries, building a strategy on the
experience curve can be potentially
disastrous. That costs decline with
experience in some industries is not news
to corporate executives. The significance of
the experience curve for strategy depends
on what factors are causing the decline.
The government can limit or even foreclose
entry to industries with such controls as
license requirements and limits on access to
raw materials. Regulated industries like
trucking, liquor retailing, and freight
forwarding are noticeable examples; more
subtle government restrictions operate in fields
like ski-area development and coal mining. The
government also can play a major indirect role
by affecting entry barriers through controls
such as air and water pollution standards and
safety regulations.
The potential rival’s expectations about the
reaction of existing competitors also will
influence its decision on whether to enter. The
company is likely to have second thoughts if
incumbents have previously lashed out at new
entrants or if:
The incumbents possess substantial resources
to fight back, including excess cash and unused
borrowing power, productive capacity, or clout
with distribution channels and customers.
The incumbents seem likely to cut prices
because of a desire to keep market shares or
because of industrywide excess capacity.
If costs are falling because a growing
company can reap economies of scale
through more efficient, automated facilities
and vertical integration, then the
cumulative volume of production is
unimportant to its relative cost position.
Here the lowest-cost producer is the one
with the largest, most efficient facilities.
A new entrant may well be more efficient
than the more experienced competitors; if it
has built the newest plant, it will face no
disadvantage in having to catch up. The
strategic prescription, “You must have the
largest, most efficient plant,” is a lot
different from, “You must produce the
greatest cumulative output of the item to
get your costs down.”
Whether a drop in costs with cumulative
(not absolute) volume erects an entry
barrier also depends on the sources of the
decline. If costs go down because of
technical advances known generally in the
industry or because of the development of
improved equipment that can be copied or
purchased from equipment suppliers, the
experience curve is no entry barrier at all—
in fact, new or less experienced
competitors may actually enjoy a cost
advantage over the leaders. Free of the
legacy of heavy past investments, the
newcomer or less experienced competitor
can purchase or copy the newest and
lowest-cost equipment and technology.
Industry growth is slow, affecting its ability to
absorb the new arrival and probably causing
the financial performance of all the parties
involved to decline.
Changing conditions
From a strategic standpoint there are two
important additional points to note about the
threat of entry.
First, it changes, of course, as these conditions
change. The expiration of Polaroid’s basic
patents on instant photography, for instance,
greatly reduced its absolute cost entry barrier
built by proprietary technology. It is not
surprising that Kodak plunged into the market.
Product differentiation in printing has all but
disappeared. Conversely, in the auto industry
economies of scale increased enormously with
post-World War II automation and vertical
integration—virtually stopping successful new
entry.
Second, strategic decisions involving a large
segment of an industry can have a major
impact on the conditions determining the
threat of entry. For example, the actions of
many U.S. wine producers in the 1960s to step
up product introductions, raise advertising
levels, and expand distribution nationally
surely strengthened the entry roadblocks by
raising economies of scale and making access
to distribution channels more difficult.
Similarly, decisions by members of the
If, however, experience can be kept
proprietary, the leaders will maintain a cost
advantage. But new entrants may require
less experience to reduce their costs than
the leaders needed. All this suggests that
the experience curve can be a shaky entry
barrier on which to build a strategy.
While space does not permit a complete
treatment here, I want to mention a few
other crucial elements in determining the
appropriateness of a strategy built on the
entry barrier provided by the experience
curve:
The height of the barrier depends on how
important costs are to competition
compared with other areas like
marketing, selling, and innovation.
The barrier can be nullified by product or
process innovations leading to a
substantially new technology and
thereby creating an entirely new
experience curve.* New entrants can
leapfrog the industry leaders and alight
on the new experience curve, to which
those leaders may be poorly positioned
to jump.
If more than one strong company is
building its strategy on the experience
curve, the consequences can be nearly
fatal. By the time only one rival is left
pursuing such a strategy, industry growth
may have stopped and the prospects of
reaping the spoils of victory long since
evaporated.
recreational vehicle industry to vertically
integrate in order to lower costs have greatly
increased the economies of scale and raised the
capital cost barriers.
Powerful suppliers & buyers
Suppliers can exert bargaining power on
participants in an industry by raising prices or
reducing the quality of purchased goods and
services. Powerful suppliers can thereby
squeeze profitability out of an industry unable
to recover cost increases in its own prices. By
raising their prices, soft drink concentrate
producers have contributed to the erosion of
profitability of bottling companies because the
bottlers, facing intense competition from
powdered mixes, fruit drinks, and other
beverages, have limited freedom to raise their
prices accordingly. Customers likewise can
force down prices, demand higher quality or
more service, and play competitors off against
each other—all at the expense of industry
profits.
The power of each important supplier or buyer
group depends on a number of characteristics
of its market situation and on the relative
importance of its sales or purchases to the
industry compared with its overall business.
A supplier group is powerful if:
It is dominated by a few companies and is
more concentrated than the industry it sells to.
* For an example drawn from the history of
the automobile industry see William J.
Abernathy and Kenneth Wayne, “The Limits
of the Learning Curve,” HBR September–
October 1974, p.109.
Its product is unique or at least differentiated,
or if it has built up switching costs. Switching
costs are fixed costs buyers face in changing
suppliers. These arise because, among other
things, a buyer’s product specifications tie it to
particular suppliers, it has invested heavily in
specialized ancillary equipment or in reaming
how to operate a supplier’s equipment (as in computer software), or its production lines are
connected to the supplier’s manufacturing facilities (as in some manufacture of beverage
containers).
It is not obliged to contend with other products for sale to the industry. For instance, the
competition between the steel companies and the aluminum companies to sell to the can
industry checks the power of each supplier.
It poses a credible threat of integrating forward into the industry’s business. This provides a
check against the industry’s ability to improve the terms on which it purchases.
The industry is not an important customer of the supplier group. If the industry is an
important customer, suppliers’ fortunes will be closely tied to the industry, and they will
want to protect the industry through reasonable pricing and assistance in activities like R&D
and lobbying.
A buyer group is powerful if:
It is concentrated or purchases in large volumes. Large volume buyers are particularly potent
forces if heavy fixed costs characterize the industry—as they do in metal containers, corn
refining, and bulk chemicals, for example—which raise the stakes to keep capacity filled.
The products it purchases from the industry are standard or undifferentiated. The buyers,
sure that they can always find alternative suppliers, may play one company against another,
as they do in aluminum extrusion.
The products it purchases from the industry form a component of its product and represent
a significant fraction of its cost. The buyers are likely to shop for a favorable price and
purchase selectively. Where the product sold by the industry in question is a small fraction of
buyers’ costs, buyers are usually much less price sensitive.
It earns low profits, which create great incentive to lower its purchasing costs. Highly
profitable buyers, however, are generally less price sensitive (that is, of course, if the item
does not represent a large fraction of their costs).
The industry’s product is unimportant to the quality of the buyers’ products or services.
Where the quality of the buyers’ products is very much affected by the industry’s product,
buyers are generally less price sensitive. Industries in which this situation obtains include oil
field equipment, where a malfunction can lead to large losses, and enclosures for electronic
medical and test instruments, where the quality of the enclosure can influence the user’s
impression about the quality of the equipment inside.
The industry’s product does not save the buyer money. Where the industry’s product or
service can pay for itself many times over, the buyer is rarely price sensitive; rather, he is
interested in quality. This is true in services like investment banking and public accounting,
where errors in judgment can be costly and embarrassing, and in businesses like the logging
of oil wells, where an accurate survey can save thousands of dollars in drilling costs.
The buyers pose a credible threat of integrating backward to make the industry’s product.
The Big Three auto producers and major buyers of cars have often used the threat of selfmanufacture as a bargaining lever. But sometimes an industry engenders a threat to buyers
that its members may integrate forward.
Most of these sources of buyer power can be attributed to consumers as a group as well as to
industrial and commercial buyers; only a modification of the frame of reference is necessary.
Consumers tend to be more price sensitive if they are purchasing products that are
undifferentiated, expensive relative to their incomes, and of a sort where quality is not
particularly important.
The buying power of retailers is determined by the same rules, with one important addition.
Retailers can gain significant bargaining power over manufacturers when they can influence
consumers’ purchasing decisions, as they do in audio components, jewelry, appliances,
sporting goods, and other goods.
Strategic action
A company’s choice of suppliers to buy from or buyer groups to sell to should be viewed as a
crucial strategic decision. A company can improve its strategic posture by finding suppliers or
buyers who possess the least power to influence it adversely.
Most common is the situation of a company being able to choose whom it will sell to—in other
words, buyer selection. Rarely do all the buyer groups a company sells to enjoy equal power.
Even if a company sells to a single industry, segments usually exist within that industry that
exercise less power (and that are therefore less price sensitive) than others. For example, the
replacement market for most products is less price sensitive than the overall market.
As a rule, a company can sell to powerful buyers and still come away with above-average
profitability only if it is a low-cost producer in its industry or if its product enjoys some
unusual, if not unique, features. In supplying large customers with electric motors, Emerson
Electric earns high returns because its low cost position permits the company to meet or
undercut competitors’ prices.
If the company lacks a low cost position or a unique product, selling to everyone is selfdefeating because the more sales it achieves, the more vulnerable it becomes. The company
may have to muster the courage to turn away business and sell only to less potent customers.
Buyer selection has been a key to the success of National Can and Crown Cork & Seal. They
focus on the segments of the can industry where they can create product differentiation,
minimize the threat of backward integration, and otherwise mitigate the awesome power of
their customers. Of course, some industries do not enjoy the luxury of selecting “good” buyers.
As the factors creating supplier and buyer power change with time or as a result of a
company’s strategic decisions, naturally the power of these groups rises or declines. In the
ready-to-wear clothing industry, as the buyers (department stores and clothing stores) have
become more concentrated and control has passed to large chains, the industry has come
under increasing pressure and suffered falling margins. The industry has been unable to
differentiate its product or engender switching costs that lock in its buyers enough to
neutralize these trends.
Substitute products
By placing a ceiling on prices it can charge, substitute products or services limit the potential
of an industry. Unless it can upgrade the quality of the product or differentiate it somehow (as
via marketing), the industry will suffer in earnings and possibly in growth.
Manifestly, the more attractive the price-performance trade-off offered by substitute products,
the firmer the lid placed on the industry’s profit potential. Sugar producers confronted with
the large-scale commercialization of high-fructose corn syrup, a sugar substitute, are learning
this lesson today.
Substitutes not only limit profits in normal times; they also reduce the bonanza an industry
can reap in boom times. In 1978 the producers of fiberglass insulation enjoyed unprecedented
demand as a result of high energy costs and severe winter weather. But the industry’s ability to
raise prices was tempered by the plethora of insulation substitutes, including cellulose, rock
wool, and styrofoam. These substitutes are bound to become an even stronger force once the
current round of plant additions by fiberglass insulation producers has boosted capacity
enough to meet demand (and then some).
Substitute products that deserve the most attention strategically are those that (a) are subject
to trends improving their price-performance trade-off with the industry’s product, or (b) are
produced by industries earning high profits. Substitutes often come rapidly into play if some
development increases competition in their industries and causes price reduction or
performance improvement.
Jockeying for position
Rivalry among existing competitors takes the familiar form of jockeying for position—using
tactics like price competition, product introduction, and advertising slugfests. Intense rivalry is
related to the presence of a number of factors:
Competitors are numerous or are roughly equal in size and power. In many U.S. industries
in recent years foreign contenders, of course, have become part of the competitive picture.
Industry growth is slow, precipitating fights for market share that involve expansion-minded
members.
The product or service lacks differentiation or switching costs, which lock in buyers and
protect one combatant from raids on its customers by another.
Fixed costs are high or the product is perishable, creating strong temptation to cut prices.
Many basic materials businesses, like paper and aluminum, suffer from this problem when
demand slackens.
Capacity is normally augmented in large increments. Such additions, as in the chlorine and
vinyl chloride businesses, disrupt the industry’s supply-demand balance and often lead to
periods of overcapacity and price cutting.
Exit barriers are high. Exit barriers, like very specialized assets or management’s loyalty to a
particular business, keep companies competing even though they may be earning low or
even negative returns on investment. Excess capacity remains functioning, and the
profitability of the healthy competitors suffers as the sick ones hang on.1 If the entire
industry suffers from overcapacity, it may seek government help—particularly if foreign
competition is present.
The rivals are diverse in strategies, origins, and “personalities.” They have different ideas
about how to compete and continually run head-on into each other in the process.
As an industry matures, its growth rate changes, resulting in declining profits and (often) a
shakeout. In the booming recreational vehicle industry of the early 1970s, nearly every
producer did well; but slow growth since then has eliminated the high returns, except for the
strongest members, not to mention many of the weaker companies. The same profit story has
been played out in industry after industry—snowmobiles, aerosol packaging, and sports
equipment are just a few examples.
An acquisition can introduce a very different personality to an industry, as has been the case
with Black & Decker’s takeover of McCullough, the producer of chain saws. Technological
innovation can boost the level of fixed costs in the production process, as it did in the shift
from batch to continuous-line photo finishing in the 1960s.
While a company must live with many of these factors—because they are built into industry
economics—it may have some latitude for improving matters through strategic shifts. For
example, it may try to raise buyers’ switching costs or increase product differentiation. A focus
on selling efforts in the fastest-growing segments of the industry or on market areas with the
lowest fixed costs can reduce the impact of industry rivalry. If it is feasible, a company can try
to avoid confrontation with competitors having high exit barriers and can thus sidestep
involvement in bitter price cutting.
Formulation of Strategy
Once having assessed the forces affecting competition in an industry and their underlying
causes, the corporate strategist can identify the company’s strengths and weaknesses. The
crucial strengths and weaknesses from a strategic standpoint are the company’s posture vis-àvis the underlying causes of each force. Where does it stand against substitutes? Against the
sources of entry barriers?
Then the strategist can devise a plan of action that may include (l) positioning the company so
that its capabilities provide the best defense against the competitive force; and/or (2)
influencing the balance of the forces through strategic moves, thereby improving the
company’s position; and/or (3) anticipating shifts in the factors underlying the forces and
responding to them, with the hope of exploiting change by choosing a strategy appropriate for
the new competitive balance before opponents recognize it. I shall consider each strategic
approach in turn.
Positioning the company
The first approach takes the structure of the industry as given and matches the company’s
strengths and weaknesses to it. Strategy can be viewed as building defenses against the
competitive forces or as finding positions in the industry where the forces are weakest.
Knowledge of the company’s capabilities and of the causes of the competitive forces will
highlight the areas where the company should confront competition and where avoid it. If the
company is a low-cost producer, it may choose to confront powerful buyers while it takes care
to sell them only products not vulnerable to competition from substitutes.
The success of Dr Pepper in the soft drink industry illustrates the coupling of realistic
knowledge of corporate strengths with sound industry analysis to yield a superior strategy.
Coca-Cola and PepsiCola dominate Dr Pepper’s industry, where many small concentrate
producers compete for a piece of the action. Dr Pepper chose a strategy of avoiding the largestselling drink segment, maintaining a narrow flavor line, forgoing the development of a captive
bottler network, and marketing heavily. The company positioned itself so as to be least
vulnerable to its competitive forces while it exploited its small size.
In the $11.5 billion soft drink industry, barriers to entry in the form of brand identification,
large-scale marketing, and access to a bottler network are enormous. Rather than accept the
formidable costs and scale economies in having its own bottler network—that is, following the
lead of the Big Two and of Seven-Up—Dr Pepper took advantage of the different flavor of its
drink to “piggyback” on Coke and Pepsi bottlers who wanted a full line to sell to customers. Dr
Pepper coped with the power of these buyers through extraordinary service and other efforts
to distinguish its treatment of them from that of Coke and Pepsi.
Many small companies in the soft drink business offer cola drinks that thrust them into headto-head competition against the majors. Dr Pepper, however, maximized product
differentiation by maintaining a narrow line of beverages built around an unusual flavor.
Finally, Dr Pepper met Coke and Pepsi with an advertising onslaught emphasizing the alleged
uniqueness of its single flavor. This campaign built strong brand identification and great
customer loyalty. Helping its efforts was the fact that Dr Pepper’s formula involved lower raw
materials cost, which gave the company an absolute cost advantage over its major competitors.
There are no economies of scale in soft drink concentrate production, so Dr Pepper could
prosper despite its small share of the business (6%). Thus Dr Pepper confronted competition in
marketing but avoided it in product line and in distribution. This artful positioning combined
with good implementation has led to an enviable record in earnings and in the stock market.
Influencing the balance
When dealing with the forces that drive industry competition, a company can devise a strategy
that takes the offensive. This posture is designed to do more than merely cope with the forces
themselves; it is meant to alter their causes.
Innovations in marketing can raise brand identification or otherwise differentiate the product.
Capital investments in large-scale facilities or vertical integration affect entry barriers. The
balance of forces is partly a result of external factors and partly in the company’s control.
Exploiting industry change
Industry evolution is important strategically because evolution, of course, brings with it
changes in the sources of competition I have identified. In the familiar product life-cycle
pattern, for example, growth rates change, product differentiation is said to decline as the
business becomes more mature, and the companies tend to integrate vertically.
These trends are not so important in themselves; what is critical is whether they affect the
sources of competition. Consider vertical integration. In the maturing minicomputer industry,
extensive vertical integration, both in manufacturing and in software development, is taking
place. This very significant trend is greatly raising economies of scale as well as the amount of
capital necessary to compete in the industry. This in turn is raising barriers to entry and may
drive some smaller competitors out of the industry once growth levels off.
Obviously, the trends carrying the highest priority from a strategic standpoint are those that
affect the most important sources of competition in the industry and those that elevate new
causes to the forefront. In contract aerosol packaging, for example, the trend toward less
product differentiation is now dominant. It has increased buyers’ power, lowered the barriers
to entry, and intensified competition.
The framework for analyzing competition that I have described can also be used to predict the
eventual profitability of an industry. In long-range planning the task is to examine each
competitive force, forecast the magnitude of each underlying cause, and then construct a
composite picture of the likely profit potential of the industry.
The outcome of such an exercise may differ a great deal from the existing industry structure.
Today, for example, the solar heating business is populated by dozens and perhaps hundreds of
companies, none with a major market position. Entry is easy, and competitors are battling to
establish solar heating as a superior substitute for conventional methods.
The potential of this industry will depend largely on the shape of future barriers to entry, the
improvement of the industry’s position relative to substitutes, the ultimate intensity of
competition, and the power captured by buyers and suppliers. These characteristics will in
turn be influenced by such factors as the establishment of brand identities, significant
economies of scale or experience curves in equipment manufacture wrought by technological
change, the ultimate capital costs to compete, and the extent of overhead in production
facilities.
The framework for analyzing industry competition has direct benefits in setting diversification
strategy. It provides a road map for answering the extremely difficult question inherent in
diversification decisions: “What is the potential of this business?” Combining the framework
with judgment in its application, a company may be able to spot an industry with a good future
before this good future is reflected in the prices of acquisition candidates.
Multifaceted Rivalry
Corporate managers have directed a great deal of attention to defining their businesses as a
crucial step in strategy formulation. Theodore Levitt, in his classic 1960 article in HBR, argued
strongly for avoiding the myopia of narrow, product-oriented industry definition.2 Numerous
other authorities have also stressed the need to look beyond product to function in defining a
business, beyond national boundaries to potential international competition, and beyond the
ranks of one’s competitors today to those that may become competitors tomorrow. As a result
of these urgings, the proper definition of a company’s industry or industries has become an
endlessly debated subject.
One motive behind this debate is the desire to exploit new markets. Another, perhaps more
important motive is the fear of overlooking latent sources of competition that someday may
threaten the industry. Many managers concentrate so single-mindedly on their direct
antagonists in the fight for market share that they fail to realize that they are also competing
with their customers and their suppliers for bargaining power. Meanwhile, they also neglect to
keep a wary eye out for new entrants to the contest or fail to recognize the subtle threat of
substitute products.
The key to growth—even survival—is to stake out a position that is less vulnerable to attack
from head-to-head opponents, whether established or new, and less vulnerable to erosion from
the direction of buyers, suppliers, and substitute goods. Establishing such a position can take
many forms—solidifying relationships with favorable customers, differentiating the product
either substantively or psychologically through marketing, integrating forward or backward,
establishing technological leadership.
1. For a more complete discussion of exit barriers and their implications for strategy, see my
article, “Please Note Location of Nearest Exit,” California Management Review, Winter 1976, p.
21.
2. Theodore Levitt, “Marketing Myopia,” reprinted as an HBR Classic, September–October
1975, p. 26.
A version of this article appeared in the March 1979 issue of Harvard Business Review.
Michael E. Porter is a University Professor at Harvard, based at Harvard Business School in
Boston. He is a co-author of The Politics Industry: How Political Innovation Can Break Partisan
Gridlock and Save Our Democracy (Harvard Business Review Press, 2020).
This article is about STRATEGIC PLANNING
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Competitive Strategy
PHASE 1- is a one-page Word document that describes the tasks completed and the strategic
issues the team has identified by then. See the schedule of deliverables in the syllabus. The first
update will focus on weeks 2 and 3 tasks, especially external environmental analysis and
strategic financial analysis.
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Download and read client company’s latest 10-K/Annual Report, 10-Q, 14A. Further
information can be obtained from finance.yahoo.com and (Mergent Online, S&P’s Net
Advantage, Wall Street Journal, Nexis Uni, Business Insights, Business Premier, IBIS World,
company’s website, among other sources).
At the minimum, you download last two years of 10-K of your client and competitors, current
10-Q, proxy statement (DEF 14A), industry survey, analyst report, comparable financial ratios,
and annual report (from the company’s website). The Annual Report is the same as 10-K, except
it may have highlighted information and a letter to shareholders that you may find helpful.
In 10-K, browse the key sections such as the business, risk factors, management discussion and
analysis, consolidated financials, and notes to financial statements (not all notes but strategy
related such as business segment data, geographic segment data, acquisitions, divestitures,
etc.). A 10-Q provides the current state of financial condition and trends. The proxy statement
also provides the business achievements, industry background of the board of directors, and
activist shareholder proposals (some may relate to business strategy). Industry surveys and
analyst reports are handy when you are analyzing the client company’s external and internal
environment and business strategy.
A client may be operating in more than one business segment. Your will analyze external and
internal environment of each business segment. A business segment is reported in 10-K when
the segment has at least 10 percent of consolidated sales of the company. Otherwise, the
segment is merged with another segment or with the core business of the company.
Research client company’s financials, financial ratios, management discussion and analysis,
and letter to shareholders, and perform strategic financial analysis (compare with at least
two primary competitors listed on Mergent Online or compensation peer group listed in DEF
14A).
– The Mergent Online has a tab for principal competitors from which you will pick two close
competitors. The S&P Net Advantage has industry surveys relevant to business segments of
your client. The S&P Net Advantage has analyst reports and financial ratios
Analyze client company’s industry trends, five forces, and external trends. Analyze
competitors’ goals, assumptions, capabilities, and strategies. Identify key external and
industry trends, challenges, and value creation opportunities.
– I have attached an article for teams to read on industry analysis. I would like the
industry analysis at industry segment level and then carve a strategic position how your
client can mitigate the power and threats of the five forces. The goal is to generate
strategic options.
PHASE 2- The deliverable update focuses on the internal environment of the client company
(for each business segment). The strategy memorandum outline in Canvas lists the analysis to
be performed, namely strategic financial analysis, value chain analysis, and business model
analysis. Identify strategic issues and growth opportunities. The update is an executive
summary (two to three pages maximum). Consult the value chain analysis and business model
analysis notes
Research client company’s internal environment including core competencies, resources and
capabilities, competitive advantage, and value chain activities, and business model. Identify
key strategic issues facing the company. Identify strengths and weaknesses.
Analyze client company’s current strategy. Evaluate alternative strategic actions to address
strategic challenges and opportunities. Consider potential implementation challenges and
costs. Consider the likelihood of success of the strategic options.

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