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Recent thinking on competition has been largely derived from the work done by one of our policy gurus, Michael Porter of Harvard University. This chapter gives an overview of Porterian discussion on competitive strategy.
Two questions underpin competitive strategic choice. One is the attractiveness of an industry, short, medium and long term. The second is the relative positions of the various competitors in the industry, and the determinants of competitive success.
Neither alone is enough to determine competitive strategy A poor competitor in an attractive industry may not earn attractive profits. An organization in a good competitive position, with high market share, but in an unattractive industry, may not show good profits either.
INDUSTRY ATTRACTIVENESS
Industry attractiveness is determined by five factors. These are:
(1) ease of entry, and threat of new entrants into the business;
(2) the threat of substitute products or services;
(3) the bargaining power of suppliers;
(4) the bargaining power of buyers;
(5) the extent of rivalry among industry competitors.
If all these factors are favourable, the industry will be an attractive one, in that profits will tend to be high. Pharmaceuticals is an example of this. In industries where pressure from one or more of these five forces is intense, such as steel, few players command good returns, however well managed they are. Industries are not all equal in terms of inherent profitability (see Figure 10). (Figure 10 omitted)
Strategies that change the inherent structure of industries can give short-term gain at the expense of the long-term profitability of the whole industry. Examples would be a new product that makes industry entry much easier (desk top publishing, for example), or the entry of generic or unbranded competition into brand-based industries (such as unbranded cigarettes and liquor which sell on price alone). Market leaders are often dependent on the profitability of the industry itself, and have to try to manage that, as well as their own profitability. The United Distillers Group, for example, have more than 50 per cent world market share of Scotch Whisky. They cannot be healthy in an unhealthy world market -- their strategic...