assignment
Reading description: Porter, Michael E. (1980) Extracts from Competitive Strategy: techniques for analyzing industries and competitors: with a new introduction (pp. ix-xxviii; 1-48). New York, NY: The Free Press USA. Reading Description Disclaimer: (This reference information is provided as a guide only, and may not conform to the required referencing standards for your subject) COMPETITIVE STRATEGY Techniques for Analyzing Industries and Competitors With a new Introduction Michael E. Porter THE FREE PRESS New York London Toronto Sydney Singapore THE FREE PRESS A Division of Simon & Schuster Inc. 1230 Avenue of the Americas New York, NY 10020 Copyright© 1980 by The Free Press New introduction copyright© 1998 by The Free Press All rights reserved, including the right of reproduction in whole or in part in any form. First Free Press Edition 1980 THE FREE PREss and colophon are trademarks of Simon & Schuster Inc. Manufactured in the United States of America 62 61 60 59 58 57 56 55 54 53 Library of Congress Cataloging-in-Publication Data Porter, Michael E. Competitive strategy: techniques for analyzing industries and competitors: with a new introduction/ Michael E. Porter. p. cm. Originally published: New York: Free Press, c 1980. Includes bibliographical references and index. I. Competition. 2. Industrial management. I. Title. HD41.P67 1998 658-dc21 ISBN 0-684-84148-7 98-9580 CIP ~ f~:f Y.i I ii Introduction When Competitive Strategy was first published eighteen years ago, I hoped that it would have an impact. There were reasons to hope, be- ca~se the book rested on a body of research that had stood the test of peer review, and the draft chapters had survived the scrutiny of my MBA and executive students. The reception of the book and the role it has played in launch- ing a new field, however, exceeded my most optimistic expectations. Most business school students around the world are exposed to the ideas in the book, invariably in core courses on policy or strategy, but often in specialized elective courses on competitive strategy and also in fields such as economics, marketing, technology manage- ment, and information systems. Practitioners in both large and small companies have internalized the ideas, as I learn from numerous thoughtful letters, personal conversations, and now E-mails. Most strategic consultants use the ideas in the book, and entire firms have emerged to assist companies in employing them. Budding financial analysts must read the book prior to certification. Competitive strategy, and its core disciplines of industry analy- sis, competitor analysis, and strategic positioning, are now an ac- cepted part of management practice. That a large number of x INTRODUCTION thoughtful practitioners have embraced the book as a powerful tool has fulfilled a career-long desire to influence what happens in the real world. Competitive strategy has also become an academic field in its own right. Now rich with its own competing ideas, this field is prominent among management researchers. It has also become a thriving area of inquiry among economists. The extent and vitality of the body of literature that traces in some way from the book, whether pro or con, is enormously gratifying. The number of out- standing scholars who are working in this field-some of whom I have had the privilege of teaching, mentoring, and writing with- has fulfilled my central aspiration of influencing the path of knowl- edge. The re-issue of Competitive Strategy has led me to ponder the reasons for the book's impact. They are clearer to me now with the passage of time. Competition has always been central to the agenda of companies, but it certainly did not hurt that the book came at a time when companies all over the world were struggling to cope with growing competition. Indeed, competition has become one of the enduring themes of our time. The rising intensity of competition has continued until this day, and spread to more and more countries. Translations of the book in mainland China ( 1997) or into Czech, Slovak, Hungarian, Polish, or Ukrainian would have been unthink- able in 1980. The book filled a void in management thinking. After several decades of development, the role of general managers versus spe- cialists was becoming better defined. Strategic planning had become widely accepted as the important task of charting a long-term direc- tion for an enterprise. Early thinkers in the field such as Kenneth An- drews and C. Roland Christensen had raised some important questions in developing a strategy, as I note in Competitive Strat- egy's original introduction. Yet there were no systematic, rigorous tools for answering these questions-assessing a company's indus- try, understanding competitors, and choosing a competitive position. Some newly founded strategy consulting firms had moved to fill this void, but the ideas they put forward, such as the experience curve, rested on a single presumed basis of competition and a single type of strategy. Competitive Strategy offered a rich framework for understand- ing the underlying forces of competition in industries, captured in the "five forces." The framework reveals the important differences Introduction xi among industries, how industries evolve, and helps companies find a unique position. Competitive Strategy provided tools for capturing the richness and heterogeneity of industries and companies while providing a disciplined structure for examining them. The _book also brought structure to the concept of competitive advantage through defining it in terms of cost and differentiation, and linking it directly to profitability. Managers looking for concrete ways to tackle strate- gic planning's difficult questions quickly embraced the book, which rang true to practitioners. The book also signaled a new direction and provided an impetus for economic thinking. The economic theory of competition at the time was highly stylized. Economists focused mainly on industries; companies were presumed equal or differing primarily in size or in unexplained differences in efficiency. The prevailing view of indus- try structure encompassed seller concentration and a few sources of barriers to entry. Managers were all but absent in economic models, with virtually no latitude to affect competitive outcomes. Econo- mists were concerned mainly with the societal and public policy consequences of alternative industry structures and patterns of com- petition. The aim was to push "excess" profits down. Few econo- mists had ever even considered the question of what the nature of competition implied for company behavior, or how to push profits up. Moreover, economists also lacked the tools to model competi- tion among small numbers of firms whose behavior affected each other. Competitive Strategy identified a range of phenomena that economists, armed with new game-theoretic techniques, have begun to explore mathematically for the first time. My training and assignments-first an MBA, then an econ- omics PhD, then the unique Harvard Business School challenge of using the case method to teach practitioners-revealed the gap be- tween actual competition and the stylized models. They also created a sense of urgency to develop tools that would inform actual choices in real markets. With rich industry and company knowledge from many case studies, I was able to off er a more sophisticated view of industry competition and bring some structure to the question of how a firm could outperrorm its rivals. Industry structure involved five forces, not two. Competitive positions could. be thought of in ~erms of cost, differentiation, and scope. In my theory, managers had important latitude to influence industry structure and to position the company relative to others. Market signaling, switching costs, barriers to exit, cost versus xii INTRODUCTION differentiation, and broad versus focused strategies were just some of the new concepts explored in the book that proved to be fertile av- enues for research, including the use of game theory. My approach helped open up new territory for economists to explore, and offered economists in business schools a way of moving beyond the teach- ing of standard economic concepts and models. Competitive Strat- egy has not only been widely used in teaching but has motivated and served as a starting point in other efforts to bring economic thinking to bear on practice. 1 What has changed since the book was published? In some ways, everything has changed. New technologies, new management tools, new growth industries, and new government policies have appeared and reappeared. But in another sense, nothing has changed. The book provides an underlying framework for examining competition that transcends industries, particular technologies, or management approaches. It applies to high-tech, low-tech, and service industries. The advent of the Internet can alter barriers to entry, reshape buyer power, or drive new patterns of substitution, for example, yet the un- derlying forces of industry competition stay the same. Industry changes make the ideas in the book even more important, because of the need to rethink industry structure and boundaries. While 1990s companies may look very different than 1980s companies or 1970s companies, superior profitability within an industry still rests on rel- ative cost and differentiation. One may believe that faster cycle time or total quality hold the key to competing, but the acid test comes in how these practices affect industry rivalry, a company's relative cost position, or its ability to differentiate itself and command a price premmm. The ideas in the book have endured for the very reason that they addressed the underlying fundamentals of competition in a way that is independent of the specifics of the ways companies go about com- peting. A number of other books on competition have come and gone because they were really about special cases, or were grounded not in the principles of competitive strategy but in particular com- petitive practices. That is not to say that Competitive Strategy is the last word on the subject. Quite the contrary, and there is much im- 1 Notable examples include S. Oster, Modem Competitive Analysis, Second Edition, Ox- ford University Press, 1994; A. Dixit and B. Nalebuff, Thinking Strategically: The Com- petitive Edge in Business, Politics, and Everyday Life, W. W. Norton & Company, New York, 1991; and D. Besanko, D. Dranove; and M. Shanley, The Economics of