I finished this book in August 2024. I recommend this book 2/10.
Why you should read this book:
This is a classic in the sense of strategy. However, it is also a little outdated. The book goes into detail about how to analyze your competitors and try to predict their position and intent in the marketplace.
Get your copy here.
🚀 The book in three sentences
Analyzing your competitors is a larger undertaking.
You should be able to get a sense of your competitor's intent
The book is a bit outdated
📝 My notes and thoughts
P7. There are seven major sources of barriers to entry:
Economic of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
P35. There are three potentially successful generic strategic approaches to outperforming other firms in an industry:
Overall cost leadership
Differentiation
Focus
P41. The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in the least of one of the three directions—a firm that is "stuck in the middle"—is in an extremely poor strategic situation. This firm lacks the market share, capital investment, and resolve to play the low-cost game, the industrywide differentiation necessary to obviate the need for a low-cost position, or the focus to create differentiation or a low-cost position in a more limited sphere. The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses—the cream—to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation systems.
P50. Future goals: The diagnosis of competitor's goals (and how they will measure themselves against these goals), the first component of competitor analysis, is important for a variety of reasons. Knowledge of goals will allow predictions about whether or not each competitor is satisfied with its present position and financial results, and thereby, how likely that competitor is to change strategy and the vigor with which it will react to outside events (for instance, the business cycle) or to moves by other firms.
P58. Assumptions: the second crucial component in competitor analysis is identifying each competitor's assumptions. These fall into two major categories:
The competitor's assumptions about itself
The competitor's assumptions about the industry and the other companies in it.
P58. If a competitor believes it has the greatest customer loyalty in the market and it does not, for example, a provocative price cut may be a good way to gain position. The competitor might well refuse to match the price cut, believing that it will have little impact on its share, only to find that it loses significant market position before it recognizes the error in its assumption.
P59. The following questions are directed toward identifying competitors' assumptions and also areas where they are likely not to be completely dispassionate or realistic:
What does the competitor appear to believe about its relative position—in cost, product quality, technological sophistication, and other key aspects of its business—based on its public statements, claims of management and sales force, and other indications? What does it see as its strengths and weaknesses? Are these accurate?
Does the competitor have strong historical or emotional identification with particular products or with particular functional policies, such as an approach to product design, desire for product quality, manufacturing location, selling approach, distribution arrangements, and so on, which will be strongly held to?
Are there cultural, regional, or national differences that will affect the way in which competitors perceive and assign significance to events? To take one of many examples, West German companies are sometimes very oriented toward production and product quality at the expense of unit cost and marketing.
Are the organizational values or canons which have been strongly that may still linger?
What does the competitor appear to believe about future demand for the product and about the significance of industry trends? Will it be hesitant to add capacity because of unfounded uncertainties about demand, or likely to overbuild for the opposite reason? Is it prone to misestimate the importance of particular trends? Does it believe the industry is concentrating, for example, when it may not be? These are all wedges around which strategies can be built.
What does the competitor appear to believe about the goals and capabilities of its competitors? Will it over or underestimate any of them?
Does the competitor seem to believe in industry "conventional wisdom" or historic rules of thumb and common industry approaches that do not reflect new market conditions? Examples of conventional wisdom are such notions as "Everyone must have a full line," "Customer trade up," " One must control sources of raw material in this business," "Decentralized plants are the most efficient manufacturing system," " One needs a large number of dealers," and so on. Identifying situations where conventional wisdom is inappropriate or can change yields advantages in terms of the timelines and effectiveness of a competitor's retaliation.
A competitor's assumptions may well be subtly influenced by, as well as reflected in, its current strategy. It may see new industry events through filters defined by its past and present circumstances, and this may not lead to objectivity.
P64. Use these questions when filling out a Strength, Weakness, Opportunity, Treat analysis:
Products:
Standing of products. From the user's point of view, in each market segment
Breath and depth of the product line.
Dealer/Distribution:
Channel coverage and quality.
Strength of channel relationships.
Ability to service the channels.
Marketing and Selling:
Skills in each aspect of the marketing mix.
Skills in market research and new product development.
Training and skills of the sales force.
Operations:
Manufacturing cost position—economies of scale, learning curve, newness of equipment, etc.
Technological sophistication of facilities and equipment
Flexibility of facilities and equipment.
Proprietary know-how and unique patent or cost advantages.
Skills in capacity addition, quality control, tooling, etc.
Location, including labor and transportation costs.
Labor force climate; unionization situation
Access to and cost of raw materials
Degree of vertical integration
Research and Engineering:
Patents and copyrights
In-house capability in the research and development process (product research, process research, basic research, development, imitation, etc.)
R&D staff skills in terms of creativity, simplicity, quality, reliability, etc.
Access to outside sources of research and engineering (e.g. suppliers, customers, contractors)
Overall Costs:
Overall relative costs
Shared costs or activities with other business units
Where the competitor is generating the scale or other factors that are key to its cost position
Financial Strength:
Cash flow
Short and long-term borrowing capacity (relative debt/ equity ratio)
New equity capacity over the foreseeable future
Financial management ability, including negotiation, raising capital, credit, inventories, and accounts receivable
Organization:
Unity of values and clarity of purpose in the organization
Organizational fatigue based on recent requirements placed on it
Consistency of organization arrangements with strategy
General Managerial Ability:
Leadership qualities of CEO: ability of CEO to motivate
Ability to coordinate particular functions or groups of functions (e.g. manufacturing with research coordination)
Age, training, and functional orientation of management
Depth of management
Flexibility and adaptability of management
Corporate Portfolio:
Ability of corporation to support planned changes in all business units in terms of financial and other resources
Ability of corporation to supplement or reinforce business unit strengths
Other:
Special treatment by or access to government bodies
Personnel turnover
Core Capabilities:
What are the competitor's capabilities in each of the functional areas? What is it best at? Worst at?
How does the competitor measure up to the tests of the consistency of its strategy?
Are there any probable changes in those capabilities as the competitor matures? Will they increase or diminish over time?
Ability to Grow:
Will the competitor's capabilities increase of diminish if it grows? in which area?
What is the competitor's capacity for growth in terms of people, skills, and plant capacity?
What is the competitor's sustainable growth in financial terms? Given a Du Point analysis, can it grow with the industry? Can it increase market share? How sensitive is sustainable growth to raising outside capital? To achieve good short-term financial results?
Quick Response Capability?
What is the competitor's capacity to respond quickly to moves by others or to mount an immediate offensive? This will be determined by factors such as the following:
Uncommitted cash reserves
Reserve borrowing power
Excess plant capacity
Unintroduced bit on-the-shelf new products
Ability to Adapt to Change:
What are the competitor's fixed versus variable costs? Its cost of unused capacity? These will influence its probable responses to change.
What is the competitor's ability to adapt and respond to changed conditions in each functional area? For example, can the competitor adapt to
competing cost?
managing more complex product lines?
adding new products?
competing on service?
escalation in marking activity?
Can the competitor respond to possible exogenous events, such as
a sustained high rate of inflation?
technological changes which make obsolete existing plants?
a recession?
increases in wage rates?
the most probable forms of government regulation that will affect this business?
Does the competitor have exit barriers which will tend to keep it from scaling down or divesting its operations in the business?
Does the competitor share manufacturing facilities, a sales force, or other facilities or personnel with other units of tis corporate parent? These may provide constraints to adaptation and/or may impede cost control.
Staying Power:
What is the ability of the competitor to sustain a protracted battle, which may put pressure on earnings or cash flow? This will be a function of considerations such as the following:
cash reserves
unanimity among management
long time horizon in its financial goals
lack of stock market pressure
P70. Picking the battleground: The ideal is to find a strategy that competitors are frozen from reacting to, given their present circumstances. The legacy of their past and current strategy may make some moves very costly for competitors to follow while posing much less difficulty and expense for the initiating firm. For example, when Folger's Coffee invaded Maxwell House strongholds in the east with price cutting, the cost of matching these cuts were enormous for Maxwell House because of its large market share. Another key strategic concept deriving from competitor analysis is creating a situation of mixed motives or conflicting goals for competitors. This strategy involved finding moves for which retaliation. For example, as IBM responds to the threat of the minicomputer with its own minicomputer, it may hasten the decline in growth of its large computers and accelerate the changeover to minicomputers. Placing competitors in a situation of conflicting goals can be a very effective strategic approach for attacking established firms that have been successful in their markets. Small firms and newly entered firms often have very little legacy in the existing strategies in the industry and can reap great rewards from finding strategies that penalize competitors for their stake in these existing strategies.
P73. Map of Process of Analysis.
P110. There are four broad criteria, drawn from the previous discussion, that determine the quality of buyers from a strategic standpoint:
Purchasing needs versus company capabilities.
Growth potential.
Structural position.
Intrinsic bargaining power
propensity to exercise this bargaining power in demanding low prices.
Cost of servicing.
P127. Companies's strategies for competing in an industry can differ in a wide variety of ways. However, the following strategic dimensions usually capture the possible differences among a company's strategic options in a given industry:
Specialization: the degree to which it focuses its efforts in terms of the width of its line the target customer segments, and the geographic market served.
Brand identification: the degree to which it seeks brand identification rather than competition based mainly on price or other variables. Brand identification can be achieved via advertising, sales force, or a variety of other means.
Push versus pull: the degree to which it seeks to develop brand identification with the ultimate consumer directly versus the support of distribution channels in selling its product
Channel selection: the choice of distribution channels ranging from company-owned channels to specialty outlets to broad-line outlets.
Product quality: its level of product quality in terms of raw materials, specifications, adherence to tolerances, features, and so on.
Technological leadership: the degree to which it seeks technological leadership versus following or imitation. It is important to note that a firm could be a technological leader but deliberately not produce the highest quality product in the market; quality and technological leadership do not necessarily go together.
Vertical integration: the extent of value-added as reflected in the level of forward and backward integration adopted, including whether the firm has captive distribution, exclusive or owned retail outlets, an in-house service network, and so on.
Cost position: the extent to which it seeks the low-cost position in manufacturing and distribution through investment in cost-minimizing facilities and equipment.
Service: the degree to which it provides ancillary services with its product line, such as engineering assistance and in-house service network, credit, and so forth. This aspect of strategy could be viewed as part of vertical integration but is usefully separated for analytical purposes.
Price policy: its relative price position in the market. Price position will usually be related to such other variables as cost position and product quality, but price is a distinct strategic variable that must be treated separately.
Leverage: the amount of financial leverage and operating leverage it bears.
Relationship with parent company: requirements on the behavior of the unit based on the relationship between a unit and its parent company. The firm could be a unit of a highly diversified conglomerate, one of a vertical chain of businesses, part of a cluster of related businesses in a general sector, a subsidiary of a foreign company, and so on. The nature of the relationship with the parent will influence the objectives with which the firm is managed, the resources available to it, and perhaps determine some operations or functions that it shares with other units (with resulting cost implications), as has been discussed.
Relationship to home and host government: in International industries, the relationship the firm has developed or is subject to with its home government as well as host governments in foreign countries where it is operating. Home governments can provide resources or other assistance to the form, or conversely can regulate the firm or otherwise influence its goals. Host governments often play similar roles.
P133. Differences in firms' relations to their parents may affect entry barriers as well. The strategic group including those firms that have a vertical relationship to their parents, for example, may enjoy superior access to raw materials or larger financial resources with which to retaliate against potential entrants than a strategic group consisting of independent competitors. Or firms who share distribution channels with another division of their parent company may reap economies of scale that their competitors cannot match, thereby deterring entry.
P142. Common Industry Characteristics: What factors determine the market power and, hence, profit potential of individual forms in an industry, and how do these factors relate to their strategic choices?
P158. As the industry goes through its life cycle, the nature of competition will shift. the product life cycle has attracted some legitimate criticism:
The duration of the stages varies widely from industry to industry, and its is often not clear what stage of the life cycle an industry is in. This problem diminishes the usefulness of the concept as a planning tool.
Industry growth does no always go through the S0-shaped pattern at all. Sometimes industries skip maturity, passing straight form growth to decline, as has occurred in the motorcycle and bicycle industries and recently in the radio broadcasting industry. Some industries seem to skip the slow takeoff of the introductory phase altogether.
Companies can affect the shape of the growth curve through product innovation and repositioning, extending it in a variety of ways. If a company takes the life cycle as given, it becomes an under-desirable self-fulfilling prophesy.
The nature of competitive associated with each stage of the life cycle is different for different industries. For example, some industries start out highly concentrated and stay that way. Others, like bank cash dispensers, are concentrated for a significant period and then become less so. Still, others become highly fragmented; of these, some consolidate (automobiles), and some do not (electronic component distribution). The same divergent patterns apply to advertising, R&D expenditures, degree of price competition, and most other industry characteristics. Divergent patterns such as these call into serious question the strategic implication ascribed to the life cycle. The real problem with the product life cycle as a predictor of industry evolution is that it attempts to describe one pattern of evolution that will invariably occur. And except for the industry growth rate, there is little or no underlying rationale for why the competitive changes associated with the life cycle will happen. Since actual industry evolution takes so many different paths, the life cycle pattern does not always hold, even if it is a common or even the most common pattern of evolution. Nothing in the concept allows us to predict when it will hold and when it will not.
P163. We can generalize about what are the important evolutionary processes. There are some predictable (and interacting) dynamic processes that occur in every industry in one form or another, though their speed and direction will differ from industry to industry: (Good rule to weigh these against the next shiny object.)
long-run changes in growth
changes in buyer segments served
buyers' learning
reduction of uncertainty
diffusion of proprietary knowledge
accumulation of experience
expansion (or contraction) in scale
changes in input and currency costs
product innovation
marketing innovation
structural change in adjacent industries
government policy change
entries and exits
P169. The second important evolutionary process is change in the buyer segments served by the industry. For example, early electronic calculators were sold to scientists and engineers, only later to students and bill payers. Light aircraft were initially sold to the military and later to private and commercial users. Related to this is the possibility that additional segmentation of existing buyer segments can take place by creating different products (broadly defined) and marketing techniques for them. A final possibility is that certain buyer segments are no longer served.
P178. Product innovation can come from outside or inside the industry. Color television was pioneered by RCA, a leader in black-and-white television. However, electronic calculators were introduced by electronics companies and not mechanical calculators or slide rule producers. Thus forecasting product innovation involves examining possible external sources. Many innovations flow vertically, originating from customers and suppliers, where the industry is an important customer or source of inputs. An example of the influence of product innovation on structure is the introduction of the digital watch. Economics of scale in producing digital watches are greater than those in producing most conventional watch varieties. Competing in digital watches also requires large capital investments and an entirely new technological base compared to conventional watches. Thus, mobility barriers and other aspects of the structure of the watch industry are changing rapidly.
P180. Whereas changes in the concentration or vertical integration of adjacent industries attract the most attention, more subtle changes in the methods of competition in the adjacent industries can often be just as important in affecting evolution. For example, in the 1950s and early 1960s record retailers dropped the policy of allowing consumers to play records in the store, what radio stations played became critical to record sales. However, because advertising rates were becoming increasingly tied to sustained audience size, radio stations were shifting to the "Top 40" format, that is, repeatedly playing only the leading songs. It became extremely difficult to get a new, unproven record aired on the radio. The change in retailing created a powerful new element for the recording industry—radio stations—which changed the strategic requirements for success. It also forced the recording industry to purchase advertising time for new record releases on radio stations, the only sure way to assure that new recordings were played, and generally increased barriers onto the recording industry.
P184. How do industries change? They do not change in a piecemeal fashion because an industry is an interrelated system. Changes in one element of an industry's structure tend to trigger changes in other areas. For example, an innovation in marketing might develop a new buyer segment, but serving this new segment may trigger changes in manufacturing methods, thereby increasing economies of scale. The firms reaping these economic will affect power with suppliers—and so on. One industry change, therefore, often sets off a chain reaction leading to many other changes.
P211. An example of a company that learned this lesson the hard way was Prelude Corporation, which had the stated goal of being the "General Motors of the lobster industry." It built a large fleet of expensive, high-technology lobster boats, established in-house maintenance and docking facilities, and vertically integrated into trucking and restaurants. Unfortunately, the economics were such that its fishermen, and its high overhead structure and heavy fixed costs maximized the company's vulnerability to the inherent fluctuations of the catch in the industry. The high fixed cost also led to undercutting on price by small fishermen who did not measure their business against corporate ROI targets but seemed satisfied with a much lower return. The result was a financial crisis and eventual cessation of operations. Nothing in the Prelude strategy addressed the causes of fragmentation in its industry, and hence, its strategy of dominance was futile.
P215. Chapter on Competitive Strategy in Emerging Industries.
P220. In an emerging industry, the configuration of mobility barriers is often predictably different from that which will characterize the industry later in its development. Common early barriers are the following:
proprietary technology
access to distribution channels
access to raw materials and other inputs (skilled labor) of appropriate cost and quality
cost advantages due to expensive made more significant by the technological and competitive uncertainties
risk, which raises the effective opportunity cost of capital and, thereby, effective capital barriers
P232. A crucial strategic choice for competing in emerging industries is the appropriate timing of entry. Early entry (or pioneering) involves high risk but may involve otherwise low entry barriers and can offer a large return. Early entry appropriate when the following general circumstances happen:
Image and reputation of the form are important to the buyer, and the form can develop an enhanced reputation by being a pioneer.
Early entry can initiate the learning process in a business in which the learning curve is important, experience is difficult to imitate, and it will not be nullified by successive technology generations.
Customer loyalty will be great, so that benefits will accrue to the form that sells to the customer first.
Absolute cost advantages can be gained by early commitment to supplies of raw materials, distribution channels, and so on.
*Early entry is especially risky in the following circumstances:
Early competition and market segmentation are on a basis different to that which will be important later in industry development. The firm, therefore, builds the wrong skills and may face high cost of changeover.
Costs of opening up the market are great, including such things as customer education, regulatory approvals, and technological pioneering, and the benefits of opening up the market cannot be made proprietary to the firm.
Early competition with small, newly started firms will be costly, but these firms will be replaced by more formidable competition later.
Technological change will make early investments obsolete and allow firms entering to have an advantage by having the newest products and processes.
P267. Strategic Alternative in Decline:
Leadership: Seek a leadership position in terms of market share
Niche: Create or defend a strong position in a particular segment
Harvest: Manage a controlled disinvestment, taking advantage of strengths
Divest Quickly: Liquidate the investment as early in the decline phase as possible
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