Competitive Strategy: Techniques for Analyzing Industries and Competitors

Citation

Porter, M. E. (1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press. (Original work published 1980.)

Chapter Summary

The 1998 Free Press edition has 16 chapters in three parts and two appendices, in about 430 pages. Its front matter includes an Introduction, a Preface and the Introduction written for the 1980 edition. The book offers a framework of analytical techniques for analysing an industry as a whole, predicting its evolution, and understanding competitors and the firm's own position. It rests on five competitive forces and three generic strategies.

Chapters 1–2: The Structural Analysis of Industries; Generic Competitive Strategies

Part I, "General Analytical Techniques", opens with industry structure. It covers the structural determinants of the intensity of competition, how structural analysis informs competitive strategy, and how industries are defined. Chapter 2 then presents the three generic strategies, the position of being "stuck in the middle", and the risks of each strategy.

Chapters 3–5: A Framework for Competitor Analysis; Market Signals; Competitive Moves

Three chapters on rivals. Chapter 3 lays out the components of competitor analysis, the competitor response profile, the link to industry forecasting and the need for a competitor intelligence system. Chapter 4 covers types of market signals and the use of history in identifying them, and asks whether attention to signals can be a distraction. Chapter 5 considers industry instability, competitive moves, commitment, focal points, and information and secrecy.

Chapters 6–8: Strategy Toward Buyers and Suppliers; Structural Analysis Within Industries; Industry Evolution

Chapter 6 treats buyer selection and purchasing strategy. Chapter 7 moves inside the industry to strategic groups, their link to a firm's profitability and the strategic group map as an analytical tool. Chapter 8 introduces basic concepts, processes and key relationships in industry evolution.

Chapters 9–13: Competitive Strategy in Fragmented Industries; Competitive Strategy in Emerging Industries; The Transition to Industry Maturity; Competitive Strategy in Declining Industries; Competition in Global Industries

Part II, "Generic Industry Environments", applies the analysis to five settings: fragmented, emerging, maturing, declining and global industries. Each chapter considers the structural features of the setting, the strategic choices available and the pitfalls. Topics include overcoming fragmentation, forecasting techniques for emerging industries, and preparing for decline.

Chapters 14–16: The Strategic Analysis of Vertical Integration; Capacity Expansion; Entry into New Businesses

Part III, "Strategic Decisions", examines three decisions:

• the benefits and costs of vertical integration, including long-term contracts and illusions in integration decisions;
• the elements and causes of overbuilding in capacity expansion, with preemptive strategies;
• entry through internal development, acquisition or sequenced entry.

Appendices A–B: Portfolio Techniques in Competitor Analysis; How to Conduct an Industry Analysis

The appendices add portfolio techniques and a practical guide to carrying out an industry analysis.

Key Concepts

Chapters 1–2: Industry Structure and Generic Strategies

• Structural analysis of industries: explaining the intensity of competition from an industry's structure, framed as five underlying forces.
• Generic competitive strategies: three positions: lowest cost, differentiation and focus.
• Stuck in the middle: the risk of pursuing no generic strategy clearly.

Chapters 3–8: Competitors, Signals and Industry Dynamics

• Competitor response profile: the picture of a rival that the four components of competitor analysis combine to give.
• Market signals and competitive moves: how firms read each other's actions.
• Strategic groups: sets of firms following similar strategies within one industry.
• Industry evolution: how an industry changes over time.

Chapters 9–16: Industry Environments and Strategic Decisions

• Fragmented, emerging, mature, declining and global industries: the five settings of Part II.
• Vertical integration, capacity expansion and entry: the three decisions of Part III.

Critical Analysis

Strengths

• A toolkit organised for use. Part I gives analytical techniques, Part II applies them to five industry settings and Part III to three strategic decisions. Appendix B is a practical guide to conducting an industry analysis.
• Fine-grained structure. The section headings within each chapter let a reader locate a technique directly, such as the competitor response profile or the strategic group map.
• Competitor analysis as well as industry analysis. Four chapters (3–5 and 7) deal with rivals and strategic groups, so the book is not only about the five forces.
• Selective reading is possible. The life-cycle chapters in Part II can be read individually according to the industry being studied.
• Frameworks that are still taught. The five forces remain a working tool in graduate strategy teaching; the University of Montana course described below, for example, builds a written assignment around a Five Forces analysis.

Limitations

• A 1980 text. The main text dates from 1980. The edition listed here adds an introduction, but the chapters on global competition, emerging industries and other topics reflect their period. Later developments in technology and platform markets are not covered.
• A reference rather than a narrative. The book is organised as a sequence of techniques, each with its own subsections, so a reader without prior strategy study may find it dense.
• Industry-first perspective. The book centres on industry structure, competitors and strategic groups. There is no chapter on a firm's resources or capabilities as a source of advantage.
• No cases inside. The cases are in a separate volume, Cases in Competitive Strategy (1983), so applications must be sought elsewhere.
• Can be taught through shorter restatements. Courses may assign Porter's later Harvard Business Review articles instead of the monograph itself, as the Montana course below does. Students may therefore meet the frameworks first in article form. The book offers further detail on topics such as competitor analysis, market signals, strategic groups, the industry settings of Part II and the decisions of Part III.

Where It Fits in the Course

This is the primary source for industry and competitor analysis in the strategy course.

• Joan Magretta's Understanding Michael Porter is a concise guide written with Porter's cooperation. It distils the five forces, competitive advantage and the value chain, and works well before Porter's own text or as a companion.
• Richard Rumelt's Good Strategy Bad Strategy addresses what a coherent strategy contains and is written for general and student readers.

The book can also serve as a deeper reference alongside assigned articles. Courses that teach the five forces and Porter's view of strategy through his HBR articles, like the Montana course below, can use the full text for the detail behind what those articles summarise.

Other books suit different aims:

• Breadth: Exploring Strategy covers industry and sector analysis as one of many topics.
• Analytical depth: Robert Grant's Contemporary Strategy Analysis builds analysis on economics and the resource-based view of the firm.
• Economic foundations: Besanko, Dranove, Shanley and Schaefer's Economics of Strategy treats industrial organisation and game theory formally. Readers who want the economic foundations should go there next.

How to Use This Book

The book is for several kinds of reader:

• MBA and advanced undergraduate students in strategy;
• managers and consultants who want the original source of the five-forces and generic-strategy frameworks;
• economics readers interested in how industrial organisation is applied to firms.

No formal prerequisites are needed, although basic microeconomics helps.

A practical reading plan:

• First: Chapters 1 and 2, and Appendix B.
• Competitors: Chapters 3–5, then Chapter 7 on strategic groups.
• Selective: Chapters 9–13 by industry type, and Chapters 14–16 for the corresponding decision.
• Alongside: Porter's 2008 Harvard Business Review article "The Five Competitive Forces That Shape Strategy", which restates the forces in a shorter form, and his 1996 HBR article "What is Strategy?".

Pick one real industry and carry out the analysis yourself with Appendix B, then compare your findings with the chapters.

A course assignment example

The University of Montana's MBA-level BMGT 604 Competitive Strategy (Fall 2022 syllabus, a few years old) requires a Five Forces analysis paper applying the framework to a case (LASIK / PCLI). Its required readings are Porter's 1996 "What is Strategy?" and his 2008 "The Five Competitive Forces That Shape Strategy", not the full Competitive Strategy book. If your course follows that pattern, use the book this way:

• Read the 2008 article for the compact statement of the forces.
• Use Chapter 1 to understand how each force is determined.
• Use Appendix B for a procedure for gathering and organising the evidence.
• Add Chapters 3 and 7 if the case calls for looking at specific rivals or strategic groups, not only the industry as a whole.

Check your own syllabus for which Porter readings are actually assigned. If your course uses the articles, the full book can serve as the deeper reference.