Conceptual framework for industry analysis has been provided by Porter. The model identifies five key structural features that determine the strength of the competitive forces within an industry and hence industry profitability. As shown in this model, the degree of rivalry among different firms is a function of the number of competitors, industry growth, asset intensity, product differentiation, and exit barriers. Among these variables, the number of competitors and industry growth are the most influential. Further, industries with high fixed costs tend to be more competitive because competing firms are forced to cut price to enable them to operate at capacity. Differentiation, both real and perceived, among competing offerings, however, lessens rivalry. Finally, difficulty of exit from an industry intensifies competition. Threat of entry into the industry by new firms is likely to enhance competition. Several barriers, however, make it difficult to enter an industry. Two cost-related entry barriers are economies of scale and absolute cost advantage. Economies of scale require potential entrants either to establish high levels of production or to accept a cost disadvantage. Absolute cost advantage is enjoyed by firms with proprietary technology or favorable access to raw materials and by firms with production experience.

In addition, high capital requirements, high switching costs (i.e., the cost to a buyer of changing suppliers), product differentiation, limited access to distribution channels, and government policy can act as entry barriers. A substitute product that serves essentially the same function as an industry product is another source of competition. Since a substitute places a ceiling on the price that firms can charge, it affects industry potential. The threat posed by a substitute also depends on its long-term price/performance trend relative to the industry’s product. Bargaining power of buyers refers to the ability of the industry’s customers to force the industry to reduce prices or increase features, thus bidding away profits. Buyers gain power when they have choices - when their needs can be met by a substitute product or by the same product offered by another supplier. In addition, high buyer concentration, the threat of backward integration, and low switching costs add to buyer power. Bargaining power of suppliers is the degree to which suppliers of the industry’s raw materials have the ability to force the industry to accept higher prices or reduced service, thus affecting profits. The factors influencing supplier power are the same as those influencing buyer power. In this case, however, industry members act as buyers. These five forces of competition interact to determine the attractiveness of an industry. The strongest forces become the dominant factors in determining industry profitability and the focal points of strategy formulation, as the following example of the network television industry illustrates. Government regulations, which limited the number of networks to three, have had a great influence on the profile of the industry.

This impenetrable entry barrier created weak buyers (advertisers), weak suppliers (writers, actors, etc.), and a very profitable industry. However, several exogenous events are now influencing the power of buyers and suppliers. Suppliers have gained power with the advent of cable television because the number of customers to whom artists can offer their services has increased rapidly. In addition, as cable television firms reduce the size of the network market, advertisers may find substitute advertising media more costeffective. In conclusion, while the industry is still very attractive and profitable, the changes in its structure imply that future profitability may be reduced. A firm should first diagnose the forces affecting competition in its industry and their underlying causes and then identify its own strengths and weaknesses relative to the industry. Only then should a firm formulate its strategy, which amounts to taking offensive or defensive action in order to achieve a secure position against each of the five competitive forces. According to Porter, this involves

• Positioning the firm so that its capabilities provide the best defense against the existing array of competitive forces.

• Influencing the balance of forces through strategic moves, thereby improving the firm’s relative position.

• Anticipating shifts in the factors underlying the forces and responding to them, hopefully exploiting change by choosing a strategy appropriate to the new competitive balance before rivals recognize it.

Take, for example, the U.S. blue jeans industry. In the 1970s most firms except for Levi Strauss and Blue Bell, maker of Wrangler Jeans, took low profits. The situation can be explained with reference to industry structure. The extremely low entry barriers allowed almost 100 small jeans manufacturers to join the competitive ranks; all that was needed to enter the industry was some equipment, an empty warehouse, and some relatively low-skilled labor. All such firms competed on price. Further, these small firms had little control over raw materials pricing. The production of denim is in the hands of about four major textile companies. No one small blue jeans manufacturer was important enough to affect supplier prices or output; consequently, jeans makers had to take the price of denim or leave it. Suppliers of denim had strong bargaining power. Store buyers also were in a strong bargaining position. Most of the jeans sold in the United States were handled by relatively few buyers in major store chains. As a result, a small manufacturer basically had to sell at the price the buyers wanted to pay, or the buyers could easily find someone else who would sell at their price. But then along came Jordache. Creating designer jeans with heavy up-front advertising, Jordache designed a new way to compete that changed industry forces. First, it significantly lowered the bargaining power of its customers (i.e., store buyers) by creating strong consumer preference. The buyer had to meet Jordache’s price rather than the other way around. Second, emphasis on the designer’s name created significant entry barriers. In summary, Jordache formulated a strategy that neutralized many of the structural forces surrounding the industry and gave itself a competitive advantage. Comparative Analysis Comparative analysis examines the specific advantages of competitors within a given market. Two types of comparative advantage may be distinguished: structural and response. Structural advantages are those advantages built into the business.

For example, a manufacturing plant in Indonesia may, because of low labor costs, have a built-in advantage over another firm. Responsive advantages refer to positions of comparative advantage that have accrued to a business over time as a result of certain decisions. This type of advantage is based on leveraging the strategic phenomena at work in the business. Every business is a unique mixture of strategic phenomena. For example, in the soft drink industry a unit of investment in advertising may lead to a unit of market share. In contrast, the highest-volume producer in the electronics industry is usually the lowest-cost producer. In industrial product businesses, up to a point, sales and distribution costs tend to decline as the density of sales coverage (the number of salespeople in the field) increases. Beyond this optimum point, costs tend to rise dramatically. However, cost is only one way of achieving a competitive advantage. A firm may explore issues beyond cost to score over competition. For example, a company may find that distribution through authorized dealers gives it competitive leverage. Another company may find product differentiation strategically more desirable. In order to survive, any company, regardless of size, must be different in one of two dimensions. It must have lower costs than its direct head-to-head competitors, or it must have unique values for which its customers will pay more. Competitive distinctiveness is essential to survival. Competitive distinctiveness can be achieved in different ways: (a) by concentrating on particular market segments, (b) by offering products that differ from rather than mirror competing products, (c) by using alternative distribution channels and manufacturing processes, and (d) by employing selective pricing and fundamentally different cost structures. An analytical tool that may be used by a company seeking a position of competitive advantage/distinction is the business-system framework. Examination of the business system operating in an industry is useful in analyzing competitors and in searching out innovative options for gaining a sustainable competitive advantage. The business-system framework enables a firm to discover the sources of greatest economic leverage, that is, stages in the system where it may build cost or investment barriers against competitors. The framework may also be used to analyze a competitor’s costs and to gain insights into the sources of a competitor’s current advantage in either cost or economic value to the customer. At each stage of the system - technology, product design, manufacturing, and so on - a company may have several options. These options are often interdependent.

For example, product design will partially constrain the choice of raw materials. Likewise, the perspectives of physical distribution will affect manufacturing capacity and location and vice versa. At each stage, a variety of questions may by raised, the answers to which provide insights into the strategic alternatives a company may consider: How are we doing this now? How are our competitors doing it? What is better about their way? About ours? How else might it be done? How would these options affect our competitive position? If we change what we are doing at this stage, how would other stages be affected? Answers to these questions reveal the sources of leverage a business may employ to gain competitive advantage. The use of the business-system framework can be illustrated with reference to Savin Business Machines Corporation. In 1975, this company with revenues of $63 million was a minor factor in the U.S. office copier market. The market was obviously dominated by Xerox, whose domestic copier revenues were approaching $2 billion. At that time, Xerox accounted for almost 80 percent of plain-paper copiers in the United States. In November 1975, Savin introduced a plain-paper copier to serve customers who wanted low- and medium-speed machines (i.e., those producing fewer than 40 copies per minute). Two years later, Savin’s annual revenues passed $200 million; the company had captured 40 percent of all new units installed in the low-end plain-paper copier market in the United States. Savin managed to earn a 64 percent return on equity while maintaining a conservative 27 percent debt ratio. In early 1980s, its sales surpassed $470 million, selling more copiers in the United States than any other company. Meanwhile Xerox, which in 1974 had accounted for more than half of the low-end market, saw its share shrink to 10 percent in 1978. What reasons may be ascribed to Savin’s success against mighty Xerox? Through careful analysis of the plainpaper copier business system, Savin combined various options at different stages of the system to develop a competitive advantage to successfully confront Xerox. The option of installing several cheaper machines in key office locations in lieu of a single large, costly, centrally located unit proved attractive to many large customers. At virtually every stage of the business system, Savin took a radically different approach. First, it used a low-cost technology that had been avoided by the industry because it produced a lower quality copy. Next, its product design was based on low-cost standardized parts available in volume from Japanese suppliers. Further, the company opted for low-cost assembly in Japan. These businesssystem

SUSTAINING COMPETITIVE ADVANTAGE Agood strategist seeks not only to “win the hill, but hold on to it.” In other words, a business should not only seek competitive advantage but also sustain it over the long haul. Sustaining competitive advantage requires erecting barriers against the competition. Abarrier may be erected based on size in the targeted market, superior access to resources or customers, and restrictions on competitors’ options. Scale economies, for example, may equip a firm with an unbeatable cost advantage that competitors cannot match. Preferred access to resources or to customers enables a company to secure a sustainable advantage if (a) the access is secured under better terms than competitors have and (b) the access can be maintained over the long run. Finally, a sustainable advantage can be gained if, for various reasons, competitors are restricted in their moves (e.g., pending antitrust action or given past investments or existing commitments). In financial terms, barriers are based on competitive cost differentials or on price or service differentials. In all cases, a successful barrier returns higher margins than the competition earns. Further, a successful barrier must be sustainable and, in a practical sense, unbreachable by the competition; that is, it must cost the competition more to surmount than it costs the protected competitor to defend.

The nature of the feasible barrier depends on the competitive economics of the business. Aheavily advertised consumer product with a leading market share enjoys a significant cost barrier and perhaps a price-realization barrier against its competition. If a consumer product has, for example, twice the market share of its competition, it need spend only one-half the advertising dollar per unit to produce the same impact in the marketplace. It will always cost the competition more, per unit, to attack than it costs the leader to defend. On the other hand, barriers cost money to erect and defend. The expense of the barrier may become an umbrella under which new forms of competition can grow. For example, while advertising is a barrier that protects a leading consumer brand from other branded competitors, the cost of maintaining the barrier is an umbrella under which a private-label product may hide and grow. A wide product line, large sales and service forces, and systems capabilities are all examples of major barriers. Each of these has a cost to erect and maintain. Each is effective against smaller competitors who are attempting to copy the leader but have less volume over which to amortize barrier costs. Each barrier, however, holds a protective umbrella over focused competitors. The competitor with a narrow product line faces fewer costs than the wide-line leader. The mail-order house may live under the umbrella of costs associated with the large sales and service force of the leader. The “cherry picker” may produce components compatible with the systems of the leader without bearing the systems engineering costs. Exhibit 4-11 shows the relationship between barrier and umbrella strategies in sustaining competitive advantage. The best position in the system is high barrier and low umbrella. A product or business with a position strong enough that the costs of maintaining the barrier are, on a per unit basis, insignificant is in a high-barrier, low-umbrella position. The low-barrier, low-umbrella quadrant is, by definition, a commodity without high profitability. Most interesting is the high-barrier, high-umbrella quadrant. The business is protected by the existence of the barrier. At the same time, it is at risk because the cost of supporting the barrier is high.

Profitability may be high, but the risk of competitive erosion, too, may be substantial. The marketplace issue is the tradeoff between consumer preferences for more service, quality, choice, or “image” and lower prices from more narrowly focused competitors. These businesses face profound decisions. Making no change in direction means continual threats from focused competition. Yet any change in spending to lower the umbrella means changing the nature of the competitive protection; that is, eroding the barrier. Successful marketing strategy requires being aware of the size of the umbrella and continually testing whether to maintain investment to preserve or heighten the barrier or to withdraw investment to “cash out” as the barrier erodes. A sustainable advantage is meaningful in marketing strategy only when the following conditions are met: (a) customers perceive a consistent difference in important attributes between the firm’s product or service and those of its competitors, (b) the difference is the direct result of a capability gap between the firm and its competitors, and (c) both the difference in important attributes and the capability gap can be expected to endure over time. To illustrate the point, consider competition between the Kellogg Co. and Quaker Oats Co. in the cereal market. Beginning in 1995, Kellogg could not maintain the barrier and the umbrella became too big. Quaker Oats (a relatively small fourth player in the industry) took advantage of this opportunity and introduced a line of bagged cereals that were cheaper versions of Kellogg’s (the industry leader’s) national brands. By skimping on packaging and marketing costs, Quaker could sell bagged products for about $1 less than boxed counterparts. Since 1995, bagged cereals have skyrocketed from virtually nothing to account for 8% of all cereal packages sold in 1998. The difference that Kellogg counted on could not be maintained. The consumer did not care whether cereals are in a bag or box.

Competition is a strategic factor that affects marketing strategy formulation. Traditionally, marketers have considered competition as one of the uncontrollable variables to be reckoned with in developing the marketing mix. It is only in the last few years that the focus of business strategy has shifted to the competition. It is becoming more and more evident that a chosen marketing strategy should be based on competitive advantage to achieve sustained business success. To implement such a perspective, resources should be concentrated in those areas of competitive activity that offer the best opportunity for continuing profitability and sound investment returns. There are two very different forms of competition: natural and strategic. Natural competition implies survival of the fittest in a given environment. In business terms, it means firms compete from very similar strategic positions, relying on operating differences to separate the successful from the unsuccessful. With strategic competition, on the other hand, underlying strategy differences vis-à-vis market segments, product offerings, distribution channels, and manufacturing processes become paramount considerations.

Conceptually, competition may be examined from the viewpoint of economists, industrial organization theorists, and businesspeople. The major thrust of economic theories has centered on the model of perfect competition. Industrial organization emphasizes the industry environment (i.e., industry structure, conduct, and performance) as the key determinant of a firm’s performance. A theoretical framework of competition from the viewpoint of the businessperson, other than the pioneering efforts of Bruce Henderson, hardly exists. Firms compete to satisfy customer needs, which may be classified as existing, latent, or incipient. A firm may face competition from different sources, which may be categorized as industry competition, product line competition, or organizational competition. The intensity of competition is determined by a combination of factors. Afirm needs a competitive intelligence system to keep track of various facets of its rivals’ businesses. The system should include proper data gathering and analysis of each major competitor’s current and future perspectives. This article identified various sources of competitive information, including what competitors say about themselves, what others say about them, and what a firm’s own people have observed. To gain competitive advantage, that is, to choose those product/market positions where victories are clearly attainable, two forms of analysis may be undertaken: industry analysis and comparative analysis. Porter’s five-factor model is useful in industry analysis. Business-system framework can be gainfully employed for comparative analysis.