COMPETITIVE

ADVANTAGE ANALYSIS

Prof.Dr.Dr.Dr.H.C. Constantin Bratianu

Faculty of Business Administration
Academy of Economic Studies
Bucharest, Romania

Strategic

Strategic

Strategies

Strategies

Intention

Analysis

Elaboration

Implementation

Strategic management
process

Michael Porter

Competitive strategy aims to establish a profitable

and sustainable position against the forces that
determine industry competition.

Porters Five-forces model

Potential
entrants

Threat of new
entrants
Suppliers

Bargaining power of
suppliers

Industry
competitors

Threat of
substitutes
Substitutes

Rivalry among
existing firms

Buyers

Bargaining power of
buyers

Five Forces
1.
2.
3.
4.
5.

The threat of new entrants.

The bargaining power of buyers.
The bargaining power of suppliers.
The threat of substitute products and services.
The intensity of rivalry among competitors in an
industry.

Each of these forces affects a companys success to

compete in a given market. Together, these forces
determine the potential profit in a given industry.

THE THREAT OF NEW ENTRANTS (I)

If the potential profit for the industry competitors is
attractive, then there is a probability that a new
company may enter the business at any time.
Any new company that enters the market means an
increased competition and a good probability for
erosion of the profit.
The extent of the threat depends on existing barriers to
entry and the combined reactions from existing
competitors.
There are entry barriers and exit barriers that
discourage new companies to enter the market.
Some of these barriers are high enough to make very
difficult the entrance of a new company.

THE THREAT OF NEW ENTRANTS (II)

Economy of scale. A company may have an economy of
scale if there is high volume of products and services
that decreases the cost of production per unit product.
For a new company to enter in such a market it would
be very difficult to have from the very beginning a high
volume of products, and therefore a low cost/unit
product. Economy of scale is fitted for mass
production.
Strong brands and customer loyalty. When companies
on the market have strong brands, it is very difficult for
a new company to compete against these known
brands. This is one of the main reasons many
companies invest heavily in creating strong brands.

THE THREAT OF NEW ENTRANTS (III)

Capital requirements. There are fields of business
where there is a need for heavy investment from the
very beginning. If that investment is done in conditions
of high risks, then companies would not be able to
compete against the existing companies on the market.
Switching costs. If the buyer must support a significant
switching cost from the existing supplier to a new
supplier, then the reaction would be not to do it. That is
equivalent to an entry barrier for the new supplier.
Access to distribution channels. The new company that
enters the market needs distribution channels. If that is
costly, it is like a barrier.

THE THREAT OF NEW ENTRANTS (IV)

Exit barriers. There are some businesses for which
there are high exit barriers which may reduce the
temptation of new companies to enter the market.
In 1970s after the oil crisis, in Europe governments in
France, UK and Germany developed nuclear energy.
The lifetime of a nuclear reactor is about 25 years,
which means that after such an operational period it
must be closed down and decommissioned.
However, during these 25 years the regulations for
environment protection changed and asked for the site
to have the same level of radioactivity like before.
That is a high exit barrier for companies generating
nuclear energy.

ENTRY BARRIERS BUSINESS STORY

In 1986, Nynex issued the first electronic phone book, a CD

containing all telephone numbers for New York City area. Nynex
charged $10,000 per copy and sold CDs to other companies and
governmental agencies.
James Bryant who was in charge with this project had the intuition
of a big business, left Nynex and started his own business ProCD
aiming at producing a phone book for entire US. However,
telephone companies refused to give him for nothing their Yellow
Pages.
Bryant went to China and used a very cheap labour force (i.e. 3.5
$/day) to copy manually all Yellow Pages for US, and produced a
CD with more than 70,000 entries. Each CD cost was less than &1.0
and was sold for hundreds of dollars.
The huge profit attracted new companies to do the same. Finally,
the competition was on prices, and these kind of CDs were sold for
just a few dollars. The business failed to yield a good profit
anymore.

THE BARGAINING POWER OF BUYERS (I)

Buyers may threaten an industry by forcing down
prices, and bargaining for higher quality or more
services.
The actions of buyers erode the industry profitability.
A buyer group is powerful under the following
conditions:
- It purchases large volumes of products relative to the
seller scale (e.g. a mechanical equipment company
from a steel company).
- The products are standard not specific to the
producer. The buyer may switch easily to other
companies.
- The buyer faces small switching costs.

THE BARGAINING POWER OF BUYERS (II)

- The buyer earns a low profit which means that it is
price sensitive.
- The buyer poses a credible threat of backward
integration. If a buyer is partially backward integrated or
is credible for doing a backward integration, then it has
a good power for bargaining.
- The industrys product is unimportant to the quality of
the buyers products or services. That makes the
buyers products to be price sensitive.
Buyers can increase their bargaining power by
aggregating in some groups with common interests and
negotiating through the group power.

THE BARGAINING POWER OF SUPPLIERS

Suppliers can exert bargaining power over participants
in an industry by threatening to raise prices or reduce
the quality of purchased goods and services.
Factors that enable the bargaining power of suppliers
mirror those discussed for buyers (i.e. by symmetry).
Examples of enabling factors:
- The supplier is dominant on the market (i.e. there are
few suppliers of the same products on the market).
- The buyer is not an important client of the supplier.
- The suppliers products are important inputs in the
buyers production.
- The supplier poses a credible threat for forward
integration.

THE THREAT OF SUBSTITUTE PRODUCTS (I)

Substitute products are those able to satisfy the same
needs.
Substitute products are a serious threat to the products
existing on the market especially if their price is
significant lower, and their performance significant
higher.
Innovation generates new products and services
making some existing products less competitive.
Companies must develop their own innovation
capability in order to make safer their products. That
means to provide themselves the substitute products
through continuous innovation and renewal.

THE THREAT OF SUBSTITUTE PRODUCTS (II)

The digital cameras eliminated practically the traditional
cameras based on films and chemical production.
Polaroid could not anticipate the success of digital
cameras and lost the dominance of the market.
In the beginning new substitute products may not be of a
very good quality but in time it can be increased. In the
beginning the photos taken by digital cameras had a poor
quality by comparison with classical photos, but now they
attain a very quality.
Ball pens almost eliminated the classical fountain pens.
Email services are more used today than ordinary mail
services.
Ebooks become more popular than printed books for
youngsters.

RIVALRY AMONG COMPETITORS (I)

Rivalry among existing companies on the same market
takes the form of competition for a better positioning.
Competition between companies develops through
different forms: price competition, advertising
competition, innovation competition, resources
competition, brand competition, loyalty competition etc.
In such an industry any action of a company will
generate reactions from the competitors which means a
continuous battle for a competitive advantage.
The intensity of competitive rivalry among companies
depends on the business life cycle, with low intensity in
the growth period and high intensity at the maturity of
the business field.

RIVALRY AMONG COMPETITORS (II)

The intensity of rivalry among companies depend also
on the following factors:
- Numerous or equally balanced competitors. Industries
with numerous competitors have a high intensity of
rivalry. To protect their market shares companies
engage in intense competitive battles.
- Industry growth speed. When industry grows fast the
rivalry is not intense. But when the growths slow down
the intensity increases.
- The level of switching costs. When switching costs are
low buyers may switch easier from one competitor to
another, and rivalry increases.

Strategic groups
Strategic group = a group of companies being on the
same market with same types of products and services,
and developing similar strategies
A strategic group is a kind of reference system for
strategy analysis since any change in any companies
belonging to the same group induce changes in the other
companies
The competition pressure is highest within a strategic
group

COMPETITOR ANALYSIS
Having an understanding of the general environment,
the competitive environment, and strategic groups, the
final activity is to perform a competitor analysis.
The competitor analysis focuses on the following
issues:
- What are the strategic objectives of the competitor?
- What are the strategies the competitor developed to
achieve those objectives?
- What are the main assumptions the competitor makes
about the future?
- What are the capabilities the competitor can use in
achieving the strategic objectives?

SWOT Analysis
max

min
Weaknesses

O
O

Opportunities

max

Strenghts

Internal
environment
External
environment
Threats

min

Strategies matrix
Internal environment
S

max - max

min - max

W
max - min

External
environment
min - min