Market structure and competitive strategy
How many competitors a business faces, and how it competes with them, shapes its prices, profits, and strategy.
Competitive forces
Michael Porter's Five Forces framework analyses an industry's attractiveness: rivalry among existing competitors, the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, and the bargaining power of buyers. Strong forces squeeze profits; weak forces allow higher returns.
Barriers to entry
Barriers that keep new competitors out include economies of scale, brand loyalty, high startup costs, patents, government licences, control of distribution channels, and network effects. Industries with high barriers, such as aircraft manufacturing, have few competitors.
Competitive advantage
A competitive advantage lets a business outperform rivals. Porter described generic strategies: cost leadership (being the lowest-cost producer, like Walmart or IKEA), differentiation (offering something unique customers will pay more for, like Apple), and focus (serving a niche market, through either low cost or differentiation).
Economies of scale
Economies of scale occur when average cost per unit falls as output increases, through bulk purchasing, specialisation, and spreading fixed costs. They give large firms cost advantages. Diseconomies of scale can arise when firms become too large to manage efficiently.
Network effects
A product has network effects when it becomes more valuable as more people use it, as with social media platforms, marketplaces, and payment networks. Network effects can create 'winner-takes-most' markets and strong barriers to entry.
SWOT analysis
SWOT analysis examines a business's internal Strengths and Weaknesses and external Opportunities and Threats. It is a simple starting point for strategy: build on strengths, fix weaknesses, seize opportunities, and guard against threats.
Disruptive innovation
Clayton Christensen described disruptive innovation: a cheaper, simpler product enters at the low end of a market, often ignored by established firms, then improves until it displaces them. Digital photography disrupted film; Kodak, despite inventing the first digital camera in 1975, filed for bankruptcy in 2012.
Worked example
A local bookshop faces strong online competition. A SWOT shows strengths (knowledgeable staff, community events), weaknesses (higher prices), opportunities (author events, cafe, curated recommendations), and threats (online retailers, e-books). Instead of competing on price, it pursues differentiation through experience and community, a focus strategy.
Key takeaways
Porter's Five Forces assess rivalry, new entrants, substitutes, supplier power, and buyer power. Barriers to entry protect incumbents. Competitive advantage comes from cost leadership, differentiation, or focus. Economies of scale lower unit costs. Network effects can create dominant platforms. SWOT analysis organises strategic thinking. Disruptive innovation can topple established firms, as digital photography did to Kodak.
Flashcard
Rivalry, entrants, substitutes, suppliers, buyers
Check your understanding
A company aims to be the lowest-cost producer in its industry so it can charge lower prices than rivals. Which strategy is this?