Competitive Strategy
Glen Whitman
Dept. of Economics
CSUN
The Industry Perspective
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Industry means all firms producing a product,
plus their customers and suppliers.
The definition depends on the meaning of
“product,” which is not always obvious.
Industry perspective is a means of categorizing
the various forces relevant to a firm’s choice of
strategy.
Porter’s Five Forces

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Bargaining Power of Customers
Bargaining Power of Suppliers
Rivalry Among Existing Firms
Threat of New Entrants
Threat of Substitute Products
The Porter Cross
Potential
Entrants
Suppliers
Industry Competitors
(Existing Firms)
Substitutes
Buyers
Competitive Relationships
Potential
Entrants
Suppliers
Industry Competitors
(Existing Firms)
Substitutes
Buyers
Products and Substitutes

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A product can be defined broadly or narrowly.
Any product competes against substitute
products (possibly produced by the same firm).
The main question: how close are the
substitutes?
Homogeneous products: definitely same industry
 Heterogeneous products: “closeness” is largely a
matter of consumer preferences and perceptions

Competition with Existing Firms
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Existence of viable alternative products places a
constraint on the price your firm can charge.
How similar are the competitors’ products to
yours?
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The more similar they are, the greater the threat to both you
and them.
How much cheaper are the competitors’
products?

The better the price-performance combination, the more
binding is the constraint on your price.
The Threat of Entry
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Just because you can’t see competitors doesn’t
mean they’re not there!
Threat of future entry can affect present
choices.
Barriers to entry reduce the threat:
economies of scale
 customer loyalty, brand identification
 proprietary technology


You can sometimes influence barriers to entry.
Buyer/Seller Relationships
Potential
Entrants
Suppliers
Industry Competitors
(Existing Firms)
Substitutes
Buyers
Bargaining Power
in Buyer/Seller Relationships


Bargaining Power : the ability of a buyer (seller)
to negotiate a lower (higher) price
Depends primarily on substitution or “escape”
opportunities, or the lack thereof
Customers/buyers can buy from someone else, do it
themselves, or do without
 Sellers/suppliers can sell to someone else, sell
something else, or integrate downward

How Competition Affects
Bargaining Power

Competition on your own side of the market
tends to reduce your bargaining power.

Competition on the other side of the market
tends to increase your bargaining power.

Competition can be actual or potential.
Other Factors That
Affect Bargaining Power

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Switching costs: how difficult is it to find a new
supplier or a new buyer?
Substitutability: could you do without?
Make-or-buy: could you integrate upward or downward
in the supply chain?
Fixed costs: do you have inputs/resources committed
to your current industry or strategy?
Legal restrictions: are some strategies forbidden?
Thinking Strategically

Strategy as defined by management scholars: seeing the
“big picture”; having an integrated plan of action

Strategy as defined by economists: choosing your plans
with a full awareness of interdependence
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Your best choice of plan depends on what others are doing;
others’ best choice of plan depend on what you’re doing.
You can affect others’ behavior through your own choice of
plans.
The Prisoners’ Dilemma
Prisoner #2
Mum
Fink
Prisoner #1
Mum
- 1 -1
0
-15
Fink
- 15 0
- 10 -10
The Prisoners’ Dilemma:
Price-Setting Application
Firm #2
High Price
Low Price
1800 1800
1500 2000
Low Price
Firm #1
High Price
2000 1500
1600 1600
The Game of Chicken
Swerve Continue
Biff
Spike
Continue
Swerve
- 5000 -5000
1000 -1000
-1000 1000
0
0
The Game of Chicken:
Bargaining Application
Seller
Hard
Bargain
Easy
Bargain
Buyer
Hard Bargain
0
0
100 400
Easy Bargain
400 100
250
250