Tag Archives: Porter’s Five Forces

What is Strategy?

Be deliberate; be thorough; be aware–Zen Master

Strategy is big – Bruce Greenwald.

Michael Porter

Greenwald credited Michael Porter for his work on strategy and his focus on competitors. Review here a Harvard Business School article: http://www.ipocongress.ru/download/guide/article/what_is_strategy.pdf

Five Forces Industry Analysis in Value Vault and here: http://www.scribd.com/doc/77131692/Five-Forces-Industry-Analysis

Mauboussin Articles on Strategy

Measuring the Moat on Michael Mauboussin’s website.

Network Economics: http://www.scribd.com/doc/77133968/CA-Network-Economics-Mauboussin

Review of Competition Demystified first 30 pages:

Anyone running a business knows that competition matters and that strategy is important.

Don’t confuse strategy with planning to attract customers or increase margins. Goals are not strategy.

Strategies are those plans that focus on the actions and responses of competitors. Strategic thinking is about creating, protecting and exploiting competitive advantages.

Some consultants call it singularity. What they mean is that for a firm to earn profits above a minimum normal return, a company must be able to do something that its competitors cannot.  With a universe of companies seeking profitable opportunities for investment, the returns in an unprotected industry will be driven down to levels where there is no “economic profit,” that is, no returns above the costs of the invested capital. If demand conditions enable any single firm to earn unusually high returns, other companies will notice the same opportunity and flood in.

Both history and theory support the truth of this proposition. As more firms enter, demand is fragmented among them. Costs per unit rise as fixed costs are spread over fewer units sold, prices fall, and the high profits that attracted the new entrants disappear. If the company is on a level playing field then competition will erode the returns of all players to a uniform minimum (Reversion to the Mean or “RTM”)

It is now 25 years ago that Harvard professor, Michael E. Porter wrote “Competitive Strategy“. Essentially Porter says you need to consider Five Competitive Forces to analyse the attractiveness of an industry for a company.

Prof. Greenwald suggests, in most cases, studying only one factor will do: Potential Entrants. They claim the Barriers to Entry is by far the most important factor in business strategy.

“Either the existing firms within the market are protected by barriers to entry or they are not,” the authors write.”

Firms operating without competitive advantages should concentrate all their efforts on being efficient;

  • Companies that do have competitive advantages need to design strategy with their competitors in mind;
  • Most competition is over pricing or capacity, and there are established techniques for analyzing these situations and devising the right strategies to handle them;
  • Cooperation between competitors is possible and beneficial and can be accomplished without breaking the law;
  • In an increasingly global economy, competitive advantages still stem primarily from local conditions. Even large international firms need to understand and protect the local sources of their success.

Most importantly, according to the authors there are really only three sustainable competitive advantages;

  1. Supply. A company has this edge when it controls an important resource: in Hollywood, for example, it may mean having Julia Roberts or Tom Cruise star in a movie. Or a company may have a proprietary technology, like a prescription drug, that is protected by patent.
  2. Demand. A company can control a market because customers are loyal to it, either out of habit – to a brand name, for example – or because the cost of switching to a different product is too high. Companies often put off changing software vendors, for example, for that reason.
  3. Economies of scale. If your operating costs remain fixed while output increases, you can gain a significant edge because you can offer your product at lower cost without sacrificing margins.

The goal of this book is to present a step by step process for strategic analysis.”

Management time and focus are the most important resources of a firm.


Strategic decisions are those whose results depend on the actions and reactions of other economic entities. Tactical decisions are ones that can be made in isolation and hinge largely on effective implementation. Understanding this distinction is key to developing effective strategy.


Strategic choices, in contrast to tactical ones, are outward looking. They involve two issues that every company must face.

  1. The first issue is selecting the arena of competition
  2. The second strategic issue involves the management of those external agents.

You should have a firm foundation to complete your Wal-Mart case study. If I am going too fast, tell me.