Industry Scenarios and Competitive Strategy under Uncertainty

How does a firm choose a competitive strategy when it faces major uncertainties about the future? Oil field suppliers currently  are agoniz­ ing, for example, over how long the drop  in drilling activity will last; the estimates range from less than  a year to the rest of the decade. Industry structure is not static,

Constructing industry scenarios

An industry scenario is an internally consistent view of an indus­ try’s future structure.  It is based on a set of plausible assumptions about the im portant uncertainties that might influence industry struc­ ture, carried through to the implications for creating and sustaining competitive advantage. An industry scenario is not a forecast but one

Industry scenarios and competitive strategy of the firm

Having developed and analyzed  a set of industry  scenarios, the next task is to use them to formulate  competitive  strategy. Scenarios are not an end in themselves. M any companies  falter in translating scenarios into strategy. The bulk of attention  is often placed on develop­ ing scenarios and not on determining their implications. There

Scenarios and the planning process of the firm

Every plan is based on an industry scenario in one form or another, though the process is frequently an implicit one. The  use of explicit industry scenarios brings the uncertainty in planning out into the open, and bases strategy on a conscious and complete  understanding  of the likely significance of uncertainty for competition. The

The process of entry or repositioning of the firm

Defensive strategy rests on an acute understanding of how a chal­ lenger views the firm and on the perceived profitability of the challeng­ er’s various options  for improving  position. The formulation  of defensive strategy must begin by recognizing  that an attack by either a new or an established competitor is a time-phased  sequence of

Defensive tactics of the firm

Defensive   strategy    aims    to    influence   a   challenger’s   calculation of the expected return  from entry or repositioning, causing the chal­ lenger to conclude that the move is unattractive or to opt for a strategy that is less threatening. To do this, a defender  invests in defensive tactics. Most defensive tactics are costly and reduce short-term 

Evaluating defensive tactics of the firm

The defensive tactics described above differ greatly in their charac­ teristics and in their appropriateness for a firm. A firm must  decide which tactics will be most effective in its industry in view of the poten­ tial challengers it faces. A number of im portant  tests can be used to assess defensive tactics: Value

Defensive strategy of the firm

Combined with an offensive strategy to increase a firm’s competi­ tive advantage, an explicit defensive strategy can raise the sustainability of whatever competitive advantages a firm possesses. The ideal of defen­ sive strategy is usually deterrence— preventing a challenger from initi­ ating a move in the first place or deflecting it to become less

Conditions for attacking an industry leader

The cardinal rule in offensive strategy  is not  to attack  head-on with an imitative strategy, regardless of  the challenger’s resources or staying power. The built-in advantages  inherent  in a leader’s position will usually overcome such a challenge and the leader will in all likeli­ hood retaliate vigorously. The ensuing  battle  ill almost  inevitably exhaust

Avenues for attacking industry leaders

Successfully attacking a leader always requires some kind of strate­ gic insight. A challenger must usually find a different  strategy in order to neutralize the leader’s natural advantages, and recognize or create impediments to leader retaliation. W hile the strategies that  have suc­ ceeded against leaders differ widely from industry  to industry,  three avenues

Impediments to leader retaliation

A successful challenger  must  also discover or create impediments to leader retaliation. This serves to blunt the natural advantages of the leader and reduces the cost of mounting  an attack.  A variety of factors can inhibit a leader’s retaliation to a challenger:6 Mixed Motives.      If a challenger’s strategy  creates mixed motives for a leader,

Signals of leader vulnerability

The preceding discussion suggests a variety of signals that  can indicate that a leader is vulnerable. These fall into two groups— indus­ try signals and signals based on leader traits. 1. Industry  Signals Structural change provides perhaps the strongest signal that an industry leader might be vulnerable. Structural change emanating from outside an industry

Attacking leaders and industry structure

A final test for attacking a leader is to weigh the effect on overall industry structure. A challenger’s attack on a leader is unwise if it destroys industry structure. Challengers must find a new way of com­ peting compared  to the   leader’s to   succeed.   However,  the   new   way of competing, in some cases, may

Structural Determinants of the Intensity of Competition

Let us adopt the working definition of an industry as the group of firms producing products that are close substitutes for each other. In practice there is often a great deal of controversy over the appro-priate definition, centering around how close substitutability needs to be in terms of product, process, or geographic market boundaries.

Intensity of Competition: Threat of entry

New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitabili–ty. Companies diversifying through acquisition into the industry from other markets often use their resources to cause a shake-up, as Philip Morris did

Intensity of rivalry among existing competitors

Rivalry among existing competitors takes the familiar form of jockeying for position—using tactics like price competition, adver-tising battles, product introductions, and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. In most industries, competitive moves by one firm have noticeable

Intensity of Competition: Pressure from substitute products

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the poten-tial returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.8 The more attractive the price- performance alternative offered by substitutes, the firmer the lid on industry

Intensity of Competition: Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bar-gaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability. The power of each of the industry’s important buyer groups depends on a number of characteristics of its market situation and on the rel-ative importance of

Intensity of Competition: Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an in-dustry by threatening to raise prices or reduce the quality of pur-chased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, for example, chemical companies have contributed to

Government as a force in industry competition

Government has been discussed primarily in terms of its possi-ble impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence