Saturday, August 20, 2005

A Radically Simplified Approach to Business Strategy

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.

A new book on business strategy: "Competition Demystified - A Radically Simplified Approach to Business Strategy" by Bruce Greenwald, a professor at the Columbia Business School, and Judd Kahn, is a conscious simplification of Michael Porter's classic.

According to the authors, 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.

If they are right that would make business strategy formulation a lot simpler!

"Either the existing firms within the market are protected by barriers to entry or they are not," the authors write. " No other feature of the competitive landscape has as much influence on a company's success as where it stands in relationship to these barriers." And: "Avoiding competition is the only way to escape a level playing field in which anyone can join... [and] only the best... survive and prosper."

Greenwald and Kahn argue that:
  • 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.

Greenwald and Kahn explain in depth how a business can capitalize on each type of advantage.