Strategic Management: Formulation and Implementation

Competitive Analysis

Competitive analysis approach to assist with strategy selection has been developed by Michael Porter (1980, 1985) and his associates. This approach assumes that by analyzing the forces that shape an industry, one can predict the general level of profits throughout the industry and the likely success of any particular strategy for a strategic business units. According to Porter, hypothesizes that five key forces shape an industry: relative power of customers, relative power of suppliers, threat of substitute products, threat of new entrants, and the amount of rivalrous activity among the players in the industry. Harrigan (1981) has argued that "exit barriers" are a sixth force influencing success in some industries.

There are two main propositions in the competitive analysis school: (1) the stronger the forces that shape an industry, the lower the general level of returns in the industry; and (2) the stronger the forces affecting a strategic business unit, the lower the profits for that unit.

The strength of competitive analysis is that it provides a systematic way of assessing industries and the strategic options facing strategic business units within those industry.

For public sector applications, the weaknesses of competitive analysis are that (1) it is often difficult to know what the industry is and what forces affect it, and (2) the key to organizational success in the public sector is often collaboration instead of competition.