How Competitive Forces Shape Strategy——chemical manufacturer

The essence of strategy formulation is to deal with competition. However, it is easy for people to view competition as too narrow and pessimistic. Although people sometimes hear executives’ complaints to the contrary, the fierce competition in the industry is neither a coincidence nor bad luck.

In addition, in the process of competing for market share, competition is not only manifested in other participants. On the contrary, the competition of an industry is rooted in its underlying economics, and the existence of competitive forces far exceeds the established competitors in a particular industry. Customers, suppliers, potential entrants, and alternative products are all competitors, and they may be more or less prominent or active, depending on the industry.

The competitive situation of an industry depends on five basic forces, as shown in the figure. The collective strength of these forces determines the ultimate profit potential of an industry. From industries such as tires, tin cans, and steel, where no company can get a significant return on investment, to moderate industries such as oilfield services and equipment, soft drinks and cosmetics, where there is considerable room for high returns.
The essence of strategy formulation is to deal with competition. However, it is easy for people to view competition as too narrow and pessimistic. Although people sometimes hear executives’ complaints to the contrary, the fierce competition in the industry is neither a coincidence nor bad luck.

In addition, in the process of competing for market share, competition is not only manifested in other participants. On the contrary, the competition of an industry is rooted in its underlying economics, and the existence of competitive forces far exceeds the established competitors in a particular industry. Customers, suppliers, potential entrants, and alternative products are all competitors, and they may be more or less prominent or active, depending on the industry.

The competitive situation of an industry depends on five basic forces, as shown in the figure. The collective strength of these forces determines the ultimate profit potential of an industry. From industries such as tires, tin cans, and steel, where no company can get a significant return on investment, to moderate industries such as oilfield services and equipment, soft drinks and cosmetics, where there is considerable room for high returns.
The most powerful competitiveness or power determines the profitability of an industry, so it is the most important in strategy formulation. For example, even a company with a strong position in an industry that is not threatened by potential competitors will get a lower return if faced with a better or lower-cost alternative product—just like chemical manufacturer. In this case, dealing with alternative products has become the primary strategic focus.

Of course, different forces play an important role in forming competition in each industry. In the ocean tanker industry, the key force may be the buyer (major oil company), while in the tire industry, it is a strong OEM buyer plus a strong competitor. The key force in the steel industry is foreign competitors and alternative materials.
Every industry has a basic structure, or a set of basic economic and technical characteristics, which lead to these competitive forces. If a strategist wants his or her company to better respond to the industry environment or exert an influence on the company's favorable environment, he must understand what makes the environment work.

This competitive view also applies to the service industry and product sales industry. In order to avoid monotony in this article, I refer to products and services collectively as "products." The same general principles apply to all types of business.

There are several characteristics that are critical to the strength of each competitive force. I will discuss them in this section.
New entrants to an industry will bring new production capacity, the desire to gain market share, and usually a lot of resources. Companies that diversify into the industry through acquisitions from other markets often use their own resources to trigger a major reshuffle, just like Philip Morris's acquisition of Miller beer.
The severity of the threat of entry depends on the existing barriers and the response of existing competitors that entrants can expect. If barriers to entry are high, newcomers can expect fierce retaliation from entrenched competitors, and it is clear that newcomers will not pose a serious threat of entry.