National Cranberry Cooperative

July 8, 2006

Title: Different Approaches to Competitive Assessment and the Impact on Shaping a Company's Strategy

Course: MBA 714M Economic Perspective and Analysis

Section 1 - Objective:

Examples and models illustrating interactions between a company and its main competitive rival have typically been analyzed within a relatively narrowly defined scope of industry structure and transactions. In part this is done for instructive purposes and also to enable the development of manageable predictive schemes. Competitive models such as Porter's Five Competitive Forces1 and the Value Net2 are very relevant in today's economy but somewhat oversimplified to develop a robust company strategy. The scope of the defined industry structure, the potential participants and their interactions must be reassessed to adapt to changes within the macroeconomic and social structure of today's world. External forces such as globalization and information technology developments are two main factors driving the need to reassess industry structure on an ongoing basis to determine how to maintain a competitive advantage or simply to avoid being disrupted within your own markets. Further, a company's strategy, business model and offerings must be modified to respond to these industry changes or to enter new markets.

This paper attempts to survey different competitive assessment models and approaches to developing company strategy relevant to the last 25 years of economic change. Selected public knowledge examples from the silicones industry will be used to illustrate specific points. Limited connections of competitive forces to microeconomic principles that drive them are made. Aspects of leveraging core competencies as a competitive assessment model are only briefly mentioned in this paper since this topic is covered extensively as part of the Comparative Advantage. A suggestion for developing a predictive microeconomic model relevant to today's global and rapidly changing economy is offered but not attempted due mainly to limitations of this author's abilities.

Section 2 - Survey of Literature

In some respects, an industry structure can be defined as two radial vectors within a circle or simply put - a piece of pie. The pie can be sliced very thinly encompassing little of the contents or very broadly taking in a large portion of the pie. How much of the pie's contents to include and who is expected to share in it define how large a piece representing industry structure is cut. A small piece is more manageable and easy to digest but a larger piece may be needed to encompass all the necessary and desired components. A larger piece is also likely to attract more people wanting to carve out their own area within the slice. Sometimes the piece of pie is redefined by external factors or players that add content to the piece; combine two or more pieces into one or completely change it. The survey of competitive assessment and company strategy models that follows attempts to illustrate how some competitive assessment and strategy models describe operating within a defined slice of pie or industry structure while others seek to redefine the size and contents of the slice itself. Further, external factors such as globalization and technology development - in particular advances in information management - which have significant impact on an industry structure favor models that encourage reshaping the defined industry structure.

Models which operate within a defined industry structure

Crockett, Spear and Sunder describe a controlled competitive model comprising a finite number of industry players trading a finite number of goods and services in a pure exchange economy3. The main theory is that a competitive equilibrium will be reached if the only parameter within the defined industry structure that changes as a result of transactions is competitive information gained and then applied to subsequent transactions. A competitive advantage exists when a market is not transparent and knowledge is not shared equally among the players. However, even if knowledge is not equal at the start then disparity will incrementally lessen with time and reduce competitive barriers. The authors bring forward a predictive model for the rate of learning in a controlled exchange economy and for the convergence over a period of time to competitive equilibrium. This approach is contrasted within the paper to the Game Theory which is described as having "short run" market dynamics and interactions that drive the competitive model.

The Five Competitive Forces model was developed by Michael E. Porter in the 1980s4. The Five Forces Model is based on microeconomic principles. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition. Porter's model is also based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially competitive strategy should be based on an understanding of industry structures and changes within the industry structure. Porter has identified five competitive forces that shape every industry and every market shown in Figure 1.

Figure 1: Porter's Five Competitive Forces

These forces determine the intensity of competition and hence the profitability and attractiveness of selling goods and services within a given industry. Even though the threat of new entrants is listed as one of the five forces, the premise is one in which the overall industry structure is not fundamentally changed by these new market players. The boundaries of the industry structure can be redrawn to encompass new and potential market players. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Put another way, all market players should be treated as competitors versus potential partners. Two aspects of company strategy derived from applying Porter's Five Forces competitive model focus on being a cost effective producer and/or having a differentiated offering.

Critics of Porter contend that his theories are based on the relatively stable