strategic-management

74 PART 2 • STRATEGY FORMULATION
FIGURE 3-3
The Five-Forces Model of Competition
Bargaining power of suppliers
Unilever recently sued Procter & Gamble (P&G) over that company’s corporateespionage
activities to obtain the secrets of its Unilever hair-care business. After spending
$3 million to establish a team to find out about competitors in the domestic hair-care industry,
P&G allegedly took roughly 80 documents from garbage bins outside Unilever’s
Chicago offices. P&G produces Pantene and Head & Shoulders shampoos; Unilever has
hair-care brands such as ThermaSilk, Suave, Salon Selectives, and Finesse. Similarly,
Oracle Corp. recently admitted that detectives it hired paid janitors to go through
Microsoft Corp.’s garbage, looking for evidence to use in court.
Market Commonality and Resource Similarity
By definition, competitors are firms that offer similar products and services in the same
market. Markets can be geographic or product areas or segments. For example, in the
insurance industry the markets are broken down into commercial/consumer, health/life, or
Europe/Asia. Researchers use the terms market commonality and resource similarity to
study rivalry among competitors. Market commonality can be defined as the number and
significance of markets that a firm competes in with rivals. 11 Resource similarity is the
extent to which the type and amount of a firm’s internal resources are comparable to a
rival. 12 One way to analyze competitiveness between two or among several firms is to
investigate market commonality and resource similarity issues while looking for areas of
potential competitive advantage along each firm’s value chain.
Competitive Analysis: Porter’s Five-Forces Model
As illustrated in Figure 3-3, Porter’s Five-Forces Model of competitive analysis is a widely
used approach for developing strategies in many industries. The intensity of competition
among firms varies widely across industries. Table 3-10 reveals the average profit margin
and return on investment for firms in different industries. Note the substantial variation
among industries. For example, the range in profit margin goes from 0 to 18 for food production
to computer software, respectively. Intensity of competition is highest in lowerreturn
industries. The collective impact of competitive forces is so brutal in some industries
that the market is clearly “unattractive” from a profit-making standpoint. Rivalry among
existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers
and customers can exercise considerable bargaining leverage. According to Porter, the
nature of competitiveness in a given industry can be viewed as a composite of five forces:
1. Rivalry among competing firms
2. Potential entry of new competitors
Potential development of substitute products
Rivalry among competing
firms
Potential entry of new competitors
Bargaining power of consumers