Strategic Management: Formulation and Implementation

Firm's Profitability

In Porter's view, both the industry and strategic groups determine a firm's profitability as follows:

I. Common Industry Characteristics

1. Industry-wide elements of structure that determine the strength of the five competitive forces and that apply equally to all firms; these traits include such factors as the rate of growth of industry demand, overall potential for product differentiation, structure of suppliers industries, aspects of technology, and so on, that set the overall context of competition for all firms in the industry.

II. Characteristics of strategic group

2. The height of mobility barriers protecting the firm's strategic group.

3. The bargaining power of the firm's strategic group with customers and suppliers.

4. The vulnerability of the firm's strategic group to substitute products.

5. The exposure of the firm's strategic group to rivalry from other groups.

III. Firm's position within its strategic group

6. The degree of competition within the strategic group.

7. The scale of the firm relative to others in its group.

8. Costs of entry into the group.

9. The ability of the firm to execute or implement its chosen strategy in an operational sense.

The task of analyzing a company's external situation is not a mechanical exercise in which analysts plug in data and definitive conclusions come out. There can be several appealing scenarios about how an industry will evolve and what future competitive conditions will be like.

Moreover, in practice, industry and competitive analysis is an incremental and ongoing process, the result of gradually accumulated knowledge and continuous rethinking and retesting.