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analysis five forces of framework
important. Finally, it does not rely heavily on price and quantity
as the principal indicators of welfare.
By assessing competition beyond existing rivals, the need is reduced for debates on
where to draw industry boundaries, or the relevant market in antitrust terms. Any
definition of a market is essentially a choice of where to draw the line between
established competitors and substitute products, between existing firms and potential
entrants, and between existing firms and suppliers and buyers. If these influences on
competition are all recognized, and their relative impact assessed, as they are in five
forces analysis, then where the lines are actually drawn becomes more or less irrelevant
to strategy formulation and, I suggest, the antitrust analysis of competition. Latent
sources of competition will not be overlooked, nor will key dimensions of competition.
The need to determine the relevant market is eliminated.
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While there is a systematic approach to market definition defined in the Merger
Guidelines, it begins with the questionable premise that a single market definition is a
meaningful concept. Moreover, the approach to market definition relies heavily on price
effects which are an incomplete measure of social benefit, not to mention a largely shortterm
and static one.
Productivity Growth and Forms of Competition. The multidimensional nature of
rivalry is important for understanding the link between rivalry and productivity. Some
forms of rivalry are more productivity-enhancing than others, and thus are more valued
socially.
For example, one can array types of rivalry along a spectrum including the following
(see also figure 7):
1. Competition based on imitation/price discounting
2. Competition based on strategic positioning.
The first type of competition is on operational effectiveness, or the extent to which
companies approach best practices in areas such as production processes, technologies,
marketing methods, and management techniques. The second, and more fundamental to
success in an advanced economy, is competition to create different value propositions for
customers, a function of the degree to which companies have distinctive strategies.
Figure 7 Rivalry and Productivity Growth
Imitation and Price
Discounting
Strategic
Rivalry
• Homogeneous products/services
at low prices
• Multiple, different value
propositions
– e.g., features, services,
processes, price levels
• Different approaches to design,
operations, marketing, etc.
“Zero sum competition” “Positive sum competition”
• Incremental cost improvements • Potential for fundamental process
improvements
• Lots of customer choice
• Expanded market
• Little true customer choice
• Imitate best practices
Assessing the two according to the productivity growth standard gives very different
results. Imitation-based competition leads to similar products among rivals and strong
pressures for price discounting. Strategic competition occurs when rivals pursue different
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value propositions: some firms offer low prices producing stripped down products, others
have higher prices but provide better service, while still others concentrate on various
segments of the market, tailoring their products and value chains accordingly.
If price/cost margins are used as the metric of social benefit, then imitation and price
discounting seem ideal. Customers get the benefit of low prices, and the ability to play
one company against others. From a productivity growth standpoint, however, this form
of competition may lead to slower dynamic improvement. Competition on strategic
positioning can foster increased variety and greater choices for customers in terms of the
product that best meets their needs, not to mention more innovation in products and
processes. In strategic competition, markets often expand as [next page]