The Structure of Industry
Industry Analysis and Strategy of the Firm
Michael Porter has also argued that Industry Analysis is a basis for determining general strategy at the business level. While the concept is admittedly vague, strategic fit identifies a successful positioning of the firm with the industry forces. That is, firms attempt to identify strategies that take advantage of the favorable forces and mitigate the effects of unfavorable forces. For example, Ford Motors dominated the early automobile market by using mass production to obtain economies of scale and low costs. The Model T was a standardized, black car mass marketed at a low price. To compete in this market, General Motors positioned itself as the maker of differentiated products - diverse car models offered at different prices with different styling and colors. GM's strategy mitigated the barrier of Ford's cost advantages through differentiation and became the dominant car manufacturer.
Positioning strategies are defensive moves to mitigate the effects of the five forces. According to Porter there are three such strategies. These generic strategies are:
| Strategy | Thrusts | How It Works |
| Overall Cost Leadership | Secure the lowest cost of production, usually by economies of scale, but also through favorable resource, distribution, and other cost factors. | When a firm produces a product at a cost lower than rivals, the firm sells at a comparable price but yields higher profits. If there are supplier cost increases to the industry, the lowest cost producer retains its cost advantage. |
| Differentiation | Tap into customer preferences, build brand loyalty, product status, product or service reputation, create quality. | Since the differentiated producer sells what is preferred by buyers, costs are not as important. |
| Niche | Unable to compete with major rivals, a market segment is identified which is not targeted by major rivals. | By targeting or focusing on a specific customer profile the firm offers the product tailored to customer's price or preferences. |
There are three generic strategies, in Porter's view, because there are three discrete ways to defend against the five forces, which are suggested in the above table "How it works".
Value Chain. - While Industry Analysis is key to understanding how the firm fits in and maneuvers within its environment to defend against the forces, to understand the firm's source of comparative advantage it is necessary to analyze internal activities that contribute to value creation. The generic strategies indicate that costs, product, price, and market choice are factors key to gaining a competitive advantage. But, it is evident that firms build advantage differently and pursue different strategies.
Porter proposes that the reason for these differences lie in unique competencies that emanate from the firm's internal activities. To assess how a firm creates an advantage the value chain is instructive. The value chain is the linkages across the activities of the firm. Each activity is viewed as creating, enhancing, or complementing value (profit) creation. The firm's activities are identified as primary and support activities. Primary activities are those that create, deliver and service the product Support activities are those that enable primary activities to perform, akin to indirect cost centers. Each activity, then, is examined as to costs and contributions to the firm's strategy.
Each firm will have different activities and/or emphasize different activities, providing unique (idiosyncratic) ways in which profits are earned. In the retail industry, for example, a WalMart emphasizes primary activities of logistics and operations to achieve low costs through economies of scale, but Nordstrom emphasizes marketing, sales, and service to differentiate its higher quality, but higher price strategy.
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