The Competitive Advantage Of Nations

This chapter looks at the general theoretical reasons why certain firms are successful—a question that must be addressed before assessing why different national contexts allow for such success. As Porter emphasises, the basic unit for analyzing the former question is the industry, which he defines as “a group of competitors producing products or services that compete directly with each other” (33). A firm’s competitive strategy in relation to its specific industry determines its success. In turn, two main factors shape strategy: industry structure and positioning within an industry. For firms to succeed, they must understand their industry’s competitive structure and how it is changing—and adapt their competitive strategy to it.

Five main variables influence industry structure. Their strength determines which industries are most profitable in the long run. These variables are (1) the threat of new entrants, (2) the threat of substitute products or services, (3) the bargaining power of suppliers, (4) the bargaining power of buyers, and (5) the rivalry among existing competitors. If the potential for many new entrants is high due to low costs of entry, like in the restaurant industry, this puts downward pressure on prices and therefore profits as more competitors seek a market share. Likewise, a small number of powerful buyers or sellers can reduce profits by commanding higher prices for their products.