The strategic management process encompasses the decisions, actions, and

commitments to ove into a unique position so as to achieve competitive advantage.

To identify this position, we must first examine external conditions associated with
an organization. These external conditions enable a firm to recognize opportunities
and threats, competition, and collaborations. As much as the macro-environment,
the industry environment is also important for strategy management. The job of
strategist is to understand and cope with competition. According to Porter,
competition doesnt only include competitors, it also includes customers, suppliers,
potential entrants and substitute products. The extended rivalry that results from all
five forces defines an industrys structure and shapes the nature of competitive
interaction within an industry. The strongest competitive forces determine the
profitability of an industry and become the most important to strategy formulation.
However, the most salient (belirgin) force may not always be obvious. Even though
rivalry may not always be the factor limiting profitability. For example, low returns in
the photographic film industry are the result of a superior substitute product as
Kodak and Fuji, the worlds leading producers of photographic film, learned with the
advent (gelis, varis) of digital photography. In such a situation, coping with the
substitute product becomes the number one strategic priority.

Threat of entry

New entrants to an industry bring new capacity and a desire to gain market share
which puts pressure on prices, costs, and the rate of investment necessary to
compete. New entrants can leverage existing capabilities and cash flows to shake
up competition, as Pepsi did when it entered the bottled water industry, Microsoft
did when it began to offer internet browsers, and Apple did when it entered the
music distribution business. When the threat is high, current organizations must
hold down their prices or increase investment to deter (block) new competitors. For
example, low barriers in coffee retailing make Starbucks invest aggressively in
modernizing stores and menus. The threat of entry depends on the barriers to entry.
Entry barriers are advantages that incumbents have relative to new entrants;
economies of scale, benefits of scale, customer switching costs, capital
requirements, unequal access to distribution channels, and restrictive government
policies.

The power of buyers

Powerful customers can capture more value by forcing down prices and demanding
better quality or more service. Buyers are powerful if they have negotiating
leverage relative to industry participants. A customer has negotiating leverage if
there are few buyers, the industrys products are standardized, and buyers can
credibly threaten to integrate backwards and produce the industrys product
themselves. A buyer group is price sensitive if the product represents a significant
fraction of its cost structure, the buyer group earns low profits, the quality of
buyers products or services is little affected by the industrys product, and the
industrys product has little effect on the buyers other costs.
Threat of substitutes

A substitute performs the same or a similar function as an industrys product by a

different means. For example, plastic is a substitute for aluminum and e-mail is a
substitute for express mail. When the threat of substitutes is high, industry
profitability suffers. Substitute products limit an industrys profit potential by placing
a ceiling on prices. The threat of substitute is high if it offers an attractive priceperformance trade-off to the industrys product (e.g. conventional telephone service
vs Skype), and the buyers cost of switching to the substitute is low (e.g. branded
drug vs generic drug).

Rivalry among existing competitors

This includes price discounts, new product introductions, advertising campaigns,

and service improvements. High rivalry limits the profitability of an industry. The
degree of limitation depends on the intensity with which companies compete and
the basis on which they compete. The intensity is high if competitors are numerous,
industry growth is slow, exit barriers are high, rivals are highly committed to the
business and have aspirations for leadership, and firms cannot read each others
signals well because of lack of familiarity. Moreover, the dimensions on which
competition takes place and whether rivals converge (bir noktaya yonelmek) to
compete on the same dimensions have a major influence on profitability. Rivalry is
especially destructive to profitability if it gravitates solely to price. Price competition
is mostly liable to occur if products or services of rivals are nearly identical, there
are low switching costs, fixed costs are high and marginal costs are low, capacity
must be expanded in large increments to be efficient, and the product is perishable.
On the other hand, Brandenburger and Nalebuff use game theory to map out the
dynamic nature of industries and their players. The Value Net represents a map of
the game, incorporating the players in the game and their relationship to each
other. It recognizes interdependence (player A must consider player Bs response to
actions). It identifies business relationships that enhance the value of firms
business activity. According to Brandenburger, many businesses use competitive
strategies but they forget about cooperative strategies. Cooperative strategies can
create win-win solutions, which is a departure from the win-lose approach of Porter.
In order to create win-win scenarios, organizations must cooperate to create a larger
pie, and then compete in terms of how to share the pie.