Reading Competitive Strategy [I] - ② What is 'Competition' for a Company

Well, it's Wednesday.
Wednesday is the day to learn about management strategy.

Since last week, I have started reading Competitive Strategy by Michael Porter. I intend to read through it over the next few weeks, incorporating my own insights and thoughts, while also taking detours here and there.

I would appreciate it if those who are interested would join me.

First, let's confirm the words being used.

In this "Competitive Strategy," Michael Porter is addressing "strategy practitioners." It seemed to sink in easily at first, and I felt like I understood it, but when I think about it carefully, I am not very familiar with the title "strategy practitioner."

After asking myself what the most fitting department name would be, I feel it is better to refer to it here as the "Corporate Strategy Department." The Corporate Strategy Department is "a department that defines a medium- to long-term vision looking toward the company's future, and leads the formulation and execution management of strategies to achieve it. Its scope of work includes collecting and analyzing information on market trends, competitors, and the company itself, and using those insights to design 'management strategies' such as management goals and execution plans."

I see.
That sounds good.

And I also want to confirm the terms being used.
"Strategy" is a plan to achieve ultimate goals. And "vision" is a term that expresses a company or organization's medium- to long-term goals; it articulates what the company or organization should look like and how it should think in order to realize its mission. By the way, "mission" articulates the duty or reason for existence that a company or organization should fulfill for society. And "medium- to long-term" generally refers to a period of about 3 to 5 years.

Now, let's enter the main text.

What is "Competition"

Part 1, Chapter 1 of this book begins with the sentence, "The job of a strategy practitioner, in essence, is to understand and deal with competition."

Strategy practitioners (that is, people who define medium- to long-term visions and manage execution to achieve those visions) tend to regard only what is happening between the companies they are directly facing right now (that is, competitors with similar positioning and scale to their own company) as competition (that is, the battle for sales share).

However, the reason why management strategies must be formulated and executed is to increase the profitability of that company. In other words, "what the average profitability of the industry to which the company belongs is, and where the company stands relative to that average" is the "competition" that strategy practitioners must understand.

How to measure "profitability"

Michael Porter argues that it is appropriate to measure profitability using "ROIC (Return on Invested Capital)." ROIC is a financial indicator that measures how efficiently a company has been able to generate profit relative to the money procured from the company and creditors (such as banks), and is calculated as After-tax Operating Profit / Invested Capital (Invested Capital = Interest-bearing Debt + Shareholders' Equity). The advantage of using ROIC as an indicator is that it can suppress deviations caused by differences in company scale or tax rates by industry.

Yes, thinking in the medium to long term about whether your company's ROIC exceeds or falls below the industry average ROIC, and if it falls below, how to raise the ROIC to the average (or above average), is a company's "competition."

The "Five Forces" that influence competition

If we define the "competition" that strategy practitioners must recognize as the act of raising their company's profitability ranking within the industry, they must know the following five competitive factors:

1. Trends of other companies in the same industry
2. Bargaining power of customers against the company or the industry
3. Bargaining power of suppliers against the company or the industry
4. New competitors that might enter in the future
5. Entry of new products or services that substitute for the company's products

The basic structure of an industry determines competition and profitability.
Regardless of whether the industry is manufacturing or service, emerging or mature, high-tech or low-tech, or whether regulations are strict or loose, it is the "industry structure" that determines medium- to long-term profitability.

From next week onwards, I plan to explain the 'five competitive forces' mentioned above in detail.

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Thank you for reading until the end.

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Please take a look.
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