Michael Porter: Strategy and Competitive Advantage

Value chain

Porters work can be summarized as Strong Domestic Rivalry

Porters Industry Analysis: Five Forces Model 1. Threat of new entrants New entrants to an industry Brings new capacity Capture market share from existing players More competition Price wars Falling returns - decline in profitability Acquisition - the preferred way to enter into a new market Barriers to entry into a new market Economies of scale Product differentiation Capital requirements Cost disadvantages independent of size Access to distribution channels Government policy

Five Forces Model 2. Intensity of rivalry among existing competitors Lead to Price wars, Advertising battles, Launches of new products and increased services and Warranties. Intensity of rivalry depends on Number of competitors Slowdown in industrial growth Lack of differentiation among products Absence of switching cost Under-pricing to avoid spoilage of goods Price-cut - supply-demand balance

Five Forces Model 3. The Bargaining Power of Buyers Buyers are powerful when The suppliers are many and the buyers are a few and large The buyers purchase in large quantities The suppliers industry depends on the buyers for a large percentage of its total orders The buyers can switch orders between supply companies at a low cost Its is economically feasible for the buyers to purchase the input from several companies at a time The buyers can use the threat to provide for their own needs through vertical integration as a device for forcing down price

Five Forces Model

4.

The Bargaining Power of Suppliers Suppliers are powerful when The product as few substitute and is important to the purchasing company No single industry is a major customer Products are too much differentiated and switching cost is higher for a buyer Supplier can use the threat of vertically integrating forward into the industry and competing directly with the buying company Buyers cannot use the threat of vertically integrating backward and supplying their own needs

Five Forces Model

5.

Threat of Substitute Products Substitute products can match the needs of the customer in the same way as the original product A close substitute is a potential threat to the companys product It limits the price charged by a company

Competitive Advantage Sources of competitive advantage: Producing top quality products Rendering superior quality services Offering the best quality service Producing at minimum cost Selecting a more convenient location Superior product design Most committed for Human Resources offering more value for money

Generic Strategies (Strategies at Business Level) 1. 2. 3. Low-cost Leadership Strategy: Low cost leaders basis for competitive advantage is lower overall costs than competitors. Differentiation Strategies: Differentiation strategy by the producer to satisfy the diversified needs of the customer. Focus and Specialization Strategies: Focusing begins by choosing a market niche where customers have distinctive preferences or requirements. A strategists basis for competitive advantage is either lower costs than competitors in serving the market niche or an ability to offer niche members something different from that of competitors.

Michael Porter: Strategy and Competitive Advantage

OVERALL COST LEADERSHIP STRATEGY Overall cost leadership strategy is a strategy followed by an organisation to design develop and market the product at a lower cost than its competitors.

Benefit of the Overall Cost Leadership Strategy Protects the organisation from its competitors because of low cost structure of its products and services. Provides the ability to face higher bargaining power of powerful suppliers since these organizations can absorb the increase in price to some extent. Provides the ability to face higher bargaining power of powerful buyers since these organizations can reduce the prices to some extent. This strategy decreases the risk of having cheap alternatives by lowering prices.

Risks associated with the Overall Cost Leadership Strategy High competition leads to the decrease in the profit level. More concerned about maintaining lower costs may avoid changes. This strategy is not useful in dynamic situations, as the organisations has to incur R&D costs to survive in the market. New organisations can minimise the cost of their products through imitation.

DIFFERENTIATION LEADERSHIP STRATEGY Differentiation leadership strategy is a strategy to create a product or service by an organisation that is not similar to the product or service of its competitors.

Conditions supporting the Differentiation Strategy Strong Marketing Skills Effective product engineering Creative Employees. Ability to perform basic research and a good reputation.

Benefit of the Differentiation Strategy Reduces the level of competition up to some extent since the customers are loyal for the product. Provides the ability to face higher bargaining power of powerful suppliers since the customers are brand loyal and price insensitive. Buyers do not usually negotiate on the prices as they are getting the special features as demanded by them. This strategy is a market and customer focussed strategy.

Risks associated with the Differentiation Strategy competitors can imitate the features of the product and sell the similar product at low cost. Customers are ready to buy at low cost, if they are getting the similar product. Customers tastes changes frequently and hence, reduces the demand of the product in the market.

FOCUS STRATEGY Focus strategy is a strategy to efficiently serve a limited section of customers than the complete market. This strategy concentrates on a particular customer, product line, geographical area, distribution channel, stage in production process or market niche.

Conditions supporting the Focus Strategy No Competitor focusing on the same target section. Expensive for the competitors to focus on the target customer of the organistion.

Benefits of the Focus Strategy Buyers are less likely to shift to other brands, since they might find other organisations that concentrate on niche markets. Focus Strategy provides specialized and customized based products to the customers.

Offensive Strategies and Competitive Advantages (Strategies at Business Level) Strategic moves are successful in producing a competitive advantage during the build up period. Benefit Period: After a successful competitive offensive. The firm can enjoy the fruits of competitive advantage. If the competitors take longer time to launch, the firm can enjoy the benefits for a longer period and vice versa. Erosion period: must devise a second strategic offensive to sustain of competitors and initiate creative strategic offensive before the competitors.

build up period

benefit period

erosion period

SIZE OF COMPETITIVE ADVANTAGE

Strategic move are successful in producing a competitive advantage

Size of advantage achieved

Imitation, duplication and attacks by rivals erode the advantage

TIME

Six ways to build up strategic offensives (a) (b) (c) (d) (e) (f) Attacks on competitor strengths Attacks on competitor weaknesses Simultaneous attack on many fronts End-run offensives Guerilla offensives Pre-emptive strikes

(a) Attacks on competitor strengths I. Price cutting II. Comparison advertisements III. New features that appeal to competitors customers IV. New plant capacity in a competitors backyard V. New models that match competitors VI. Good product with lower price VII. Focus on competitors geographic area.

b)

Attacks on competitor weaknesses i. Attack geographical regions where a rivals has a weak market share. ii. Attack buyer segments that a rival is neglecting iii. Attack rivals that lag on quality, features iv. Attack rivals that have done a poor job of servicing. v. Attack rivals with weak advertising and brand recognition. vi. Attack market leaders that have gaps in their product line. vii. Attack market leaders who are ignoring certain buyer needs by introducing product.

c)

Simultaneous attacks on Many Fronts i. Change the product attributes including configuration, features, flavor. ii. Creation of new market segments, new services, new channels of distribution changes in promotional activities.

d)

End-Run Offensives i. Concentrating on innovative product attributes, technological advances and early entry into less contested geographic markets. These strategies are to out throw the competitors.

e)

Guerrilla Offensives i. Attacking where and when an loser can temporarily use the situation of its own advantage. Types of guerrilla offensives: (i) Attack a narrow, well-defined segment i.e. weakly defended by competitors. (ii) Enhancing delivery schedules at times when competitors delivers are running behind. (iii) Adding to quality when competitors produce less quality products. (iv) Increasing technical services.

f)

Pre-emptive Offensives i. Moving first to secure an advantageous position that competitors are excluded from duplicating. ii. This strategy gives an important position to the firm.

Defensive Strategies and Competitive Advantages (Strategies at Business Level) Defensive strategy aims at lowering the risk of being attacked, weaken the impact of any attack that occurs and influence challengers to aim their efforts at other competitors. 1. Methods of Protecting Competitive Position: (i) Announcing managements commitment to maintain the firms present market share. (ii) Announcing plans to construct adequate production capacity to meet increasing demand. (iii) Giving out advance information about a new product. (iv) Committing the firm to a policy of matching the prices offered by competitors. (v) Making strong counter response to the moves of weak competitors.

2. first-Mover than competitors: Advantages: (i) Pioneering helps to build firms image. (ii) First-time customers remain strongly loyal. (iii) Moving first Disadvantages: (i) Pioneering is costly. (ii) Early investments are soon obsolete. (iii) Easy for the latecomers to crack the market leaders by copying.

Entry Barriers Entry Barriers includes: Low cost leadership Differentiation strategy Focus Strategy Government Regulations Appropriate Quality

Exit Barriers Exit Barriers includes: Mergers or Joint ventures find it difficult to exit Lack of opportunities in other markets works as an exit barrier. Companies which become part of culture of the nation find it difficult to exit.

FUNCTIONAL STRATEGIES (i) (ii) (iii) (iv) (v) (vi) Production / Operations Finance Research and Development Marketing Human Resources Information Systems

PRODUCTION / OPERATIONS
Strategies for Small Business Units: Compete with niche-low-strategy go for low initial investments in their plant, equipment, building outlets. Go for low investments in semi-variable and variable costs. Adopt niche-differentiation strategy select strategies that yield quality. Go for hand-crafting process to differentiate the product and produce according to the customers preferences. Units adopting niche-low-cost/differentiation strategy go for strategies that simultaneously lower costs and increase differentiation.

PRODUCTION / OPERATIONS
Strategies for Large Business Units: Reduction in cost per unit of output that occurs as a firm gains experience. Advantage of large scale of economies refer to reductions in costs. Adopters of differentiation as a generic strategy.

PRODUCTION / OPERATIONS
Quality Considerations: Producing a quality product relates the quantity of defects. Producing product right the first time reduces the number of rejects and time and money spent. Making the operative employees responsible for quality eliminates the need for inspection.

PRODUCTION / OPERATIONS
Finance: Business units that adopt the niche-low-cost follow financial strategies that are intended to lower their cost of capital, cost of borrowings, cost of purchase of plant and machinery, cost of purchase of material, cost of imports etc.

RESEARCH AND DEVELOPMENT Product / service R&D: efforts that ultimately lead to improvements or innovations in the firms products / services. Process R&D: refers to reducing the costs of operations and making them more efficient.

MARKETING Product / services Place of markets Location of outlets Channels of distribution Price and promotional activities Units that adopt niche-low-cost no-frill products. Units that adopt generic strategies of differentiation and low-cost differentiation follow different marketing strategies.

HUMAN RESOURCES Activities like designing and analyzing jobs, planning for future human resource needs, recruiting, selecting and employing people. Training and Developing employees. Appraising their performance and move the employees among different levels. Employee career goals, fixing and maintaining the compensation. Maintaining conducive human relations, creating and maintaining high quality of work life. Adopting growth strategies for the HRD, creating and maintaining harmonious organizational climate, team building, OD, empowering the employees, management of diversified cultures. Companies adopting stability strategy do not bring significant changes in HRM. Companies adopting retrenchment strategies cut the size of HR, cut the compensation package etc.

MATCHING STRATEGY TO SITUATION 1. 2. 3. 4. 5. 6. 7. 8. Strategies for competing in Emerging Industries. Strategies for competing during the transition to industry maturity. Strategies for Firms in Mature or Declining Industries. Strategies for competing in Fragmented Industries Strategies for competing in International Markets. Strategies for Industry Leaders Strategies for Runner-Up Firms Strategies for Weak Businesses

1.

Strategies for competing in Emerging Industries: Push hard to perfect the technology, improve product quality, develop attractive performance features. Try to capture first-mover advantages, early commitments to technologies and raw materials suppliers, experience curve effects and new distribution channels. Search out new customer groups, new geographical areas to enter, and the new user applications. Shift the advertising emphasis from building product awareness to increasing frequency of use. Use price cuts to attract price-sensitive buyers.

2. Strategies for competing during the transition to Industry maturity: i. Pruning the Product Line a) Pruning the product lines. b) Concentrating sales efforts on items whose margins are highest. c) Reduce the costs where the firm has competitive advantage.
ii. More emphasis on Process Innovation a) Process innovation to become lower-cost producers of higher-quality products. Stronger Focus on Cost Reduction a) Effort to reduce costs: bargain with the suppliers, switch to lower priced components, development of more economical product designs, cut unnecessary tasks, increasing production and distribution efficiency.

iii.

iv.

Increasing Sales to Present Customers a) Strategies include: broadening the lines offered to complimentary products b) Finding more ways for customers to use the product and performing more functions for the buyers. v. Purchasing Rival Firms at Bargain Prices vi. Expanding Internationally

3. Strategies for Firms in Mature or Declining Industries: i. Pursue a focused strategy by identifying, creating and exploiting the growth segments within the industry. ii. differentiation based on quality improvement and product innovation. iii. Work attentively and persistently to drive costs down. a) Reducing operating costs and increasing efficiency. b) Increasing manufacturing process. c) Consolidating underutilized production facilities. d) Adding more distribution channels to ensure the unit volume needed for low-cost production. e) Closing low-volume, high cost distribution outlets. f) Focus on the value chain to eliminate some cost.

4. Strategies for Firms Competing in fragment Industries: Fragmented Industries: Number of industries are populated with thousands of small firms without a substantial market share.
i. Constructing and operating formula facilities a) Construct outlets in favorable conditions. ii. Becoming a low-cost operator iii. Increasing customer value through integration iv. Specializing by product type a) A focus strategy based on specialization in one area of the line can be very effective. v. Focusing on a limited geographic area a) Concentrating facilities and marketing activities on a limited territory can produce greater sales force efficiency, speed delivery and customer services and permit saturation advertising. b) Convenience food stores, banks and department store retailers have been successful in operating multiple locations within a limited geographic area.

5. Strategies for Firms Competing in International Markets:

i. ii. iii. iv. v. vi. License foreign firms to use the companys technology and distribute the companys products. Maintain the national product based and export goods to foreign markets, using either company-owned or foreign-controlled forward distribution channels. Follow a multicountry strategy: companys international strategy is crafted country-by-country to be responsive to customer needs and conditions in each country. Follow a global low cost strategy: Company produces at the lowest cost and supplies to most of the buyers or all strategically important markets in the world. Follow a global differentiation strategy: adopting this strategy, differentiates its product on the same attributes in all countries to create a consistent image and consistent competitive theme. Follow a global focus strategy: Company, by adopting this strategy aims at serving the same identifiable niche in each of many strategically important country markets.

6. Strategies for Industry Leaders:

i. Stay-on-the-Offensive Strategy: i. First movers to build competitive advantage and a solid reputation as the leader. Strengthen and Defend Strategy: This strategy is to make it very difficult for new firms to enter. Introducing more of the companys own brands. Making it very difficult to the customers to switch to rival products Broadening the product line to close off possible niche for competitors. Keeping prices reasonable and attractive quality, design etc. Building new capacity. Investing more to remain cost competitive and technologically progressive. Patenting alternative technologies. Contracts with the best suppliers of inputs and dealers or distributors.

ii.

7. Strategies for Runner-Up Firms:

i. Focusing on a new market segment where the companys strengths can yield a competitive edge. Developing technical expertise that will be valued by customers. Development of new products for customers in the target segments. Using innovative approaches.

ii. iii. iv.

7. Strategies for Weak Businesses:

i. ii. iii. iv. Offensive Strategy: focused on low cost of production or new differentiation. Aggressive Defense: using variations in the present strategy and fighting hard to keep sales, market share and competitive position at current levels. Immediate Abandonment: getting out the business either by selling out or by closing down the operations. Harvest Strategy (Endgame Strategy) : keeping reinvestment to a bare minimum and maximizing short-term cash flow in preparation for an orderly exit.

End