In the previous post we discussed the
issue of corporate strategies. In this post: "Corporate Strategies
II," Michael Porter's ideas on
strategy in general are presented, describing three aspects:
-
The
Five Forces model, in order to make the diagnosis
-
The Three Generic Strategies of the
Competitive Advantages and
-
The
importance of Activity Concept so as to implement the value chain
There are other prominent authors, from the offensive and defensive strategies Philip Kotler, the dynamics capabilities by Teece and Pisano, nevertheless, the reason why the vision of M. Porter is chosen is due to an extensive use of Porter's ideas specially related to the Competitives Advantages strategy, both in companies and in regions and nations.
Porter’s five
forces model.
The five forces analysis provides a
framework for determining the degree of competition in the productive sector,
and therefore what their expected profitability. From this study the most
suitable for the company and its activities chains generic strategy will be
established. Dynamic processes must be continuously review and implement
systemic and flexible manner.
It is expected that the profit in the
commodities sector goods - v.g: wheat or iron - is substantially lower than
that obtained in sectors with high barriers to entry or high differentiation,
-v.g. the pharmaceutical industry or luxury cars -.
The study of the degree of competition in
an industry emerges from the traditional microeconomic principles of partial
equilibrium analysis, where the rate of profit would be inversely proportional
to the degree of market competition.
Porter's five forces can be divided into
two groups:
Three forces horizontal competition: Threat
of substitution; Threat
of new entry; and Competitive rivalry.
Two forces vertical competition: Supplier
power; and Buyer
power.
1.
Threat of
substitution:
In many cases the risk of a company does
not reside in its market competitors, but in the appearance of a substitute good
spawned within another productive sector. Some broadly known examples would be
the fax against the telex, and afterwards the e-mail versus the fax.
Although there are segments of products
more difficult to be replaced, either because of legal protection - patents or
legal monopoly – or due to technological reasons, the increasing development of
innovation processes make the potential appearance of substitute products more
accessible. Apart from technical feasibilities, social factors that favor or
not fidelity to a product type will be discovered thereafter.
2.
Threat of new entry:
The easier to enter as a supplier to a
sector, the harder would be the threat to their current participants. Some
industries have high entry barriers such as: high sunk costs, high optimal yields
levels of scale, use of unique resources or access to specific distribution
channels.
3.
Competitive
rivalry:
Even though a high rivalry between
competitors is expected, this type of scenario is more expectable in
oligopolistic markets. Markets in which suppliers have comparable levels of
sales and, public bodies which severely control possible price agreements. The
price war situations are an example of high rivalry and decreasing profit rates
of participants.
4.
Supplier
power:
It is related with the degree of
concentration of raw materials supply involved in production processes; the
difficulty of replacing; and its impact on the cost structure of the industry.
The bargaining power of suppliers should be contrasted with the power of the demanding
industry. An example would be the big supermarket chains that hold a greater
negotiation capability to impose trading conditions to their suppliers.
5. Buyer
power:
Similarly to the previous point, if the
organization is facing few customers, well organized and with a high
participation in the procurement industry, the negotiation capacity of the
sellers - and thus profitability - would tend to be lower.
In points 4 and 5, another pressure
element on the negotiations of the industry, it is given by the capability -
technical and competitive - that may have suppliers to link up forward and customers
to link up backward, becoming direct competitors in the market to which the
company belongs.
Competitive Advantages, Generic strategies.
According to Michael Porter, there are
three generic strategies:
• Leader in costs, by offering, sustainably,
products or services at lower prices than the competition. The sources of
advantage may include preferential access to raw materials, superior
technology, experience curve, economies of scale and the like.
• Leader in differentiation, introducing
products or services which are perceived by customers as exclusive; and
therefore capable to justify a higher price. This differentiation can be
obtained through various ways; thanks to a continuing policy of product
innovation, due to providing excellent levels of quality, because the core
product incorporates new circles of value services, or to distinguish the buyer
with the use of a brand of accredited prestige.
Before moving on to the third strategy, there
is a point to be considered: if a company does not lead in costs or
differentiation in an industry, tends to fall into an intermediate zone. The
company will fall into a halfway point; demanders would not be able to clearly
position it as a result of not having a clear strategy.
• Leader in a particular segment. The
organization focuses on meeting the needs of a very specific target. Like any
other segmentation, this can be made according to age range, gender,
socioeconomic status, region or lifestyle.
Activity Concept.
A company can outperform rivals only if it is able to
make a difference that is sustainable in the long-term. To stand out companies
must deliver greater value to customers or create a comparable value at a lower
cost, or both. By delivering greater value a company is able to charge higher
average unit prices, while greater efficiency results in lower average unit
costs.
Differentiation occurs both by the choice of
activities to be performed and by how they are made. Therefore, the activities
are the basic units of competitive advantage. The total advantage or
disadvantage is the result of all activities of a company.
Differences in operational effectiveness among
companies can be seen everywhere. Some companies are able to get more of their
inputs than others because they eliminate wasted efforts to use more advanced
technology, motivate best employees or are more astute in managing certain
activities or groups of activities. Such differences in operational efficiency
are an important source of differences in profitability among competitors,
because they directly affect the relationship between their position costs and
levels of differentiation.
The productivity boundaries are continuously expanding as new
technologies and management approaches are created and new inputs are
available.
As companies move towards the boundaries, they can often improve various
dimensions of performance simultaneously. The constant improvement of
operational efficiency is necessary to achieve outperformance. Nevertheless, it
is usually not enough, since it is becoming increasingly difficult to stay
ahead of rivals. The obvious reason is the rapid spread of best practices. Competitors
can quickly imitate management techniques, new technologies, advances in inputs
and better ways to meet customer needs
The competitive strategy
consists in being different which means to deliberately select a set of
different activities in order to deliver a unique value mix.
The different alternatives of positioning determine not only which
activities a company will implement and how to configure them, but also how
these activities are related to each other. There are three types of
relationship schemas among activities:
-
The first one consists in the
consistency between each activity and the overall strategy. Consistency ensures
that the competitive advantages of activities get accumulated. It also
facilitates communication strategy to customers, employees and shareholders,
and improves its implementation thanks to the uniformity of the criteria within
the company.
-
The second one occurs when
activities are reinforced among each other
-
The third one goes beyond
the strengthening of the activities, it consists in optimizing the effort
In the three schemas the whole is more important
than any of the parts. The competitive advantage arises from the whole system
of activities. The adjustment among the activities diminishes the cost or
increases substantially the differentiation.
For a competitor, it is more difficult to match
a set of interrelated activities than only imitate a particular approach of the
sales force, imitate a process technology or replicate a set of product
features. The positions grounded in systems of activities are far more
sustainable than the ones grounded in individual activities.
Two alternative visions of ‘strategy’:
The last decade implicit strategic model
■ An ideal competitive position in the sector
■ Benchmarking of all activities and achieving
the best practice
■ Outsourcing and aggressive alliances to achieve
efficiencies
■ The advantages lie in just a few success
factors, crucial resources and core competencies
■ Flexibility and quick responses to all
competitive and market changes
The sustainable competitive advantage
■ Unique competitive position of the company
■ Activities adapted to the strategy
■ Clear trade-offs and choices regarding the
competitors
■ Competitive advantage arises from the merge of
all the activities
■ Sustainability derives from the whole activity
system, not from isolated parties
■ Operational efficiency is taken for granted
Source: Michel Porter
It is usually considered that threats against
the strategy come from outside the company due to changes in technology or
because of the competitors’ behavior. Although external changes may be the
problem, the biggest threat for strategy often comes from the same company. A
solid strategy is weakened due to a misinformed vision of competitors,
organizational errors and, especially, the desire to grow.
Deepen a position implies to differentiate even
more the activities of the company, to strengthen the fit among the activities
and to communicate better the strategy to clients. But nevertheless, many
companies succumb to the temptation to encourage an "easy" growth,
adding features, products or services without evaluating if they suit to the
strategy. Otherwise, they target new customers or markets to which the company
has not many novelties to offer. As usual, a company can grow faster -and more
profitably- deepening better in the needs and varieties that differentiate it
rather than forcing itself to grow in areas which lack of unique features.
Final Comment
There are some critics against Porter’s
Competitive Advantages Strategy:
The Five Forces model that is used in order to
make a diagnosis is based on the analysis of the company external situation. Although
is fundamental to study the own market characteristics, it is also important to
analyze the organization internal capabilities and experience. On one hand, a great part of the knowledge a
company handles is tacit (Nonaka Takeuchi, 1995: The
Knowledge-Creating Company: How Japanese Companies Create the Dynamics of
Innovation, New York, Oxford University Press). The innovations market is imperfect; therefore the
reach of new knowledges, productive processes and products is mostly generated
within the organization. Hence, in order to define properly the strategies, it
is mandatory to know the firm internal potentialities. In relation with this
topic, Porter’s point of view is too simple and narrow.
