Library of Congress Cataloging-in-Publication Data. Porter, Michael E. Competitive strategy: techniques for analyzing industries and competitors: with a new. Porter, Michael E. Competitive advantage. Bibliography: p. Includes index. L Competition. 2. Industrial management. I. Title. HDP PDF | Strategic planning as a formal discipline originated in the s and early s. Porter's farst book Competitive Strategy, published in , is an.
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Michael Porter - Competitive medical-site.info - Ebook download as PDF File .pdf), Text File .txt) or read book online. page of the text, and compare this to the version number of the latest PDF version of the text on the At Edinburgh Business School he has written the Competitive Strategy elective, which he teaches in the Porter's Diamond Framework. This presentation draws on ideas from Professor Porter's books and articles, in particular, Competitive Strategy (The Free Press, );.
Unpack: Get an accurate picture of the full costs of each activity, including direct operating, asset, and overhead costs. What specific overhead costs could be cut if you stopped performing this activity?
Examples Magretta shows three possible value chains for the same goal — providing wheelchairs for developing areas. Southwest might focus on gate turnarounds as a significant cost driver. One level deeper, it would unpack all the subactivities to turn around a plane. Southwest would then get its supplier Boeing to reposition the service panel on the new plane. Brokers had a fully integrated set of activities, including analyzing securities to executing trades.
Charles Schwab created a different value chain — not all customers want advice, so why pay for it? Focus on executing trades and you create a different kind of value.
Part 2: What Is Strategy? If you have a real competitive advantage, compared with rivals, you operate at a lower cost, command a premium price, or both. A good strategy is a set of activities that achieves competitive advantage. Strategy is not the value proposition itself — it must describe how the value is being created and delivered. A good strategy should pass five tests: Is there a distinctive value proposition? Is there a unique set of activities? Are the trade-offs different from rivals?
Do the activities fit with each other? Is there continuity over time? A good strategy delivers distinctive value through a distinctive value chain. It must perform different activities from rivals, or perform similar activities in different ways. If the activities reinforce each other, imitating them all is difficult.
If they involve trade-offs, your activities may contradict those of competitors, making it difficult for them to plunge in. Creating Value: The Core The value proposition is the piece of strategy that looks outward at customers, the demand side. The value chain looks internally on operations. Strategy is integrative, bringing supply and demand sides together. A distinctive value proposition answers three questions: Which customers are you going to serve? Which needs are you going to meet?
What relative price will provide acceptable value for customers and acceptable profitability for the company?
Value propositions tend to focus on one aspect as a pillar, with the other applying to varying degrees. For example, focusing on a particular customer need can blur traditional demographic bounds. Likewise, one can focus on a demographic and serve most of their needs. Compare your value proposition to your rivals.
Avoid the temptation to serve more customers and offer more features. Your value proposition may also imply advantages based on the five forces. Examples: Serving a distinctive demographic Walmart began by servicing small towns with populations below 10k, which other discount retailers deliberately stayed away from.
These towns could usually support only one store, increasing barrier of entry. Progressive Insurance began by servicing higher risk customers that other insurance companies rejected. With few alternatives, they had lower bargaining power.
Serving distinctive customer needs Hertz provided cars at airports to business and leisure travelers. Enterprise focused on short-term rentals for city residents eg car needing repairs, so insurance companies make up a third of revenues.
In turn, Zipcar offered even shorter rental periods of hours, and extreme convenience of location, booking, and simple pricing. Focusing on a distinctive price point Focus on customers who are currently underserved by building a premium offering , or overserved by stripping away a premium offering.
Traditional airlines focused on expansive service between any point A to point B, with perks like food built in.
Southwest offered low-cost fares with no frills. It saw its competition as cars and buses, not other airlines. Unique Value Chain A good strategy delivers distinctive value through a distinctive value chain. Also, if the same value chain can deliver the same value proposition, it has no strategic relevance. Even if the product looks identical, there are many opportunities along the value chain for differentiation — delivery, disposal, support, financing.
When finding a new position, starting with a value proposition is intuitive, but starting with the value chain is equally valid. This is what companies do when they identify their strengths. Examples: How could Progressive make high-risk customers work financially, where others had failed?
They further segmented groups to find pockets of lower risk — motorcycle riders over 40 years old; drivers with accident history who have children.
They also cost of accidents by by having inspectors issue checks on the spot, thus decreasing lawsuits. Enterprise leased locations in the city rather than airport rental areas, which were more convenient for their customers and also cheaper.
Their target customers were less picky about cars, allowing Enterprise to stock budget, older vehicles. It marketed to insurance companies and car dealerships, rather than expensive consumer ads. Southwest made a host of changes to support their lower prices. Where traditional airlines serviced every point A to point B through a hub and spoke model, Southwest offered fewer routes but flew direct. They flew from secondary airports that were often more convenient to cities and also lower cost for the airline.
Southwest cut out frills like food and higher class seats. They decreased plane turnaround time through a first-come first-serve boarding process, reducing meals, and standardizing their fleet. Finally, where airlines jumped to travel booking sites like Expedia, Southwest adamantly maintained its own website, preventing price comparison.
Trade-Offs: The Linchpin Trade-offs are strategic forks in the road.
If you take one path, you cannot simultaneously take the other. The choices are incompatible. Trade-offs force you to limit your value proposition. Without tailoring, your value chain will have inefficiencies that more focused competitors will exploit. Trade-offs also make it difficult for competitors to copy what you do without compromising their own strategies.
For example, in contrast to hub-and-spoke models, Southwest uses a direct-flight model. There is little middle ground. Trade-offs arise in 3 ways: Product trade-offs: Tailoring a product to suit one need makes it less capable of servicing another need.
In , major semiconductor companies manufactured their own chips and sold excess capacity to smaller firms. These smaller firms feared that the major companies would steal their IP. Home Depot innovated with huge warehouses with well-trained associates to appeal to DIYers and contractors, mostly male.
Operational trade-offs: Activities that deliver one kind of value are less efficient at producing another kind of value. If an activity is over- or under-designed for its use, value will be destroyed. A value chain for deliveries that optimizes cheap shipping that arrives in weeks requires different activities from fast shipping that arrives in hours.
Brand trade-offs: Muddling the brand identity compromises why fans support the brand. Robust strategies incorporate multiple trade-offs. The best strategies have trade-offs at almost every step in the value chain.
Willfully ignoring large segments of customers feels like leaving growth on the table. Product designers want their products to do more to get more users. Financial analysts want every company to look like the market favorite. Short-term stock traders put pressure on companies to enact change, while strategy takes years to build.
These itches push companies to straddle their trade-offs, matching the benefits of a different successful position while maintaining its existing position. This can mean designing a product or value chain that services contradictory needs.
This leads to inefficiencies, creating openings for focused rivals to deliver superior value or lower prices to customers. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry. The state of competition in an industry depends on five basic forces, which are diagrammed in the Exhibit.
The collective strength of these forces determines the ultimate profit potential of an industry. It ranges from intense in industries like tires, metal cans, and steel, where no company earns spectacular returns on investment, to mild in industries like oil field services and equipment, soft drinks, and toiletries, where there is room for quite high returns.
This kind of industry structure, of course, offers the worst prospect for long-run profitability. The weaker the forces collectively, however, the greater the opportunity for superior performance.
The collective strength of the forces may be painfully apparent to all the antagonists; but to cope with them, the strategist must delve below the surface and analyze the sources of each. For example, what makes the industry vulnerable to entry, What determines the bargaining power of suppliers?
Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action. They highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats.
Understanding these sources also proves to be of help in considering areas for diversification. Contending Forces The strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation. For example, even a company with a strong position in an industry unthreatened by potential entrants will earn low returns if it faces a superior or a lower-cost substitute product—as the leading manufacturers of vacuum tubes and coffee percolators have learned to their sorrow.
In such a situation, coping with the substitute product becomes the number one strategic priority. Different forces take on prominence, of course, in shaping competition in each industry. In the ocean-going tanker industry the key force is probably the downloaders the major oil companies , while in tires it is powerful OEM downloaders coupled with tough competitors. In the steel industry the key forces are foreign competitors and substitute materials.
Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces.
This view of competition pertains equally to industries dealing in services and to those selling products. A few characteristics are critical to the strength of each competitive force. I shall discuss them in this section. Threat of entry New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Companies diversifying through acquisition into the industry from other markets often leverage their resources to cause a shake-up, as Philip Morris did with Miller beer.
The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that entrants can expect. If barriers to entry are high and newcomers can expect sharp retaliation from the entrenched competitors, obviously the newcomers will not pose a serious threat of entering.
There are six major sources of barriers to entry: 1. Economies of scale These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage.
Scale economies in production, research, marketing, and service are probably the key barriers to entry in the mainframe computer industry, as Xerox and GE sadly discovered. Economies of scale can also act as hurdles in distribution, utilization of the sales force, financing, and nearly any other part of a business. Product differentiation Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty.
Advertising, customer service, being first in the industry, and product differences are among the factors fostering brand identification. It is perhaps the most important entry barrier in soft drinks, over-the-counter drugs, cosmetics, investment banking, and public accounting.
To create high fences around their businesses, brewers couple brand identification with economies of scale in production, distribution, and marketing. Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up losses. While major corporations have the financial resources to invade almost any industry, the huge capital requirements in certain fields, such as computer manufacturing and mineral extraction, limit the pool of likely entrants.
Cost disadvantages independent of size Entrenched companies may have cost advantages not available to potential rivals, no matter what their size and attainable economies of scale. These advantages can stem from the effects of the learning curve and of its first cousin, the experience curve , proprietary technology, access to the best raw materials sources, assets downloadd at preinflation prices, government subsidies, or favorable locations. Sometimes cost advantages are legally enforceable, as they are through patents.
For an analysis of the much-discussed experience curve as a barrier to entry, see the insert. The Experience Curve as an Entry Barrier In recent years, the experience curve has become widely discussed as a key element of industry structure. The experience curve, which encompasses many factors, is a broader concept than the better known learning curve, which refers to the efficiency achieved over a period of time by workers through much repetition.
The causes of the decline in unit costs are a combination of elements, including economies of scale, the learning curve for labor, and capital-labor substitution. Adherents of the experience curve concept stress the importance of achieving market leadership to maximize this barrier to entry, and they recommend aggressive action to achieve it, such as price cutting in anticipation of falling costs in order to build volume.
The answer is: not in every industry. In fact, in some industries, building a strategy on the experience curve can be potentially disastrous. That costs decline with experience in some industries is not news to corporate executives. The significance of the experience curve for strategy depends on what factors are causing the decline.
If costs are falling because a growing company can reap economies of scale through more efficient, automated facilities and vertical integration, then the cumulative volume of production is unimportant to its relative cost position.
Here the lowest-cost producer is the one with the largest, most efficient facilities.
A new entrant may well be more efficient than the more experienced competitors; if it has built the newest plant, it will face no disadvantage in having to catch up. If costs go down because of technical advances known generally in the industry or because of the development of improved equipment that can be copied or downloadd from equipment suppliers, the experience curve is no entry barrier at all—in fact, new or less experienced competitors may actually enjoy a cost advantage over the leaders.
Free of the legacy of heavy past investments, the newcomer or less experienced competitor can download or copy the newest and lowest-cost equipment and technology. If, however, experience can be kept proprietary, the leaders will maintain a cost advantage.
But new entrants may require less experience to reduce their costs than the leaders needed.
All this suggests that the experience curve can be a shaky entry barrier on which to build a strategy. While space does not permit a complete treatment here, I want to mention a few other crucial elements in determining the appropriateness of a strategy built on the entry barrier provided by the experience curve: The height of the barrier depends on how important costs are to competition compared with other areas like marketing, selling, and innovation.
The barrier can be nullified by product or process innovations leading to a substantially new technology and thereby creating an entirely new experience curve. If more than one strong company is building its strategy on the experience curve, the consequences can be nearly fatal. By the time only one rival is left pursuing such a strategy, industry growth may have stopped and the prospects of reaping the spoils of victory long since evaporated.
Access to distribution channels The newcomer on the block must, of course, secure distribution of its product or service. A new food product, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means.
The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry will be.
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