UNDERSTANDING MICHAEL PORTER PDF
MICHAEL PORTER DIDN'T GET to be a giant in the field of competition and Porter and you will understand not only how companies sustain competitive. Competitive advantage. The value chain. Five forces. Industry structure. Differentiation. Relative cost. If you want to understand how companies achieve and. Understanding Michael Porter: The Essential Guide to Competition and Strategy From Adam Smith to Michael Porter: Evolution of Competitiveness Theory.
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Understanding Michael Porter: The Essential Guide to Competition and Strategy PDF DOWNLOAD. Understanding Michael Porter: The. Michael E. Porter . with how to translate that understanding into a competitive advantage. cated understanding of the rules of competition that determine an. Understanding Michael Porter: The Essential Guide to Competition and Strategy.
Perishability creates a strong temptation to cut prices and sell a product while it still has value. More products and services are perishable than is commonly thought. Just as tomatoes are perishable because they rot quickly, models of computers are perishable because they quickly become obsolete, airline seats are perishable because they are worthless if not sold by flight time, and information may be perishable if it diffuses and thereby loses its value.
Indeed, many services are perishable in the sense that unused capacity can never be recovered. Regardless of whether price is a primary basis of competition, the intensity of competition is greatest if: In such a situation, rivals find it hard to avoid poaching business.
Without an industry leader, practices desirable for the industry go unenforced. Slow growth precipitates fights for market share. Slow or negative growth in popular music in the s has intensified rivalry, and pressure on profitability is driving consolidation in the industry. These barriers keep companies competing even though they may be earning low or even negative returns on investment. Excess capacity remains in use, and the profitability of the healthy competitors suffers as the sick ones hang on.
Clashes of personalities and egos have sometimes exaggerated rivalry in fields such as the media and high technology. By considering all five forces, a strategist keeps overall structure in mind instead of gravitating to any one element.
In addition, attention is paid to long-run industry conditions rather than fleeting factors; industry structure is reflected in profitability over a business cycle, not in a single year. In assessing industry competition, analysts are often drawn to a number of industry attributes.
These attributes can be highly salient, but their significance depends on their effect on the competitive forces. Consider, for instance: Industry growth rate A common mistake is to assume that fast-growing industries are attractive industries. Growth does tend to mute rivalry because an expanding pie offers opportunities for all competitors. The full effect of growth, however, depends on how growth influences overall industry structure. Fast growth can put suppliers in a powerful position, and high growth with low entry barriers will draw in entrants.
Even without new entry, a high growth rate certainly does not guarantee profitability if customers are powerful or substitutes are attractive.
Government Government involvement is not inherently good or bad for industry profitability, nor is government best understood as a sixth force.
Instead, it is often most fruitful to analyze each specific government policy to see whether it improves or undermines industry structure.
Either effect is possible. For instance, patents raise barriers to entry, boosting industry profit potential. Conversely, government policies favoring unions may raise supplier power and diminish profit potential. Bankruptcy rules that allow failing companies to reorganize rather than exit can lead to excess capacity and intense rivalry. The best way to understand the influence of government on competition is to analyze how present government policies affect the competitive forces.
Technology and innovation Technology or innovations alone are not themselves enough to make an industry structurally attractive or unattractive. The impact of technology on industry attractiveness depends on how the technology affects the full set of competitive forces. Mundane, low-technology industries are often far more profitable than sexy industries such as software and Internet technology that attract competitors.
Computer hardware and software, for instance, are valuable together and worthless when separated. Personal digital assistants PDAs are valuable on their own, but their value is enhanced by thousands of applications that third-party developers have created.
In recent years, strategy researchers have highlighted the role of complements, especially in high- technology industries.
The value of a car, for example, is greater when the driver also has access to gasoline stations, paved roads, spare parts, auto insurance, a car navigation system, and so forth. Especially when demand is small or stagnant, firms should encourage the provision of complements and sometimes produce complementary products themselves or partner with other firms to do so. Michelin, for example, began publishing its now-famous guidebooks in order to encourage travel by car and boost demand for its tires.
More recently, Intel invested in companies that produce equipment for videoconferencing via computers. While the availability of complements boosts demand, complements have an ambiguous effect on overall industry structure.
In computers, for example, operating systems and microprocessors are complements. Each industry would benefit if the other industry were more competitive, with lower prices and less profit.
Understanding Michael Porter: The Essential Guide to Competition and Strategy
Similarly, operating systems are complements to application software. Microsoft eagerly provides tool sets that make it easier to write applications for Windows, which lowers the barriers to entry into the application software industry. As these examples illustrate, complements are neither inherently good nor inherently bad for industry profit potential. MIT Press, In the market for PDAs, for example, Palm beat out other makers largely because it promoted third-party applications and enabled its product to synch with desktop computers— thereby making computers a complement for PDAs rather than a substitute.
In the early days of the videocassette recorder, sets of firms led by JVC and Sony battled to determine whose recording standard would be dominant. The company convinced movie studios to favor its standard when releasing taped films to video stores.
Changes in Industry Structure So far, we have discussed the competitive forces at a single point in time. Industry structure proves to be relatively stable, and industry profitability differences are remarkably persistent in practice. However, industry structure is constantly undergoing modest adjustment and occasionally changes abruptly.
Shifts in structure sometimes emanate from outside an industry due to technological, customer, or other developments. In other cases, choices or innovations from within the industry culminate in a new structure. Sometimes industry structural change boosts the profit potential of an industry; sometimes change reduces it.
The five competitive forces provide a framework for identifying those industry developments that are most important and for anticipating their impact on industry attractiveness.
Shifting threat of new entry Changes to any of the seven entry barriers described above can raise or lower the threat of new entry. The expiration of a patent, for instance, may unleash new entrants.
Conversely, proliferation of products in the ice cream industry has filled up the limited freezer space in grocery stores, making it harder for new ice cream makers to gain access to distribution in North America and Europe. Strategic decisions of leading competitors often have a major impact on the threat of entry.
Starting in the s, for example, retailers such as Wal-Mart, Kmart, and Toys R Us began to adopt new distribution and inventory-control technologies with large fixed costs, including automated distribution centers, bar coding, and point-of-sale terminals. These investments increased the economies of scale in retailing and made it more difficult for small retailers to enter the business and for existing small players to survive. Changing supplier and buyer power As the factors underlying supplier and buyer power change with time, their power rises or declines.
In the global appliance industry, for instance, competitors including Electrolux, General Electric, and Whirlpool have been squeezed by the consolidation of retail channels e.
At the same time, rising global demand for appliance-grade steel, driven by such things as the rapid growth of China, has made suppliers more powerful, at least in the short run.
With technological advances, they are now serious substitutes.
Flash computer memory has improved enough recently to be a meaningful substitute for low-capacity hard disk drives. New bases of rivalry Rivalry often intensifies naturally over time. As an industry matures, growth slows. Competitors become more similar as industry conventions emerge, technology diffuses, and consumer tastes converge.
Industry profitability falls, and weaker competitors are driven from the business. This story has been played out in industry after industry; televisions, snowmobiles, aerosol packaging, and telecommunications equipment are just a few examples.
It is not inevitable, however, that industries will trend toward more intense rivalry, and especially toward price-based rivalry. The U. Head-to-head rivalry that lowers prices or boosts payouts to customers has been limited.
Mergers and acquisitions can also alter the nature of rivalry in an industry. In the global petroleum industry, for instance, mergers of Exxon and Mobil, British Petroleum and Amoco, Chevron and Texaco, and Conoco and Phillips have raised concerns among consumer advocates and some policymakers about the possibility of muted competition. Technological innovation is another factor in reshaping rivalry.
In the retail brokerage industry, the advent of the Internet triggered far more intense competition on commissions and fees than in the past. Implications for Strategy Understanding the forces that shape competition in an industry is the starting point for developing strategy.
It reveals the most salient aspects of the competitive environment and the crucial constraints to overall profitability. It highlights the industry changes that pose the greatest threats and opportunities.
Positioning the Company Industry structure reveals insights for positioning. Here, strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weakest. The heavy-truck industry is structurally challenging.
Many buyers are large fleets or leasing companies, with a keen interest and the clout to drive down the price for one of their largest purchases. Many trucks are built to regulated standards and offer similar features, so price competition is rampant.
Capital intensity causes rivalry among competitors to be fierce, especially during the cyclical downturns in demand. Though there are few direct substitutes for an wheeler, truck buyers face important substitutes for their service, such as cargo delivery by rail. Such individuals have limited bargaining power and take great pride in and live for long stretches in their trucks.
Owner-operators tend to be willing to pay more for amenities and customization. PACCAR has found a portion of its industry where competitive forces are weaker—where it can avoid buyer power and price-based rivalry.
And it has tailored every single internal function to cope well with the forces in that part of the industry. Exploiting Industry Change Industry change brings with it the opportunity to spot and claim promising strategic new positions.
Understanding Michael Porter: The Essential Guide to Competition and Strategy
An increase in customer knowledge of PCs led more corporate customers to want unique specifications and not require third-party resellers. Coyne and Somu Subramaniam claim that three dubious assumptions underlie the five forces: That buyers, competitors, and suppliers are unrelated and do not interact and collude. That the source of value is structural advantage creating barriers to entry.
That uncertainty is low, allowing participants in a market to plan for and respond to changes in competitive behavior. Using game theory , they added the concept of complementors also called "the 6th force" to try to explain the reasoning behind strategic alliances. Complementors are known as the impact of related products and services already in the market. Martyn Richard Jones, while consulting at Groupe Bull , developed an augmented five forces model in Scotland in It is based on Porter's Framework and includes Government national and regional as well as pressure groups as the notional 6th force.
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95 of the world's top 100 brands choose CGMA
Buying for your team?The analysis can be readily extended to understand the challenges facing a potential entrant. Rather, entry was barred by other benefits that large music labels enjoyed. Understanding Michael Porter sets the record straight, providing the first concise, accessible summary of Porter s revolutionary thinking. And it has tailored every single internal function to cope well with the forces in that part of the industry.
The more limited the wholesale or retail channels are and the more that existing competitors have tied them up, the tougher entry into an industry will be. Food service distributors purchase food and related items from food processors and farmers. When industries are in flux, the framework for analyzing industry structure can not only point a company toward promising positions within its existing industry but can also help the company weigh diversification into other industries.
In a new industry, it takes longer for the rules of competition to be clear, and this gives companies a range of experimental competitive strategies.
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