Porter Strategies

8/11/2019 Porter Strategies

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Porter’s 5 Forces

Benchmarking (Porter’s Value Chain)

Porter’s Generic Strategies

Prof. Arijit Bhattacharya

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Porter’s 5 Forces Model :

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Threat of New Entrants

• Threat of entry depends on – Height of Entry barriers

– Reaction entrants can expect from incumbents.

• Entry Barriers

– Advantages that incumbents have relative to new entrants.1. Supply-side economies of scale

2. Demand-side benefits of scale

3. Customer switching costs

4. Capital requirements

5. Incumbency advantages independent of size6. Unequal access to distribution channels

7. Restrictive government policy

8. Expected retaliation

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The Power of Suppliers

A supplier group is powerful if:

1. Supplier group is more concentrated than theindustry it sells to.

2. Supplier group does not depend heavily on theindustry for its revenues.

3. Industry players face switching costs in changingsuppliers.

4. Offer products that are differentiated.

5. No substitute for what the supplier groupsprovides.

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The Power of Buyers

• A customer group has negotiating leverage if:

1. There are few buyers or large volume buyers.

2. Industry products are standardized or

undifferentiated.

3. Buyers face few switching costs in changing

vendors.

4. Buyers can integrate backward and produceindustry’s product themselves.

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Threat of Substitutes

• The threat of a substitute is high if:

1. Substitute offers an attractive price-performance

trade-off to the industry’s product.

2. Buyer’s cost of switching to the substitute is low.

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Rivalry Among Existing Competitors

• Intensity of rivalry is high if: – Competitors are many or are roughly equal in size.

– Industry growth is slow.

– Exit barriers are high.

– Rivals are highly committed to the business and haveaspirations for leadership.

• Price competition is likely to occur if: – Products/services of rivals are nearly identical and few

switching costs for buyers.

– Fixed costs are high and marginal costs are low.

– Capacity must be expanded in large increments to beefficient.

– Product is perishable.

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Benchmarking Features

Continuous method of measuring andcomparing a firm’s business processes

against those of another firm.

Discover performance gaps betweenone’s own processes and those of

leading firms.

Incorporate leading firm’s processes into

one’s own strategy to fill the gaps and

improve own performance.

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Benchmarks in the World

Toyota

• Process

Intel

• Design

Honda• Rapid product development

Motorola

• Training

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A Benchmarking Process

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Benefits of Benchmarking

Product and Process Improvement

Cost Reduction

Competitive Strategy

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What to Benchmark? Porter’s Value Chain

How it can enhance performance

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Primary Activities• Examine each activity with respect to competitors’ abilities and

rate as superior, equivalent or inferior.• Inbound Logistics

– Receiving and warehousing of raw materials.

– Distribution of raw materials to manufacturing and operations.

• Operations

– Process of transforming inputs into finished goods and services.• Outbound logistics

– Warehousing of finished goods.

– Distribution of those finished goods to customers or retail stores.

• Marketing and Sales

– Identification of customer needs. – Deploying product into marketplace.

– Process of selling to customers.

• Service – Supporting customers after they buy products and services.

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Support Activities

• Procurement – Purchasing of raw materials and inputs needed to create

the product.

• Technology Development

– Technology developments that support value chainactivities.

• Human Resource Management – Activities associated with recruiting, training, hiring and

compensation.

• Firm Infrastructure – Legal team, accounting department, PR, quality

department etc.

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Why this matters

• Profits depend on how well firms execute theseactivities in the value chain.

• Firms that excel in a value chain activity is said to

have a competitive advantage.• Competitive advantage is gained through cost

advantage.

– Reducing cost of individual value chain activities

– Reconfiguring the value chain

• Structural changes to an activity in a value chain to reducecosts.

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The Bigger Picture

• Firm’s value chain is a bigger value chain

• Competitive advantage also depends on the

management of connections with other firms’

value chains.

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Types of Benchmarking

• “What” is being compared with other

organizations?

– Product, (functional) performance, process,

strategic

• “Who” is being compared with our

organization?

– Internal vs. External, Generic, International, Best inClass, Best of the Best

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Benchmarked Performance Measures

Financial Ratios (ROA, ROI)

Productivity Ratios (use of resources)

Consumer –related Results (C-Sat)

Operating Results (Cycle time, waste redn, lead time)

HR measures (E-Sat, absenteeism, turnover)

Quality measures (reject rate)

Market Share Data (shares in different markets)

Structural Measures (objectives, policies, procedures

followed by a firm) 20



Benchmarked Business Processes

• Employee recognition

• Process improvement management

• Procurement purchasing

• Management operations policy leadership• Employee development and Training

• Marketing

• Asset management

• Balanced Scorecard

• Corporate Governance

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Balanced Scorecard

• Pioneered by Robert Kaplan and David Norton

– To effectively implement business strategy

• Derives its name from the perceived need of

firms to “balance” financial measures that are

often used exclusively in strategy evaluation

and control with nonfinancial measures such

as product quality and customer service.

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Balanced Scorecard - Example

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• Marketing strategy challenge

– To find a way of achieving a sustainable

competitive advantage over the other competing

products and firms in a market.

• Competitive advantage

– An advantage over competitors gained by offering

consumers greater value, either by means oflower prices or by providing greater benefits and

services that justifies higher prices.

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Generic Strategies

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Cost Leadership Strategies

• To employ a cost leadership strategysuccessfully, a firm must ensure that itstotal costs across its overall value chain

are lower than competitors’ total costs – Perform value chain activities more efficiently

than rivals and control the factors that drivethe costs of value chain activities

– Revamp the firm’s overall value chain toeliminate or bypass some cost-producingactivities

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Cost Leadership Guidelines

• When price competition among rivalsellers is especially vigorous

• When there are few ways to achieve

product differentiation that have value tobuyers

• When most buyers use the product in the

same ways• When buyers incur low costs in switchingtheir purchases from one seller to another

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Differentiation Strategies

• Should be pursued only after a careful studyof buyers’ needs and preferences todetermine the feasibility of incorporating oneor more differentiating features into a unique

product that features the desired attributes – When there are many ways to differentiate the

product

– When buyer needs and uses are diverse

– When few rival firms are following a similardifferentiation approach

– When technological change is fast paced

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Focus Strategies

• Successful focus strategy depends on an industrysegment that is of sufficient size, has good growthpotential, and is not crucial to the success of othermajor competitors

• Most effective when consumers have distinctivepreferences – When the target market niche is large, profitable, and

growing

– When industry leaders do not consider the niche to becrucial to their own success

– When the industry has many different niches andsegments

– When few, if any, other rivals are attempting to specializein the same target segment

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Risk

• Cost Leadership

– Competitors imitate

– Technology changes

• Differentiation

– Bases for differentiation unattractive.

• Focus

– Target segment becomes structurally unattractive

– Demand disappears

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Differentiation

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Stuck in the middle

• To be successful in long-term, a firm must

select only one of these three generic

strategies.

• With more than one generic strategy, the firm

will be “stuck in the middle” and will not

achieve competitive advantage.

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Generic Strategies vs. 5 Forces

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Examples of value-creating activities

with the Cost Leadership Strategy

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How to obtain a Differentiation

Advantage

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Documents

Porter Strategies