Michael Porter and Strategy ManEc 300 Prof. Bryson

Michael Porter and
Strategy
ManEc 300
Prof. Bryson
Michael E. Porter’s New Approach
Harvard Business School
1980: The Five Competitive Forces
 The Competitive Advantage of
Nations, 1990.
First “strategist,” a field that is,
basically, straight economics
 Enormous popularity
The Five Competitive Forces
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the threat of new entrants,
the bargaining power of customers,
the bargaining power of suppliers,
the threat of substitute products or
services, and
• the jockeying among current
contestants.
Porter and Strategy Today
• Strategy has now become a regular field in
management schools. It is mostly a haven for
economists.
• Brickley, Smith and Zimmerman devote Chapter
8 to the “Economics of Strategy: Creating and
Capturing Value.”
• They address Value Creation, which is finding an
approach, a cost-reduction technique, or some
manner permitting the firm to compete
effectively.
Establishing a Strategic Agenda
• To establish a strategic agenda for dealing
with these contending currents and to
grow despite them, a company must
understand how they work in it’s own
industry and particular situation.
• The essence of strategy formulation is
coping with competition.
Establishing a Strategic Agenda
. Different forces take on prominence, of
course, in shaping competition in each
industry.
• Every industry has an underlying structure,
or a set of fundamental economic and
technical characteristics, whether an
industry is dealing in services or selling
products.
Establishing a Strategic Agenda
• Brickley, Smith, and Zimmerman combine
strategy and organizational architecture as
the key determinants of the success of a
firm.
Threat of Entry
• New entrants to an
industry bring new
capacity, the desire
to gain market
share, and often
substantial
resources.
• There are six
major sources of
barriers to entry:
Barriers to Entry
• 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.
• Product differentiation -- Brand
identification creates a barrier by forcing
entrants to spend heavily on marketing
Barriers to Entry
• 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.
Barriers to Entry
• Access to distribution channels -- The
newcomer must, of course, secure
distribution of its product or service.
• Government policy -- Governments can
limit or even foreclose entry to industries
with such controls as license requirements
and limits on access to raw materials.
Barriers to Entry, BSZ
BSZ tell us that without
barriers to entry, new firms
tend to erode profits within
the industry.
They discuss the “degree of
rivalry,” the threat of
substitutes, buyer and
supplier power, and market
power and strategy.
See pp. 187ff.
Powerful Suppliers and Buyers
• The power of each important supplier or
buyer group depends on a number of
characteristics of its market situation and
on the relative importance of its sales or
purchases to the industry compared with
its overall business.
Powerful Suppliers and Buyers
• A company's choice of suppliers to buy
from or buyer groups to sell to should be
viewed as a crucial strategic decision.
Most common is the situation of a
company being able to choose whom it will
sell to, in other words, buyer selection.
Substitute Products
•
Substitute products place a ceiling on
prices a competing firm can charge,
limiting the potential of an industry.
Substitutes not only limit profits in normal
times; they also reduce the bonanza an
industry can reap in boom times.
Substitute Products
• Substitutes often come rapidly into play if
some development increases competition
in their industries and causes price
reduction or performance improvement.
Jockeying for Position
Intense rivalry is
related to the
presence of a
number of factors:
• Competitors are
numerous or are
roughly equal in size
and power.
Jockeying for Position
Industry growth is
slow, precipitating
fights for market
share that involve
expansion-minded
members.
Jockeying for Position
The product or
service lacks
differentiation or
switching costs,
which lock in buyers
and protect one
combatant from
raids on its
customers, by
another.
Jockeying for Position
• Fixed costs are high
or the product is
perishable, creating
strong temptation to
cut prices.
• Capacity is normally
augmented in large
increments.
Formulation of Strategy
1. Positioning the company
Positioning the company
so that its capabilities
provide the best defense
against the competitive
force.
Formulation of Strategy
2. Influencing the balance
Influencing the balance
of the forces through
strategic moves, thereby
improving the company's
position.
Formulation of Strategy
• 3. Exploiting industry change
Anticipating shifts in the factors underlying
the forces and responding to them, with
the hope of exploiting change by choosing
a strategy appropriate for the new
competitive balance before opponents
recognize it.
Formulation of Strategy
• 4. Recognizing Multifaceted Rivalry
Porter and numerous other authorities
have stressed the need to look beyond
product to function in defining a business,
beyond national boundaries to potential
international competition, and beyond the
ranks of one's competitors tomorrow.
Formulation of Strategy
• BSZ remind us (pp.203-208) that to
formulate strategy we must
• understand our resources and capabilities
• understand the environment, and
• combine knowledge of strategy and
organizational architecture.
Conclusions
• The key to growth -- even survival -- is to
stake out a position that is
– less vulnerable to attack from head-to-head
opponents, whether established or new, and
– less vulnerable to erosion from the direction of
buyers, suppliers, and substitute goods.
Conclusions
• Establishing such a position can take
many forms
– solidifying relationships with favorable
customers,
– differentiating the product either substantively
or psychologically through marketing,
integrating forward or backward, or
– establishing technological leadership.