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Michael Porter Competitive forces and competitive advantage

Tourish and environment

Pedro Francisco Medina Marín Dni: 15425741D Id:b121300810

24/02/2012

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SUMMARY 1. Competitive forces………………………………………………………………………Pag. 2

1.1.Rivalry

1.2.Threat of Substitutes

1.3.Buyer Power

1.4.Supplier Power

1.5.Threat of New Entrants and Entry Barriers

2. Competitive advantage………………………………………………………….……Pag. 6

2.1.Resources and Capabilities

2.2.Cost Advantage and Differentiation Advantage

2.3.Value Creation

3. Porters Five Forces Context: Environment……………………………Pag. 8

4. Competitive advantages relationship with environment…….Pag. 10

4.1.Improved productivity due to a possible cost savings

4.2.Product differentiation

5. Activities to be more competitive……………………………….…………Pag. 12

6. References……………………………………………………………………………………..Pag. 13

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1.Competitive forces

(Diagram of Porter´s 5 forces)

1.1. Rivalry.

In the traditional economic model, competition among rival firms drives profits to zero.

But competition is not perfect and firms are not unsophisticated passive price takers.

Rather, firms strive for a competitive advantage over their rivals. The intensity of

rivalry among firms varies across industries.

The CR indicates the percent of market share held. A high concentration ratio indicates

that a high concentration of market share is held by the largest firms the industry is

concentrated. With only a few firms holding a large market share, the competitive

landscape is less competitive.

A low concentration ratio indicates that the industry is characterized by many rivals,

none of which has a significant market share. These fragmented markets are said to be

competitive.

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When a rival acts in a way that elicits a counter-response by other firms, rivalry

intensifies. The intensity of rivalry commonly is referred to as being intense, moderate,

or weak, based on the firms aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive

moves:

Changing prices

Improving product differentiation

Creatively using channels of distribution

Exploiting relationships with suppliers

The intensity of rivalry is influenced by the following industry characteristics:

1. A larger number of firms increases rivalry.

2. Slow market growth causes firms to fight for market share.

3. High fixed costs result in an economy of scale effect that increases rivalry.

4. High storage costs or highly perishable products.

5. Low switching costs increases rivalry.

6. Low levels of product differentiation.

7. Strategic stakes are high.

8. High exit barriers.

9. A diversity of rivals.

10. Industry Shakeout.

1.2. Threat of Substitutes.

In Porter´s model, substitute products refer to products in other industries. To the

economist, a threat of substitutes exists when a product´s demand is affected by the

price change of a substitute product.

Product´s price elasticity is affected by substitute products as more substitutes

become available, the demand becomes more elastic since customers have more

alternatives. A close substitute product constrains the ability of firms in an industry to

raise prices.

The competition engendered by a Threat of Substitute comes from products outside

the industry.

While the threat of substitutes typically impacts an industry through price competition,

there can be other concerns in assessing the threat of substitutes.

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1.3. Buyer Power.

The power of buyers is the impact that customers have on a producing industry. In

general, when buyer power is strong, the relationship to the producing industry is near

to what an economist terms a monopsony, a market in which there are many suppliers

and one buyer. Under such market conditions, the buyer sets the price. In reality few

pure monopsony exist, but frequently there is some asymmetry between a producing

industry and buyers. The following tables outline some factors that determine buyer

power.

1.4. Supplier Power.

A producing industry requires raw materials labor, components, and other supplies.

This requirement leads to buyer-supplier relationships between the industry and the

firms that provide it the raw materials used to create products.

Suppliers, if powerful, can exert an influence on the producing industry, such as selling

raw materials at a high price to capture some of the industry´s profits. The following

tables outline some factors that determine supplier power.

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1.5. Threat of New Entrants and Entry Barriers.

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility

that new firms may enter the industry also affects competition. In theory, any firm

should be able to enter and exit a market, and if free entry and exit exists, then profits

always should be nominal. In reality, however, industries possess characteristics that

protect the high profit levels of firms in the market and inhibit additional rivals from

entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets

typically make. For example, when industry profits in increase, we would expect

additional firms to enter the market to take advantage of the high profit levels, over

time driving down profits for all firms in the industry. When profits decrease, we would

expect some firms to exit the market thus restoring a market equilibrium.

Falling prices, or the expectation that future prices will fall, deters rivals from entering

a market. Firms also may be reluctant to enter markets that are extremely uncertain,

especially if entering involves expensive start-up costs. These are normal

accommodations to market conditions. But it firms individually keep prices artificially

low as a strategy to prevent potential entrants from entering the market, such entry-

deterring pricing establishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers

reduce the rate of entry of new firms, thus maintaining a level of profits for those

already in the industry. From a strategic perspective, barriers can be created or

exploited to enhance a firm´s competitive advantage. Barriers to entry arise from

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several sources:

1) Government creates barriers.

2) Patents and proprietary knowledge serve to restrict entry into an industry.

3) Asset specificity inhibits entry into an industry.

4) Organizational (Internal) Economies of Scale.

Barriers to exit work similarly to barriers to

entry. Exit barriers limit the ability of a

firm to leave the market and can

exacerbate rivalry unable to leave the

industry, a firm must compete. Some of an

industry´s entry and exit barriers can be

summarized as follows:

2. Competitive advantage

When a firm sustains profits that exceed the average for its industry, the firm is said to

possess a competitive advantage over its rivals. The goal of much of business strategy

is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

• cost advantage

• differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as

competitors but at a lower cost (cost advantage), or deliver benefits that exceed those

of competing products (differentiation advantage). Thus, a competitive advantage

enables the firm to create superior value for its customers and superior profits for

itself.

Cost and differentiation advantages are known as positional advantages since they

describe the firm's position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to

create a competitive advantage that ultimately results in superior value creation.

The following diagram combines the resource-based and positioning views to illustrate

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the concept of competitive advantage:

2.1. Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage

the firm must have resources and capabilities that are superior to those of its

competitors. Without this superiority, the competitors simply could replicate what the

firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation

advantage and that few competitors can acquire easily. The following are some

examples of such resources:

• Patents and trademarks

• Proprietary know-how

• Installed customer base

• Reputation of the firm

• Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a

capability is the ability to bring a product to market faster than competitors. Such

capabilities are embedded in the routines of the organization and are not easily

documented as procedures and thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies. These

competencies enable innovation, efficiency, quality, and customer responsiveness, all

of which can be leveraged to create a cost advantage or a differentiation advantage.

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2.2. Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either

a lower cost structure or a differentiated product. A firm positions itself in its industry

through its choice of low cost or differentiation. This decision is a central component

of the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter

formed a matrix using cost advantage, differentiation advantage, and a broad or

narrow focus to identify a set of generic strategies that the firm can pursue to create

and sustain a competitive advantage.

2.3. Value Creation

The firm creates value by performing a series of activities that Porter identified as the

value chain. In addition to the firm's own value-creating activities, the firm operates in

a value system of vertical activities including those of upstream suppliers and

downstream channel members.

To achieve a competitive advantage, the firm must perform one or more value creating

activities in a way that creates more overall value than do competitors. Superior value

is created through lower costs or superior benefits to the consumer (differentiation).

3. Porters Five Forces Context: Environment

Generally, strategic planning commences with an analysis phase, where you seek to refresh your understanding of your businesses 3 key strategic environments, these three strategic environments that you analyses during your strategic analysis are your

Macro Environment, Industry Environment, (or Porter's Five Forces), and Internal Environment

Porter´s five forces is a competitive analysis model, it helps you to understand at the nature of competition within your industry, hence it is used when completing your industry analysis.

The traditional view among economists and managers concerning environmental

protection is that it comes at an additional cost imposed on firms, which may erode

their global competitiveness. Environmental regulations (ER) such as technological

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standards, environmental taxes or tradable emission permits force firms to allocate

some inputs (labor, capital) to pollution reduction, which is unproductive from a

business perspective. Technological standards restrict the choice of technologies or

inputs in the production process. Taxes and tradable permits charge firms for their

emission pollution, a by-product of the production process which was free before.

These fees necessarily divert capital away from productive investments.

This traditional paradigm was challenged by a number of analysts, notably Professor

Michael Porter and his co-author Claas van der Linde. Based on cases studies, the

authors suggest that pollution is often a waste of resources and that a reduction in

pollution may lead to an improvement in the productivity with which resources are

used. More stringent but properly designed environmental regulations can trigger

innovation that may partially or more than fully offset the costs of complying with

them in some instances.

Porter and van der Linde first described the main casual links involved in the PH, if

properly designed, environmental regulations can lead to innovation offsets that will

not only improve environmental performance, but will partially and sometimes more

than fully offset the additional cost of regulation.

Porter and van der Linde go on to explain that there are at least five reasons that properly crafted regulations may lead to these outcomes:

• First, regulation signals companies about likely resource inefficiencies and potential technological improvements.

• Second, regulation focused on information gathering can achieve major benefits by rising corporate awareness.

• Third, regulation reduces the uncertainty that investments to address the environment will be valuable.

• Fourth, regulation creates pressure that motivates innovation and progress.

• Fifth, regulation levels the transitional playing field.

Finally, they note “…we readily admit that innovation cannot always completely offset the cost of compliance, especially in the short term before learning can reduce the cost of innovation-based solutions”.

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4. Competitive advantages relationship with environment

The company competes in a global competitive environment characterized by

uncertainty, dynamism and complexity. The strategic direction that will be responsible

for developing the company adapt to the changes that take place, trying to transform

an environment into an environment dominated dominating. The business strategy

will be in charge of trying to transform risks into opportunities to adapt as quickly as

possible to the environment. Thus, the environmental factor adversely affect

companies react or do not react late, but positively affect companies that fit better.

This new environment is the emergence of new competitive advantages that can be

exploited by companies that understand the importance of this opportunity.

In other words, as a positive pursuit of profit for the environment does not necessarily

harm the company. The overlap of the ecological and economic objectives is greater

than one might think at first. It is possible to achieve a common benefit. Improved

environmental performance can lead the company improved its competitiveness.

These are called situations win-win-win. While the company can maximize their

financial goals and the customer gets their needs through the product of the company,

the environment is benefited by a minimization of the impact.

This improvement can come from both the supply side (through improved

productivity), and from the demand orientation (via product differentiation).

4.1. Improved productivity due to a possible cost savings.

Analogously to quality management, investment and increases costs to adapt our

process and our product more environmentally stringent criteria (prevention costs)

can be amortized over the following cost savings:

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a) Costs of waste: caused by the misuse of resources.

b) Legal costs: both of complying with current legislation and the costs of non-

compliance (sanctions, indennizaciones, etc.)

c) Costs of loss of image: a negative image of the behavior of the company

towards the environment can lead to a rejection of its products by customers.

According to the Environment Foundation study, 78% of the Spanish would not

be willing to buy a product if the manufacturer knew that undertaking practices

that harm the environment, compared with 10% that would be.

Therefore, one can say that investing in prevention environmental impact

(environmental quality costs) can offset the existence of environmental quality costs

no (fines and penalties, taxes, costs of damage restoration or cleaning, insurance

coverage environmental risks, ...).

4.2. Product differentiation

Just as the quality, branding, packaging, added services, etc.. are means of

differentiation, ecological attributes of the product or the packaging or the image of

company concerned with the environment may also constitute elements of

differentiation for the consumer segment, the green, which gradually becomes larger.

These consumers are willing to prefer, for the same price and quality, a brand with

ecological attributes compared to competing brands or even to pay a premium for it.

Therefore, the environment can be beneficial to the company by creating a corporate

image / green product created through the implementation of a marketing strategy to

disseminate credible market efforts in the industry regarding environmental

protection.

The creation of this company respects the natural environment is valuable not only

towards our potential consumers but also to other stakeholders face (1) of the firm as:

a) Current and potential employees, who begin to question their responsibility for

the pollution generated by your business.

b) Public bodies, they begin to incorporate the environmental variable in public

procurement processes and procurement of work.

c) Potential investors, since more and more people looking to invest their money

consistent with their ethical values.

d) Financial institutions, which are beginning to include environmental

considerations in the lending process.

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5. Activities to be more competitive

The environment offers opportunities for improvement to companies that incorporate

management of environmental quality. In this regard, in addition to respect

environmental legislation increasingly stringent and punitive to those who commit

crimes against the environment, environmental quality management improves

business efficiency, reduces the risk of accidents and related penalties, and can

achieve an ecological image, used in public relations for the company, helping to

improve their competitiveness.

The environmental management system is understood within the total quality

management of the company, laying down the procedures, measures and actions to

meet environmental requirements and thus, get a quality product that meets

consumer economically.

The environmental quality management involves the establishment of an

environmental policy and an organization to fully achieve the objectives. Once

launched, the company is audited to measure efficiency. In short, involves the creation

of a department - that is dependent on the size of the organization - that works like

any other organization.

Now, as any department, requires control systems that allow their permanence in

time. In any case, the quality system registration is not mandatory, but it is a voluntary

process used to improve the company.

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6. References:

http://www.quickmba.com/strategy/porter.shtml

http://www.quickmba.com/strategy/competitive-advantage/

http://www.whatmakesagoodleader.com/Porters-five-forces.html

http://www.cirano.qc.ca/pdf/publication/2010s-29.pdf

http://www.ciberconta.unizar.es/leccion/gestmed/200.HTM