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Michael Porter and
Strategy
ManEc 300
Prof. Bryson
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Michael E. Porters New Approach
Harvard Business School
1980: The Five Competitive Forces
The Competitive Advantage ofNations, 1990.
First strategist, a field that is,
basically, straight economics
Enormous popularity
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The Five Competitive Forces
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 currentcontestants.
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Establishing a Strategic Agenda
To establish a strategic agenda for dealingwith these contending currents and to
grow despite them, a company must
understand how they work in its ownindustry and particular situation.
The essence of strategy formulation iscoping with competition.
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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 sellingproducts.
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Threat of Entry
New entrants to anindustry bring new
capacity, the desire
to gain market
share, and often
substantial
resources.
There are sixmajor sources ofbarriers to entry:
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Barriers to Entry
Economies of scale - - These economiesdeter entry by forcing the aspirant either to
come in on a large scale or to accept a
cost disadvantage.
Product differentiation -- Brandidentification creates a barrier by forcing
entrants to spend heavily on marketing
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Barriers to Entry
Cost disadvantages independent ofsize -- Entrenched companies may have
cost advantages not available to potentialrivals, no matter what their size and
attainable economies of scale.
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Barriers to Entry
Access to distribution channels -- Thenewcomer must, of course, secure
distribution of its product or service.
Government policy -- Governments canlimit or even foreclose entry to industries
with such controls as license requirements
and limits on access to raw materials.
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Barriers to Entry, BSZ
BSZ tell us that withoutbarriers to entry, new firmstend to erode profits withinthe industry.
They discuss the degree ofrivalry, the threat of
substitutes, buyer andsupplier power, and market
power and strategy.See pp. 187ff.
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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 orpurchases to the industry compared with
its overall business.
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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 acompany being able to choose whom it will
sell to, in other words, buyer selection.
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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 normaltimes; they also reduce the bonanza an
industry can reap in boom times.
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Substitute Products
Substitutes often come rapidly into play if
some development increases competitionin their industries and causes price
reduction or performance improvement.
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Jockeying for Position
Intense rivalry isrelated to thepresence of a
number of factors:
Competitors arenumerous or are
roughly equal in sizeand power.
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Jockeying for Position
Industry growth isslow, precipitatingfights for market
share that involveexpansion-mindedmembers.
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Jockeying for Position
The product orservice lacks
differentiation orswitching costs,which lock in buyersand protect onecombatant from
raids on itscustomers, byanother.
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Formulation of Strategy
1. Positioning the company
Positioning the companyso that its capabilities
provide the best defenseagainst the competitiveforce.
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Formulation of Strategy
2. Influencing the balance
Influencing the balanceof the forces through
strategic moves, therebyimproving the company'sposition.
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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.
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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.
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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.
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Conclusions
The key to growth -- even survival -- is to
stake out a position that is
less vulnerable to attack from head-to-headopponents, whether established or new, and
less vulnerable to erosion from the direction of
buyers, suppliers, and substitute goods.
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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.