Porter's Models

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Porters Models
E3 Enterprise Strategy
By KAPP Edge Solutions
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Index

• Porters Five Forces
• Porters Value Chain
• Porters Generic Strategies
• Porters Diamond

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Michael Porters Models and their applicability
Snap shot
Value Chain
Generic Strategies
Diamond
5 Forces
Helps an organization to continuously evaluate
its market position based on an external factor
analysis
Useful framework for a company to identify the
target audience for its products / services and
decide on the pricing strategy based on the scope
of the market (narrow or broad)
A mix of inward and outward analysis of the
entire value chain (primary secondary) which
helps the firm identify and remove non value
added activities making the process efficient and
drive margins higher
A useful framework to understand and analyze the
competitive advantage of a nation
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Porters Five Forces
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Environmental Analysis - Porters
5 Forces
New Entrants

• Largely depends on the barriers to entry
• Economies of scale
• Capital requirement
• Access to distribution channels
• Differentiation
• Legislation
• Access to resources

• Essential input
• Few suppliers
• Branded product
• Switching costs
• Customers are fragmented with little buying power

Rivalry against competitors
Power of Suppliers
Power of Buyers

• Stage of life cycle
• Lack of differentiation amongst products
• Balance of competitors

• Standardized product
• Too many small firms
• No Switching costs

Helps companies continuously analyze their
position in the market
Role of Government is the 6 force in addition to
5 forces suggested by Porter
Substitutes
PESTEL is also used in addition to the Porters
five forces for a comprehensive environmental
analysis
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Five Forces

Potential Competitors/ Barrier of Entry (Companies currently not competing in the industry but have the necessary resources to do so How loyal are the end users in this industry? How troublesome or hard is it for the end users to switch and use another product? Does it require a large seed capital to enter this industry? Do entries to this industry regulated by government? How hard is it to gain access to the distribution channels? How long does it take for new staff to acquire the necessary skills to do the work?
Threat of Substitutes (Products in another industry that satisfy similar needs) How many close substitutes are available? How pricy are the substitutes? What is the perceived quality of the substitutes?
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Five Forces
Intensity of rivalry among established firms (Direct competitors competing for market share) How many close competitors exist in the industry? What are the sizes of your close competitors? What is the industry structure? Is it a fragmented, consolidated, oligopoly or monopoly industry? What is the current industry growth rate? How diversified are your competitors?
Bargaining power of buyers (Customers) How large are your buyers company? How many companies are there for the buyer to choose from? How hard is it for the buyers to switch and use a competing product? Do the buyers have the capacity to enter your business and produce the goods themselves?
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Five Forces
Bargaining power of suppliers Are there substitutes for your suppliers products? Do your suppliers serve multiple industries? Does the total industry revenue accounting for only a small portion of the suppliers total revenue? Do you have high switching cost to use another supplier? Do suppliers have the capacity to enter your business? Does your company capable to enter the suppliers business?
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Environmental Analysis
Industry Examples
Inability of Honda to predict the power of buyers
and suppliers made it loose to Vento
Google almost has a monopoly in the mobile
software space
Nokia under estimated the force of new entrants
such as Micromax, Samsung in to mobiles
Governments measures to promote the telecom
industry in India attracted larger no of entrants
Apple shortens the life cycle of its products by
launching new models which keeps the product in
the growth stage
Effective use of Porters 5 forces can help the
company identify opportunities and prevent threats
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Five Forces analysis of The Coca-Cola Company

• Threat of New Entrants/Potential Competitors
  Medium Pressure
• Entry barriers are relatively low for the
  beverage industry there is no consumer switching
  cost and zero capital requirement. There is an
  increasing amount of new brands appearing in the
  market with similar prices than Coke products
• Coca-Cola is seen not only as a beverage but also
  as a brand. It has held a very significant market
  share for a long time and loyal customers are not
  very likely to try a new brand.
• Threat of Substitute Products Medium to High
  pressure
• There are many kinds of energy drink s/soda/juice
  products in the market. Coca-cola doesnt really
  have an entirely unique flavour. In a blind taste
  test, people cant tell the difference between
  Coca-Cola and Pepsi

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• The Bargaining Power of Buyers Low pressure
• The individual buyer no pressure on Coca-Cola
• Large retailers, like Wal-Mart, have bargaining
  power because of the large order quantity, but
  the bargaining power is lessened because of the
  end consumer brand loyalty.
• The Bargaining Power of Suppliers Low pressure
• The main ingredients for soft drink include
  carbonated water, phosphoric acid, sweetener, and
  caffeine. The suppliers are not concentrated or
  differentiated.
• Coca-Cola is likely a large, or the largest
  customer of any of these suppliers.
• Rivalry Among Existing Firms  High Pressure
• Currently, the main competitor is Pepsi which
  also has a wide range of beverage products under
  its brand. Both Coca-Cola and Pepsi are the
  predominant carbonated beverages
  and committed heavily to sponsoring outdoor
  events and activities.
• There are other soda brands in the market that
  become popular, like Dr. Pepper, because of their
  unique flavours. These other brands have failed
  to reach the success that Pepsi or Coke have
  enjoyed.

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Value Chain Analysis What can it do for you and
your company?

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Value Chain Analysis

• Value Chain analysis was first suggested by
  Michael Porter (1995) as a way of presenting the
  construction of value as related to end customer.
• It can
• Increase your competitiveness
• Reduce your costs
• Improve your market share
• Bottom Line - improve overall profitability!

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Driving Efficiency
Porters Value Chain
Primary Activities Direct creation / delivery
of products / services Secondary Activities
Activities that support the primary activities
Image taken from Google Image

• Steps
• Analyze own value chain
• Analyze customers value chain
• Identification of
• Value Created Cost of creating value Margin
• Identification of sub activities for primary and
  support activities i.e. (a) Direct, (b) Indirect
  and (c) Quality

How activities contribute to an organizations
Competitive Advantage
Each member of the system uses their position and
negotiation power to drive margins higher
Aim Continuously identify opportunities to
increase value and reduce non value adds
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Driving Efficiency Porters Value Chain
Pre implementation of Porters value chain
Automobile company procurement process
If parts Are good
If parts are not good
Supplies Parts to Car manufacturer
Sends parts Received to Inspection team
Parts are used in cars
Manufacturer of car parts
Post use of Porters value chain Automobile
company procurement process
Certifies s supplier
No inspection required and parts are directly
used in cars
Supplies Parts to car manufacturer
Non value added activity relating to inspection
has been done away with leading to reduction in
cost and increase in margins
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Driving Efficiency Porters Value Chain
Company needs to continuously review is value
chain to identify Non value adding activities
Removal of non value added activities from a
process makes it efficient
Efficient processes help in reducing cost and
improving margins
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Value Chain Analysis

• It can be developed for individual competitors or
  an entire industry

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Value Chain Analysis

• Cost Factors-Identify factors that determine
  costs of different activities
• Why costs differ? Understand why a firms costs
  or a sectors costs differs from its competitors
• Why swings in profitability? Understand why large
  differences in profitability exist within the
  same industry
• Efficiencies and inefficiencies Identify which
  activities are performed efficiently or
  inefficiently
• Influence Show how costs in one activity
  influence another
• Competitors costs Identify competitors cost
  positions
• Nature and source of advantage Understand the
  nature and source of competitive advantage

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Value Chain Components
Value Chain Analysis for Assessing Competitive
Advantage CMA Handbook
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Developing Value Chains

• Value Chain Analysis requires expertise in more
  than one area
• Competitive intelligence is to be gathered
  ethically
• And then developing a systematic process for
  capturing, analyzing it and disseminating the
  intelligence and developing the appropriate
  strategies to enhance your competitiveness.

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How a firm can use Value Chain Analysis

• Three useful strategic frameworks have been
  identified for value chain analysis
• Industry Structure Analysis
• Core Competencies
• Segmentation Analysis

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Real Life Examples

• SWATCH
• IKEA
• FedEx
• AB originated Beef to L.A. retail stores
• Agricultural chemicals sold in the US Midwest

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Porters Diamond
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Porters Diamond Competitive Advantage of Nations
Rivalry Curve Low initially and Higher later
Demand Conditions
e.g. BRIC countries
Structure, Strategy and Rivalry
Related and Supporting Industry
Nations Competitive Advantage

• Diamond affects 4 components that enable a
  nations competitive advantage
• Availability of resources and skills
• Opportunities available for companies to pursue
• Goals of individual companies
• Pressure on companies to innovate and invest

• 6th Force Role of Government
• Encourage companies to raise performance
• Stimulate demand
• Focus on the R/C grid of a nation

Factor Conditions
All the above factors are interconnected
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Porters Diamond Competitive Advantage of Nations
India had a competitive advantage of highest
number of English speaking people resulting in
highest number of call centers operating out of
India
Chinas government focus on making it the
manufacturing hub gave China the competitive
advantage
Size of markets in the BRIC countries make all
companies set up their business in these countries
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National Influences on Competitiveness The
Theory of Comparative Advantage

• A country has a relative efficiency advantage in
  those products that make intensive use of
  resources that are relatively abundant within the
  country. E.g.
• Philippines relatively more efficient in the
  production of
• footwear, apparel, and assembled electronic
  products than in the production of chemicals and
  automobiles.
• U.S. is relatively more efficient in the
  production of
• semiconductors and pharmaceuticals than shoes
  or shirts.

When exchange rates are well-behaved,
comparative advantage becomes competitive
advantage.
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Competitive Advantage within an International
Context The Basic Framework
FIRM RESOURCES CAPABILITIES -- Financial
resources -- Physical resources -- Technology --
Reputation -- Functional capabilities -- General
management capabilities
THE INDUSTRY ENVIRONMENT Key Success Factors
COMPETITIVE ADVANTAGE
THE NATIONAL ENVIRONMENT -- National resources
and capabilities (raw materials national
culture human resources transportation,
communication, legal infrastructure -- Domestic
market conditions -- Government policies --
Exchange rates -- Related and supporting
industries
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Porters Competitive Advantage of Nations

• Extends and adapts traditional theory of
  comparative advantage to take account of three
  factors
• International competitive advantage is about
  companies not countriesthe role of the national
  environment is providing a home base for the
  company.
• Sustained competitive advantage depends upon
  dynamic factors-- innovation and the upgrading of
  resources and capabilities
• The critical role of the national environment is
  its impact upon the dynamics of innovation and
  upgrading.

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Porters National Diamond Framework
FACTOR CONDITIONS
RELATING AND SUPPORTING INDUSTRIES
DEMAND CONDITIONS
STRATEGY, STRUCTURE, AND RIVALRY

• FACTOR CONDITIONSHome grown resources/capabilit
  ies more important
• than natural endowments.
• 2. RELATED AND SUPPORTING INDUSTRIESKey role of
  industry clusters
• 3. DEMAND CONDITIONSDiscerning domestic
  customers drive quality innovation
• 4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic
  rivalry drives upgrading.

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Consistency Between Strategy and National
Conditions

• In globally-competitive industries, firm
  strategy needs to take account of national
  conditions
• U.S. textile manufacturers must compete on the
  basis of advanced process technologies and focus
  on high quality, less price-sensitive market
  segments
• Dispersion of value chain to exploit different
  national environments (e.g. Nike conducts RD in
  US, components in Korea and Thailand, assembly in
  Indonesia, China, and India, marketing in Europe
  and North America)

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General Motors Alliances with Competitors
SAAB
FIAT
20 owned (2000-5). Collaboration on technology
and components
AVTOVAZ
50 owned
SUZUKI
Russian JV to produce cars
10 owned. Co-production
GM
20 owned joint production
FUJI
60 owned
49owned. Co-production
ISUZU
JV to produce cars in China
IBC Vehicles Ltd. (U.K.)
40 investment
50 owned
SAIC
(Makes vans in UK)
50.9 owned technical production collaboration
New United Motor Manufacturing Inc. (NUMMI)
TOYOTA
50 owned
DAEWOO
(Makes cars in US)
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Porters Generic Strategies
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Strategic Choice Porters Generic Strategies
Cost Leader Broad Focus

• Price penetration helps to develop an existing
  market, explore new market
• Develop new segment
• Earn high profits due to higher sales volume
• Defense against price wars and acts as a barrier
  to entry
• E.g. Future Group

• Higher margins (customer willing to pay a
  premium) and inelastic demand
• Life cycle of a product extends
• Helps in building a brand
• Avoid price wars
• E.g. Samsung

Differentiation Broad Focus

• Price skimming is relevant
• Smaller segment
• Lesser competition
• Relatively smaller investment
• E.g. Harley Davidson

Niche Narrow Focus
Depending on the product portfolio and strategy
of a company, one or a combination of the above
can be used by a company for e.g. I phone offers
all high end phones whereas Samsung offers
products both in the cost and differentiation
category
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Cost Leadership Strategy

• Firms that succeed in cost leadership often have
  the following internal strengths
• Access to the capital required to make a
  significant investment in production assets this
  investment represents a barrier to entry that
  many firms may not overcome.
• Skill in designing products for efficient
  manufacturing, for example, having a small
  component count to shorten the assembly process.
• High level of expertise in manufacturing process
  engineering.
• Efficient distribution channels.
• Risks
• For example, other firms may be able to lower
  their costs as well. As technology improves, the
  competition may be able to leapfrog the
  production capabilities, thus eliminating the
  competitive advantage. Additionally, several
  firms following a focus strategy and targeting
  various narrow markets may be able to achieve an
  even lower cost within their segments and as a
  group gain significant market share.

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Differentiation Strategy

• To be different, is what organisations strive
  for companies and product ranges that appeal to
  customers and "stand out from the crowd" have a
  competitive advantage.
• With a differentiation strategy the business
  develops product or service features which are
  different from competitors and appeal to
  customers including functionality, customer
  support and product quality.
• For example Brompton folding bicycles when folded
  are more compact than other folding bikes.
  Folding bikes are usually purchased by people
  with limited storage space at home or on the
  move a compact bike is therefore a valued
  product feature and differentiates Brompton
  bicycles from other folding bicycles.
• A differentiation strategy is known as a broad
  scope strategy because the business is hoping
  that their business differentiation strategy,
  will appeal to a broad section of the market.
• New concepts which allow for differentiation can
  be protected through patents and other
  intellectual property rights, however patents
  have a certain life span and organisation always
  face the danger that their idea which gives them
  a competitive advantage will be copied in one
  form or another.

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Focus Strategy

• Under a focus strategy a business focuses its
  effort on one particular segment of the market
  and aims to become well known for providing
  products/services for that segment.
• They form a competitive advantage by catering for
  the specific needs and wants of their niche
  market.
• Examples include Roll Royce, Bentley and Saga a
  UK company catering for the needs of people over
  the age of 50.
• Once a firm has decided which market segment
  they will aim their products at, Porter said they
  have the option to pursue a cost leadership
  strategy or a differentiation strategy to suit
  that segment.
• A focus strategy is known as a narrow scope
  strategy because the business is focusing on a
  narrow (specific) segment of the market.

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Stuck in the Middle?

• These generic strategies are not necessarily
  compatible with one another. If a firm attempts
  to achieve an advantage on all fronts, in this
  attempt it may achieve no advantage at all.
• For example, if a firm differentiates itself by
  supplying very high quality products, it risks
  undermining that quality if it seeks to become a
  cost leader. Even if the quality did not suffer,
  the firm would risk projecting a confusing image.
  
• For this reason, Michael Porter argued that to be
  successful over the long-term, a firm must select
  only one of these three generic strategies.
  Otherwise, with more than one single generic
  strategy the firm will be "stuck in the middle"
  and will not achieve a competitive advantage.
• Porter argued that firms that are able to succeed
  at multiple strategies often do so by creating
  separate business units for each strategy. By
  separating the strategies into different units
  having different policies and even different
  cultures, a corporation is less likely to become
  "stuck in the middle."
• To create a competitive advantage businesses
  should review their strengths and pick the most
  appropriate strategy cost leadership,
  differentiation or focus.

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Choose The Right Strategy Dont Hedge Your Bets

• A company has to spend time and effort to choose
  the right Generic Strategy, as this will support
  all other strategic options. The company needs to
  make a decision on which strategy to use and stay
  on it for the long term. It is simply not
  feasible to try out a particular strategy option.
  Michael Porter has specifically warned against
  attempting to hedge your bets by employing more
  than one strategy option, as every strategy
  appeals to different types of people and requires
  radically different approaches . Trying to employ
  multiple strategies, will typically render a
  company without any clear strategic advantage and
  in a poor strategic position. Such companies are
  bound to become low-profitable, second-rate
  companies due to ambiguous corporate culture,
  conflicting organizational structures and
  contradictory and ineffective incentive schemes.
  So, when choosing which Generic Strategy is right
  for your company, play to your companys
  strengths.
• Use SWOT Analysis to determine your companys
  strengths, weaknesses, opportunities and threats
  in each Generic Strategy scenario
• Use Porters Five Forces to assess the balance of
  power and how it might affect your company
• Use the Congruence Model or the McKinsey 7S
  Framework to determine what performance drivers
  your company would have in each scenario
• Cross-analyze the results of each finding and
  work out which Generic Strategy provides the
  strongest set of options.

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