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MICHAEL PORTER’ FIVE FORCES ANALYSIS • • • • • Threat of new entrants Bargaining power of customers – powerful customers usually bargain

for better serviceswhich involve cost and investment Bargaining power of suppliers – may determine the cost of raw materials and other inputseffecting profitability Rivalry among competitors – competition influences the pricing and other costs likeadvertising etc. Threats from substitutes – where-ever substantial investments in R&D is taking place, thethreat of substitutes is large. It also affects profitability.

“Value chain” concept proposed by Michael Porter can also be applied to competitor analysis.Value chain is a tool for identifying ways in which value can be created / enhanced by acompany and this can be used for comparing with the value chain of the competitor.Value creation depends not only on how well each department of the company performs itsactivities but also on how well the various departmental activities are coordinated. The business process is basically a value creating and value delivering process. Customers patronize thecompany that offers the highest delivered value. Hence, the name of the game is to locate theactivities in which value could be created and create maximum possible value in each of them.In analyzing the value chain of the competitor, the company actually identifies the strengths andweaknesses of the competitor; it also gets insights into the strategy followed by the competitor.These revelations help the company improve its assumptions about the competitors whileformulating its own strategy.Basic approach to competitor analysis Identify competitor’s objectives • Identify their strategy • Identify their strengths and weaknesses • Predict their future actionsOnce the environmental survey is completed, the information thus gathered is integrated in ameaningful pattern. Opportunities – threats profile (OTP) is made by the company to understandwhere they stand with respect to environment and competitors. The summary of environmentalsurvey is of core importance to the strategic planning process.The fact, that industry structure, competition, customer etc. are constantly in a flux, compels acompany to be vigilant towards environment and have a dynamic analysis of the environmentalfactors. Main purpose of the constant vigil towards environmental factors is to facilitateappropriate strategic response at the right time.Once the opportunities present in the environment are identified next step is to have anunderstanding of its own strengths and weaknesses through methodical internal appraisal

• Assessing capability gap and take steps for elevating the same in line with growthopportunities.g. Competitive advantage is a position of superiority on the part of the company in somefunction / factor / activity in relation to its competitors and it is through this superiority that thecompany attempts to carve out a comfortable position for itself in the industry.. For example . Thefirm should get rid of some untested assumptions. organizational culture.Assessment of strengths and weaknesses should cover all functional areas in the company e. adequacy of policy deployment. strengths and weaknesses. which it might have developed over time. • Selecting opportunities to be tapped in line with its capabilities. • Marketing • Product wise positioning • Finance • Manufacturing • R&D • Human resources • Corporate factors (corporate image.Only properly assessed facts can be of help. useof IT. assessment and review mechanism etc.)Analysis of strengths and weaknesses portfolio brings out the competitive advantage thecompany has over its competitors and the core competencies of the company.Internal appraisal helps in • Assessing its position in terms of capabilities. organizational structure.

It is not strategy alone butthe acquisition of competitive advantage and its utilization through strategy that takes a companyto its objectives. For strength to becomecompetitive advantage. Competitive advantages are spotted only after internalappraisal as well as industry and competition analysis as competitive advantage is alwaysrelative to the competition.alliances. A cost or differentialadvantage may accrue through lower cost of capital.A durable and higher order competitive advantage rests on some fundamental and enduringstrength of the firm that is unique to the firm. This unique strength of the company can not beeasily imitated by the competitors and from which newer and stronger competitive advantagescan keep emerging. latest technology or innovative raw material handling. Well managed firms are aware of competitive advantage theyenjoy and factors that contributed to that.In short competitive advantage is the heart of strategy and for strategy to succeed the firm shouldhave relevant competitive advantage.All strengths identified in internal assessment do not amount to competitive advantage. a firm can maintainthe competitive edge it enjoys only through a process of continuous monitoring. In fact corporate level decisions on acquisitions. Such strength is referred as core competency .The companies should correctly spot their competitive advantage factors and draw up their competitive advantage profile (CAP). and in the process build some competitive advantages. Thestrength in production may mean that a particular company may be an efficient producer whencompared to its competitor. It actually serves as a back up for strategy as a company not having acompetitive advantage may struggle to place a worthwhile strategy. Right share of resources should always go to factors that constitutethe source of competitive advantage.Corporate creates a built in mechanism in their corporate strategy to take care of the task of competitive advantage building. one or moreof the forces shaping the competition. but with so many changes taking place in theenvironment and so many new forces of competition coming up all the time. Developing and nurturing durable competitive advantages involves a conscious choice andmedium / long term efforts. Companies which enjoy such unique and fundamental strength keep winningin an enduring manner.some companies may be strong in production and some others may be strong in marketing. whether from production factors or marketing factors or some other factor.Corporate may use benchmarking as a practice to ensure excellence instead of mereimprovement. or else it may havestrength of variety.HLL has distribution as its distinctive competitive advantage with a network to reach theremotest rural areas of the country. efficientdistribution. Strengthis a necessity but not sufficient condition for a competitive advantage. or it may have more flexible production system. fresh investments etc. are all steps that would result in competitive advantage building. But here is an example contrary to the rule just mentionedThe phenomenal winners in any industry usually possess competitive advantage in severalfunctions / areas. General rule is that a factor could be counted a competitive advantage if could influence in company’s favour. Scoring over competition and defending against competition requires a solidand sustainable base of competitive advantage. Ford has used this tooleffectively in their “Taurus” project and built competitive advantage in that segment of cars. As a general rule big firms have strength of size and smaller ones have thestrength of flexibility. unique production facilities. mergers. it must lead to a cost or differential advantage to the company.Value chain approach is also used to develop competitive advantage through customer valuecreated by the company by creating / enhancing value in each of its activities.

. Such a preserve of competency is core competency. process or any other field of expertise but it should be anexclusive preserve of the company or the company should possess it in substantially largemeasure when compared to the competitors.of the firm.Competency can be in technology.In other words companies acquire lasting and higher competitive advantages only by buildingcore competencies.

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