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Michael Porter and

Strategy

ManEc 300
Prof. Bryson
Michael E. Porter’s New Approach

Who is Michael Porter?


Michael E. Porter’s New Approach
Harvard Business School

1980: The Five Competitive Forces

 The Competitive Advantage of


Nations, 1990.

Probably the first “strategist” in a new


field that is, basically, straight
economics

 Enormous popularity
The Five Competitive Forces
• How many can we remember?
• There were two threats, two bargaining
powers, and some jockeying.
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 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.”
• In their approach, what is “Value
Creation”?
Porter and Strategy Today
• Value Creation is finding an approach, a
cost-reduction technique, or some manner
permitting the firm to compete effectively.
Establishing a Strategic Agenda
• What must a firm be able to do before it
can establish a strategic agenda for
dealing with the five competitive forces?
Establishing a Strategic Agenda
• To establish a strategic agenda for dealing
with these forces and to grow despite
them, a company must understand how
they work in it’s own industry and
particular situation.
• What makes them vary?
• The essence of strategy formulation is
coping with the specific kinds of
competition experienced.
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

• In Brickley, Smith, and Zimmerman,


strategy and _________ (what else) are
the key determinants of a firm’s success?
Establishing a Strategic Agenda

• In Brickley, Smith, and Zimmerman


strategy and organizational architecture
are seen as the key determinants of the
success of a firm.

• What has entry got to do with strategy?


• Why should it be avoided?
Threat of Entry
• New entrants to an
industry bring new
capacity (the ability to
push down the industry
price as the industry S
shifts out to the right), S1
the desire to gain P1 S2
market share, and often P2

substantial resources.
Threat of Entry
• So it is very strategic to try
to inhibit entry if possible.
• Can you think of the six
major barriers to entry?
• Did you ever do a scripture
chase?
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. 202ff.
Powerful Suppliers and Buyers
• What determines the power of each
important supplier or buyer group a
strategic firm must work with?
Powerful Suppliers and Buyers
• That power depends on the characteristics
of the supplier’s or buyer’s 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.
• This is especially true of a company that is
able to choose whom it will sell to. In other
words, “buyer selection” is often a
strategic concern for a company.
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
What factors determine
the intensity of
competitive rivalries?
• The first important issue
is whether competitors
are numerous. Also, are
they roughly equal in
size and power?
Jockeying for Position
Is jockeying especially
intense when industry growth
is fast?
No, when industry growth is
slow, fights are precipitated
in the struggle for market
share among expansion-
minded competitors.
Jockeying for Position
Will the jockeying be
intense when the product
or service is not
differentiated or when
switching costs are high?
Not especially! Such
costs lock in buyers and
protect one combatant
from raids on its
customers by another.
Jockeying for Position
• When fixed costs are
high or the product is
perishable, there is
strong temptation to
cut prices.
Formulation of Strategy

1. Positioning the
company so that its
capabilities provide the
best defense against the
competitive force.
Formulation of Strategy
2. 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.217-220) 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.