Q.5. Discuss the Porter’s generic competitive model.
Ans. Porter’s Generic Competitive Model: Michael Porter has suggested a method of categorising the various types of competitive strategies. He identified two generic competitiva strategies, overall lower cost strategy and differentiation strategy. These strategies are termed as generic because they can be applied to any size or form of business.
Overall Lower Cost Strategy: Overall lower cost refers to companies that can develop manufacture and distribute products more efficiently than their competitors.
Differentiation Strategy: Differentiation refers to companies that are able to provide superior products based on some factors other than low cost. Differentiation can be based on customer services, product quality, unique style and so on.
Porter also suggests that another factor affecting a company’s competitive position is its competitive scope. Competitive scope defines the breadth of a company’s target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope The combination of broad scope and narrow scope with a low-cost strategy and differentiation results in the following competitive strategies:
- cost leadership. 2. Cost-focus. 3. Differentiation. 4. Focus differentiation
The implementation of these strategies requires different organisational arrangements and control processes. Larger firms with greater access to resources typically select a cost leadership or a differentiation strategy, whereas smaller firms often complete on a basis.
1. Cost Leadership: A cost leadership is a low-cost, broad-based market strategy. Firms pursuing this type of strategy must be particularly efficient in engineering tasks, production operations and physical distribution. Because these firms focus on a large market, they must also be able to minimise costs in marketing and Rand D. A low-cost leader can gain significant market share enabling it to procure a more powerful position relative to both suppliers and competitions. This strategy is particularly effective in case of price sensitive buyers in the market and small possibilities to achieve product differentiation.
2. Cost-focus: A cost-focus strategy is a low-cost, narrowly focused market strategy. Firms employing this strategy may focus on particular buyer segment or a particular geographic segment and must locate a niche market that wants or needs and efficient product and is willing to do without the extras in order to pay a lower price for the product. A company’s cost can be reduced by providing little or no service, providing a low-cost method of distribution or producing a no-frills product.
3. Differentiation Strategy: A differentiation strategy involves marketing a unique product to a broad-based market. This type of strategy involves a unique product so, price is not the significan factor. In fact, consumers may be willing to pay a high price for a product that they perceive as different. The product difference may be based on product design, method of distribution, or any aspect of the product (other than price) that is significant to a broad market group of consumers. – company choosing this strategy must develop and maintain a product that is perceived as different enough from the competitor’s products to warrant the asking price.
Errective implementation of differentiation strategy requires an analytical study of customer and needs and preferences in order to offer a unique product. This usually helps business organizations to achieve customer loyalty, which can also serve as an entry barrier for new firms. Several studies have shown that a differentiation strategy is more likely to generate higher profits than a cost-leadership strategy, because differentiation creates stronger entry barriers. However, a cost-leadership strategy is more likely to generate increases in marker share.
4. Focus Differentiation: A differentiation focus strategy is product to a narrow market, often involving a unique product and a unique market. This strategy is viable for a company that can convince consumers that its narrow focus allows it to provide better goods and services than its competitors.
None of these competitive strategies is guaranted to achieve success and some companies that have successfully implemented one of Porter’s generic strategies have found that they could not sustain the strategy. Several risks associated with these strategies are base on evolved market conditions (buyer perceptions, competitors etc).
Recent researchers ague that both cost-leadership and differentiation strategies can be simultaneously achieved. The principal condition for this situation is superior quality, which may lead to increased customer commitment on the one hand and minimized quality costs (through learning effects, economies of scale etc.) on the other.
Q.6 Discuss Porter’s five force model of strategic analysis.
Ans. Porter’s Five Force Model: Before a company enters a market or market segment, the competitive nature or the market or segment is evaluated porter suggests that five forces collectively determine the intensity of competition in an industry.
The five forces are:
- Threat of new entrants.
- Threat of newe substitutes.
- Bargaining power of buyers.
- Bargaining power of suppliers.
- Rivalry of existing firms in the industry.
BY using the model shown in figure a firm can identify the existence and importance of thfe five competitive forces, as well as the effect of each force on the firms success.
- Threat of New Entranrts: The threat of new entrants deals with the ease or difficulty with which new companies can enter an industry. When a new company enters an industry, the competitive climate changes, there is new capacity, more competition for market share and the addition of new.
resource. Entry barriers and exit barriers affect the entrance of new companies into a marketplace If entry barriers (capital requirements, economies of scale, product differentiation, switching coste access to distribution channels, cost of promotion and advertising etc.) are high, a company is less likely to enter a market. The same holds true for exit barriers.
2. Threat of Substitutes: The threat of substitutes affects competition in an industry by placing an artificial ceiling on the prices companies within an industry can charge. A substitute product is one that can satisfy consumer’s needs also targeted by another product; for example, lemonade can be
ssures arising from substitute product increase substituted by a soft drink. Generally, competitive pressures arising from suos as the relative price of substitute products declines and as consumer’s switching costs decrease.
3. Bargaining Power of Buyers: The bargaining power of buyers is affected by the concentration and number of consumers, the differentiation of products, the potential switching costs and the potential of buyers to integrate backwards. If buyers have strong bargaining power in the exchange relationship, competition can be affected in several ways. Powerful buyers bargain for lower prices better product distribution, higher-quality products, as well as other factors that can create greater competition among companies.
4. Bargaining Power of Suppliers: The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are a large number of suppliers, limited substitute raw materials, or increased switching costs. The bargaining power of suppliers is important to industry competition because suppliers can also affect the quality of exchange relationships. Competition may become more intense as powerful suppliers raise prices, reduce services, or reduce the quality of goods or services.
5. Rivalry of Existing Firms in the Industry: The rivalry among existing firms is affected by the competition in industry, it is usually considered as the most powerful of the five competitive forces. In most industries, business organisations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus, may cause retaliation or counter-efforts (e.g. lowering prices, enhancing quality, adding features, providing services, extending warranties and increasing advertising). The nature of competition is often affected by a variety of factors, such as the size and number of competitors, demand changes for the industry’s products, the specificity of assets within the industry, the presence of strong exit barriers and the variety of competitors.
Recently, several researchers have proposed a sixth force that should be added to Porter’s list in order to include a variety of stakeholder groups from the task environment that wield over industry activities. These groups include government, local communities, creditors, trade association, special interest groups and shareholders.
The implementation of strategic planning tools serves a variety of purposes in firms, including the clear definition of an organisation’s purpose and mission and the establishment of a standard hase from which progress can be measured and future actions can be planned. Furthermore, the strategic planning tools should communicate those goals and objectives to the organisation’s constituents. Thus, the worth of these tools, as well as others, is often dependent on the objective insight of those who participate in the planning process. It is also important for those individuals who will implement the strategies to play a role in the strategic planning procesa ateam effort that should allow a variety of inputs and should result in a better overall understanding the strategic planning process. This often requires of the company’s current and future industry position.
0.7. Discuss Porter’s diamond model for strategic analysis.
Ans Porter’s Diamond Model: Michael Porter’s diamond model is an economical framework that provides a platform to analyse who some countries as well as industries with more competitive than others. This model of Porter works to incorporate the theory of his previous models (theory of competitive five force model and theory of competitive advantage.) this model recognizes five major factors: factor conditions, home demand conditions, related and supporting industries, firm strategy-structure and rivalry, government and chance
1. Factor Conditions: This factor referen te used as factors of production such as worker, infrastructure, capital etc., which are relevant for competition in particular industries. These factors can be categorised into human resources such as cost of labour, qualification level etc. material resources such as cost of labour, qualification level etc. material resources such as natural resources, vegetation, space etc. knowledge resources, capital resources and infrastructure. They also include factors like quality or research on
universities, liquidity of stock markets, or deregulation of labour market.
According to Porter a lack of resources often actually helps countries to become actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovate mindset. Such contries are forced to innovate to overcome their problem or scarce resourcse.
(a) Switzerland was the first country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative or high end watches.
(b) Japan has high priced land and so its factory space is at a premium. This leads to just-in-time inventory techniques (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it, they innovated traditional inventory techniques). (c) Sweden has a short building season and high construction costs. These two things created
a need for pre-fabricated houses.
2. Firm Strategy, Structure and Rivalry: This factor describes the conditions in a country that determine how companies are established, organised and managed, as well as the characteristics of domestic, competitive industries. Here cultural aspects play an important role. In different countries, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. According to Porter, the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited. For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms.
According to Porter, strong competition encourages innovation. Competition is quite severe in Japan, where many companies compete dynamically in most industries. International competition is not as strong and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.
3.Home Damand Conditions: This factor describes the situation of home demand for producte and services produced in a country. Home demand conditions have made an impact on the pace and direction fo innovation and product development. According to Porter, home demand is determined by three maior characteristics: the mix of customers needs and wants, their scope and growth rate and the method that send out domestic preferences to foreign markets. One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines. Country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Generally, domestic markets have much higher impact of a firm’s ability to determine customer’s needs than foreign markets do.
4. Related and Supporting Industries: The existence or non-existence of internationally competitive supplying industries and supporting industries. Organisations may use une mucho identify the extent to which they can build on home-based advantages to create competitive advantage in relation to others on a global front. On national level, government can consider the policies that they should follow to establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can encourage such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level.
5. Government and Chance: Government can influence development when interfering market development, unexpected events are described with the factor chance. Government can influence each of the above four factors through a variety of actions such as:
(a) Subsidies to firms, either by providing funds or by supporting their infrastructure.
(b) They should concentrate on specific factor creation.
(c) Educational policies that affect the skill level of workers. (d) Tax codes applicable to corporation, business or property rights.
(e) They should enforce tough standards. For example, establishment of high technical and product standards including environmental regulations.
Distinctly government can control the supply conditions of key production factors, demand conditions in the home market and competition between industries. Government involvement can occur at local, regional, national or supranational level. Chance events are occurrences that are outside of control of an industry. They are important because they create discontinuities in which some gain competitive positions and some lose.