Michael Porter and Strategy

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Michael Porter and Strategy

• ManEc 300
• Prof. Bryson

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Michael E. Porters New Approach
Who is Michael Porter?
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Michael E. Porters 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

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The Five Competitive Forces

• How many can we remember?
• There were two threats, two bargaining powers,
  and some jockeying.

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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 current contestants.

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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?

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Porter and Strategy Today

• Value Creation is finding an approach, a
  cost-reduction technique, or some manner
  permitting the firm to compete effectively.

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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?

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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 its own
  industry and particular situation.
• What makes them vary?
• The essence of strategy formulation is coping
  with the specific kinds of competition
  experienced.

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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 selling products.

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Establishing a Strategic Agenda

• In Brickley, Smith, and Zimmerman, strategy and
  _________ (what else) are the key determinants of
  a firms success?

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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?

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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), the
  desire to gain market share, and often
  substantial resources.

S1
S2
P1
P2
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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?

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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

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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.

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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.

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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.
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Powerful Suppliers and Buyers

• What determines the power of each important
  supplier or buyer group a strategic firm must
  work with?

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Powerful Suppliers and Buyers

• That power depends on the characteristics of the
  suppliers or buyers market situation and
• on the relative importance of its sales or
  purchases 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.
• 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.

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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 normal
  times 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 competition in their
  industries and causes price reduction or
  performance improvement.

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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?

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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.

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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.

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Jockeying for Position

• When fixed costs are high or the product is
  perishable, there is strong temptation to cut
  prices.

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Formulation of Strategy

• 1. Positioning the company so that its
  capabilities provide the best defense against the
  competitive force.

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Formulation of Strategy

• 2. Influencing the balance of the forces through
  strategic moves, thereby improving the company's
  position.

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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.217-220) 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-head
  opponents, 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.