|
Competitive
Strategy
Competitive Strategy: Techniques for Analyzing Industries and Competitors was written by Michael E. Porter and published by New York: Free Press in 1980. Competitive Advantage by Michael E. Porter was an interesting look into the world of business strategy and competition. There were timeless ideas and suggestions for positioning a business within an industry. Positioning should occur after thorough analysis of the industry’s structure, evolutionary maturity and the forces acting upon the industry as a whole. The book also provides an analytical framework for determining attractive industries to consider as a new entrant and the positioning possibilities within an industry. The book was published in 1980 just as the “technological revolution” was becoming mainstream. The book’s weakness is it’s lack of acknowledgement of the impact of technological advances on industries and the increasing pace of change. Porter wrote in a time before globalization of many industries. Although he addressed global markets and their impact on some industries, he did not predict the tremendous impacts that technology and globalization would have on alomst all industries. The impact of a global economy is not considered in many of the concepts advanced by Porter. Political influence in regulation of industries and commerce is not given adequate consideration in Porter’s Competitive Advantage. Structural Analysis of an Industry The introductory chapters of the book lead the reader through the analysis of an industry and the state of competition within the chosen industry. It provides a framework for analysis with the “underpinning of this framework the analysis of the five competitive forces acting on an industry and their strategic implications.” (1) Porter espouses that it is these five forces that determine the industry’s profit potential and the strength of competition within the industry. The five forces are: bargaining power of suppliers, bargaining power of buyers, threats of substitute products, rivals within the industry and threats of potential new entrants to the industry. These forces are dynamic and have varying degrees of influence in a specific industry. The framework allows for rapid analysis of critical factors based on the five forces affecting competition within the chosen industry. Once the industry as a whole is analyzed, each firm can evaluate its own strengths and weaknesses and define a defendable position based on an overall strategy. The framework and the appropriate analysis of the industry provide information to develop strategy to maximize returns and profits. Porter developed three “Generic Strategic Approaches” firms may utilize to gain competitive advantage within an industry. “The first strategy is to achieve overall cost leadership in an industry through a set of functional policies aimed at the basic objective.” (2) The focus of these policies must be to provide the product for sale at the lowest possible cost to the customer while minimizing production costs to the producer. This strategy’s ultimate goal is to gain profitability through increased market share. “The second generic strategy is one of differentiating the product offering of the firm, creating something that is perceived industry wide as being unique.” (3) This differentiation of a product focuses on the attributes of the product more than on the procedural operations of the firm. Greater risk exists of missing market share through differentiation. By differentiating a product, a firm deliberately forgoes a portion of the market by developing a perception of exclusivity. This strategy may allow firms to set higher product prices but risks both overall economic downturns and missing the market by producing a product that does not have the currently desired attributes. Porter’s third generic strategy is broadly defined as “focus.” Any firm choosing this “generic strategy is focusing on a particular buyer group, segment of the product line or geographic market.” (4) The first two strategies are developed around industry wide applications while the third strategy develops focus on “serving a particular target very well.” (5) This strategy carries many of the same risks of the differentiation strategy in terms of missing the market and economic influences on a particular portion of the market. Analysis of an industry and determination of strategy is always accomplished in a dynamic environment. The five forces of Porter are part of the dynamic process of industry evolution. As industries mature, the impact of the five forces varies and the application of generic strategies must be re-evaluated. There are many additional factors that are crucial in determining the strategic context within which a firm competes. Some of these factors are structural changes in adjacent industries, diffusion of proprietary knowledge, product innovation, buyers knowledge expansion and changes to government policies. Porter’s concepts of industry evolution incorporate many of these factors. He also introduces the concept of “generic industry environments.” (6) These generic environments include fragmented industries, emerging industries, industries transitioning to maturity and declining industries. The latter three generic environments are likened to the product life cycle “S curve.” Porter indicates that most industries follow a similar cycle of emergence, maturity and decline. This appears to be a weakness inherent in Competitive Advantage as written by Porter. Having been written prior to widespread saturation of technology and market globalization, the book does not address the issues accompanying digitalization, globalization and deregulation. Although the overall concepts of industry structure and development Porter advances may be applicable, many of the strategies he developed may not be effectively implemented by a firm due to the rapid pace of change in technology and worldwide politics. Porter did recognize the influence of globalization and technology evident at the time, but he did not accurately anticipate the impacts of these issues on industries of the future. The generic environment of a fragmented industry has current applicability to many industries and Porter’s suggested strategies for positioning a firm within a fragmented industry are still appropriate. “These differing environments reflect fundamental differences in industry concentration, state of maturity and exposure to international competition.” (7) Once Porter developed the analysis of the industry structure and evolution and defined the five forces and three generic strategies, the remainder of the book focused on specific strategic decisions facing firms within an industry. Some of the choices available to firms seeking to gain competitive advantage are vertical integration, capacity expansion and entry into new businesses. The economies of these issues are discussed and the variations on each strategic decision are explored. Vertical integration may proceed in a forward or backward direction and may offer great economic benefits. Capacity expansion offers great potential if the firm has accurately analyzed its position and developed appropriate strategies for the future. However, it normally limits a firm in terms of future flexibility. Firms often invest heavily in capacity expansion and may not have adequate financial reserves after an expansion to maintain operations at a level necessary to capture full value from the expansion. A firm may also be locked into production after a capacity expansion and find that they overestimated the market. The profit implications for this lack of flexibility can be enormous. Entering a new industry is a strategic decision that must be carefully considered. Lack of experience and knowledge within an industry can be compensated for through recruitment of these attributes, but often the price is high and previous experience may also limit future innovation. Competitive Advantage offers managers and investors a tool to assist analysis of an industry and a firms’ positioning within an industry. The generic concepts developed are applicable to most industries. Its greatest benefit may be that it encourages analysis of an entire industry rather than an individual firm or segment of an industry. The broader perspective offered is beneficial in developing current and future strategies of any firm. Reflections and Applications of Porter’s Principles Although I work for the federal government (and have for years beyond count), Porter offers me a good basis for analyzing the two major industries that I interact with on a daily basis, agriculture and construction. Agriculture in particular has experienced a major evolutionary shift within the last ten years. The construction industry had made the evolutionary leap approximately twenty years ago. Both industries are geographically fragmented and segmented by size. They have several large, major firms within a geographical region. These firms compete primarily with each other and to a lesser extent with large national firms and small local firms. There is fierce competition among these few large firms. The larger group of smaller firms also experiences great competition among themselves. Agriculture has seen a recent trend toward vertical integration. This has been driven by many factors. It is now clearer to me that these factors are part of the evolutionary processes explained in Competitive Advantage. Differentiation is not an option for most agricultural products. There are examples of success in differentiating an agricultural product such as Bob Evan’s pork sausage but such differentiation normally requires great inputs of capital to develop an exclusive image. Focusing on a particular market segment has little success when applied to agricultural products. However, focusing on a particular geographical market is commonplace in the agricultural products marketplace. Most milk producers have limited geographical market range and agricultural cooperatives are almost exclusively regionally based. The industry’s drive toward vertical integration has been led by those firms devoted to a strategy of overall cost leadership within their geographical region. There are now dairy farms with herds that are 1000 times the size of the typical herd size ten years ago. These firms dominate many regional markets. These larger firms have also led the vertical integration trend by owning the land to produce the crops, owning the buildings and animals, owning the trucks to transport the milk, owning the dairies that process that milk into various dairy products and owning the distribution channels from the dairy. Several firms also have expanded into retail outlets to sell their products. Sugar Creek Farms in the upstate New York area is a good example of this type of vertical integration driven by an overall cost leadership strategy. Currently, the pork industry segment of the agricultural industry is experiencing a tremendous push toward vertical integration. This strategy has caught the attention of policy makers at both the national and state levels across the country. The threat of increased regulation within the livestock industry The construction industry has progressed along the evolutionary line further than the agricultural industry. The overall industry is highly fragmented both geographically and by type of construction. There are few national firms in any type of construction (housing, road, general). The industry is also segmented by size of firm. There are few national firms, many regional firms and hundreds of smaller local firms in all regions of the country. There are some multi-national firms that compete on a limited basis within the U.S. This industry is in a mature state. There is little movement among firms within the industry. Porter would refer to the industry as an oligopoly since there is often implicit cooperation between competitors on all levels. There is innovation and technological progress within the industry that is advanced by the firms having the security of known markets and their place within the market. Strategy of the larger firms often consists of increasing barriers to entry and leveraging power from buyers and suppliers. The industry maturity is a reflection of the state of the national infrastructure. The United States has a well developed infrastructure. Most large construction projects have been built and current projects either repair existing structures or mimic those already built. Large firms wishing to increase in size or capabilities must look to the multi-national market for expansion. Small firms compete almost exclusively on the basis of low cost. Firms normally submit bids for small to moderately sized projects and the lowest cost provider is typically selected. With the benefit
of Porter’s insight, I now understand the forces acting upon the farmers
and contractors that I work with on a daily basis. The concept of
“taking value from the buyers and/or suppliers” has particular significance
in the agricultural arena. Farmers typically receive between 5% and
10% of the retail value of a food product as their pay for their hard work.
There are several “farmers unions”
organizing around the country to address this problem. One result
has been the vertical integration of several segments of the industry.
The construction industry illustrates the “cooperation” that often exists
in oligopolies. Several contractors have made statements to me that
reflect their reluctance to bid on projects that are “in their competitors
backyard.” They are reacting to the nature of a mature oligopoly.
Porter's work provides me with background knowledge of the nature of competition
within industries and how firms position themselves within an industry.
Additional Sites Farm
Bureau
References
|
