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Long essay:
1) Describe 3 Porter Generic Strategies?
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in
(b) Differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.
2) 5 forces in porter's five forces model.
1. Competitive Rivalry
One important force that Porter describes is the degree of rivalry between existing companies in the market. If there are more companies competing with each other, the resulting competitive pressure will mean that prices, profits and strategy will be driven by it.
One company may end up having little or no power in its own industry if there is a variety of quality products are offered in the market in direct competition with it. Customers have the option of simply moving on to a different company easily. Conversely, in the absence of this rivalry, the company may be able to freely set prices and profit margins without being dictated by what the customer finds attractive.
Competitive rivalry may be higher when:
- Similar sized companies operate in one market
- These companies have similar strategies
- Products on offer have similar features and offer the same benefits
- Growth in the industry is slow
- There are high barriers to exit or low barriers to entry
2. Threat of new Entrants
The competitive threat to a company’s business may not only be from existing players in the market but also from potential new entrants into the market place. If an industry is profitable, or attractive in a long term strategic manner, then it will be attractive to new companies. Unless there are barriers to entry in place, new firms may easily enter the market and change the dynamics of the industry.
The particular dynamics of an industry that restrict entry into it are called barriers to entry The most attractive scenario for a new company is when a potential market has low barriers to exit but high barriers to entry. The economics of any industry will determine the level of difficulty faced when trying to enter this market.
Barriers to entry may stem from things like:
- patents and proprietary knowledge
- access to specialized technology or infrastructure
- economies of scale or government driven obstacles
- high initial investment needed
- high switching costs for consumers, loyal consumers
- difficulty in accessing raw material and difficulty in accessing distribution channels
3. Threat of Substitutes
Within the framework defined by Porter, substitute products are those that exist in another industry but may be used to fulfill the same need. The more substitutes that exist for a product, the larger the company’s competitive environment and the lower the potential for profit. An example of this is that for a boxed juice producer, fresh juice, water and soft drinks are all substitutes though they exist in separate categories.
A high threat of substitutes will impact a company’s ability to set prices that it wants. If a substitute is priced lower or fulfills a need better than it may end up attracting consumers towards it and reduce sales for existing companies.The threat of substitutes is affected by factors such as brand loyalty, switching costs, relative prices, as well as trends and fads.
4. Bargaining Power of Buyers
When buyers have the power to affect prices in an industry, it becomes an important factor to consider for a company.Buyers tend to have power over an industry if they are important to the company, this may be if the industry is such that buyers either buy in bulk, or can easily switch to another supplier. A limited number of strong buyers may be able to exert significant control over a seller. In addition, if a product is similar to its competitor with little or no differentiation, then there are chances that the company may need to let the supplier dictate terms in order to avoid losing the customer.
5. Bargaining Power of Suppliers
Suppliers provide the raw material needed to provide a good or service. This means that there is usually a need to maintain strong steady relationships with suppliers. Depending on the industry dynamics, suppliers may be in the position to dictate terms, set prices and determine availability timelines. Powerful suppliers may be able to increase costs without affecting their own sales volume or reduce quantities that they sell. Supplier may enjoy more power if there are less of them. Costs of switching to an alternate are high, or there are no alternates. A supplier may also be the only provider of a certain raw material. This may be the case in instances where a supplier holds a patent or have proprietary knowledge. Because of a lack of alternates, they may be able to withhold quantities or increase prices without losing sales.
How to use the model?
The Porter’s five forces model is often used as a starting point to evaluate a company’s positionin its industry and to assess its level of competitiveness. Though this framework is generic and applicable to any industry, it is only effective if it is used in a specific context that applies directly to the company undertaking the evaluation.
Porter also emphasized the importance of using this model at more basic industry level. If an organization operates in different industries, then it must develop a separate five forces model for each of its industries.
3) Explain how technology can develop a competitive advantages for each force in five forces model?
Traditional competitors
- All firms share market space with competitors who are continuously devising news product , services , efficiencies , and switching cost.
New market entrants
- New companies have new equipment , younger workers , but little brand recognition.
Substitute product and services
- Substitute costumers might use in prices become too high , for example iTunes substitute for CDs.
Customers
- Customer can easily switch to competitor's products
- Force businesses to compete on price alone in transparent marketplace.
Suppliers
- Market power of suppliers when firm cannot raise as fast as suppliers.
