A critical review of Porters competitive strategy

A critical review of ostiariuss combative strategyTitle A critical review of doorman&aposs agonistical strategy in relation to his five forces model in comparison to other billets.All men flowerpot see these tactics whereby I conquer, still what none tail end see is the strategy out of which victory is evolved. Sun Tzu, Chinese GeneralIntroductionStrategy originates from military and warf are and according to Stephen Cummings the word itself has its origins from the classic word stratos which meant army (Cummings, 1993, pp 133 135). A number of ancient generals and scholars deem defined the character of strategy. Some famous ones are Sun Tzu, the Chinese general in the 2nd century BC and Sextus Frontinus, the Roman general in the first century AD. Frontinus has defined strategy as everything achieved by a commander, be it characterised by foresight, advantage, enterprise or resolution (Cummings, 1993, pp 133 135). Another Greek military commander Xenophon very aptly define d strategy as knowing the business which you put up to carry out (Cummings, 1993, pp 133 135).The importance of clear intent, seeking advantage over adversaries, objectives of survival and expansion, and utilisation of given resources with inherent strengths and weaknesses in a manner that successfully leverages the advantage, are as relevant to a business organisation as to military. Aligning resources to objectives to gain advantage to maximum limits requires strategic thinking. This process evoke be either logical or creative. Strategy jumpation itself can be deliberate or emergent.Strategy operates at various levels and contexts. It can operate in a combination of business level, corporate level or network level in pains context, organisational context or international context (Wit and Meyer, 2004, p.14). thither are diverse models on strategy and strategic management. However all models focus on the importance of aligning the dynamics of a business governing body to the d ynamics of its environment for meeting its long-term objectives. The goal of strategic management is to gain militant advantage.According to Wit and Meyer, a business system is the bod of resources (inputs), activities (throughput) and product/service offering (output) and this constellation is the cornerstone of gaining competitive advantage (Wit and Meyer, 2004 p. 231).There are two broad models on business level strategy. wizard involves market orientation and the other is focussed on resources. One revolves around the outside-in position, while the other is inside-out perspective. Both deal with the ability of a form to acquire competitive advantage (See Appendix I and II).One much(prenominal) prominent strategy model is Michael Porters Five Forces model. This assignment critically evaluates Porters Five Forces model and compares it with alternative models.Sustainable Competitive AdvantageIt is important for competitive advantage to be sustainable. But what exactly is compe titive advantage and what makes it sustainable?According to Wits and Meyer, a firms has a competitive advantage when it has the means to edge out rivals when vying for the favour of customers (Wit and Meyer, 2004 p. 244). Michael Porter argues that competitive advantage is sustainable if it cannot be copied, substituted or eroded by the actions of rivals, and is not made redundant by developments in the environment (Porter, 1980). Wits and Meyer visualize that sustainability is determined by competitive defendability and environmental consonance.Porters Five Forces ModelThe five forces model involves market orientation and is an outside-in perspective. The model proposes that the starting decimal point in determining an appropriate competitive strategy is to transform two dynamic factors, (1) the long-term gainfulness that determines the attractiveness of the persistence in which the firm operates and (2) the fructify that a firm occupies within an industry vis--vis its compet itors.Porter concludes that neither all industries are equal in attractiveness, nor are all firms equal in achieving levels of profitability with in their respective industry. But these positions change and then cannot fully determine competitive strategy. On the other hand, a firm can actually find both (1) the industry attractiveness as well as (2) its competitive position. By understanding of what he calls as the rules of competition a firm can create an effective competitive strategy that can alter the balance in its favour.According to Porter, five competitive forces determine the rules of competition. These areThe barriers to entry for new-fashioned competitorsThe threat of substitutesThe bargaining military unit of suppliersThe bargaining power of buyersThe magnitude of existing competitionAs can be understood that all the above forces have a direct or an indirect impact upon how the damages and the greet that make up business operations within the industry. Whats more, the level of investment necessary by a new comer to get into the industry is also portrayed by these forces. The intensity as well as the importance of these forces varies from industry to industry. But irrespective of the nature of industry the collective strength of these forces determines the ability of firms in an industry to earn, on average, rates of return on investment in excess of cost of capital (Porter, 1985). For example, for an industry with low entry barriers, the magnitude of competition will be amplyer. Similarly, availability of substitutes deflates the price within the industry. Bargaining power of buyers brings knock off prices and as a consequence the margins for firms within the industry. Bargaining power of the suppliers has a direct impact on cost and availability of raw materials. For an industry, which is intensely competitive, the margins once again come under pressure. The UK supermarkets are clearly operating in an intensely competitive industry albei t with a authorized degree of restrainer over their suppliers. However, this is not entirely true for the airlines industry, which is not only highly competitive, but also has a low control over its suppliers, especially for its just about important raw material the petrol prices. Therefore the pressure is on both ends the cost as well as the price. Each industry has certain economic and technical features that make up its structure. Industry structure is susceptible to change over a period of time. It is important for a firm to understand the factors that could change the industry structure. It is this understanding that can enable a firm to build an effective competitive strategy that can alter the structure of an industry. Porter argues that a successful strategy is the one that can alter the rules of competition to create a position of advantage for the firm. He states that the merit of the five-forces framework lies in the fact that it allows a firm to see through the comp lexity and pinpoint those factors that are critical to competition in its industry, as well as to key out those strategic innovations that would improve the industrys and its own profitability (Porter, 1985).A strategy has a potential of altering the industry structure in a negative manner as well. It can bring about price sensitivity, competitive backlash or lowering of barriers that protect the industry and ensure its profitability. A good example of this is the low-cost airlines where pricing is treated as the strategy.Smart companies take a long-term perspective while making strategic choices, so as not to destroy the industry structure. Industry leaders whose strategic choices can easily alter the industry structure, due to their size and bargaining power, are sensitive to the fact that an altered structure can have a negative impact on the firms own growth therefore a leader unavoidably to show an approach that protects the industry structure, rather than destroy it.The im portance of industry structureTwo key areas are affected by industry structure. These areBuyer needs, andSupply/demand balanceBuyer needs Serious firms treat the task of satisfying buyer needs as their core objective. The effort is al shipway to create tax for their customers. However, industry structure determines how profitable this effort turns out to be. For instance, two industries that create an equally high value for their customers may have different returns. Entry barriers, threat of substitutes, bargaining power of buyers and suppliers as well as intensity of competition, all these forces influence industry profitability vis--vis customer value creation.Supply/demand balance This also has an impact on the industry profitability and at the same time is influenced by industry structure in the long term. Entry and exit barriers exert influence as also capacities. For example, in some industries, even a puny excess capacity can lead to price wars and therefore lower the prof itability. This is being witnessed in the airlines industry.Competitive strategiesThe objective of understanding industry structure lies in the need to build a sustainable competitive strategy which results in a position of advantage relative to its competitors. The starting point is in value chain analysis that helps a firm to determine the activities which contribute to creating superior value. The goal is to achieve profitability higher than the industry average.Porter argues that based on this analysis, a firm can have one of the three competitive strategiesCost leadership by which a firm leverages its scale to bring down the cost of doing business and then passes the benefit to its customers. This is achievable only for firms that display one or more of such features (1) they operate on a extended scale, serving multiple segments and perhaps even operating in complementary industries (2) have proprietary technology (3) have preferential access to raw materials (Porter, 1985) . Whats more, cost leadership advantage is not at the expense of differentiation and is pursued by seeking cost advantage from multiple operational areas such as marketing, finance, human resources, in addition to performance and supply-chain. Porter states that a cost leader must achieve parity or proximity in the basis of differentiation relative to its competitors o be an above-average performer, even though it relies on cost-leadership for its competitive advantage (Porter, 1985). An example is Tesco. Differentiation This strategy is aimed at achieving singularity on attributes that determine consumer preference. According to Porter, this strategy can emerge from product differentiation, distribution system, and/or marketing approach. This allows a firm to charge premium price and can result in a loyal customer base. However care must be taken that the premium price is more than the cost of differentiation as well as is sustainable in long run. Once again, pursuing this strate gy does not mean that a firm can ignore the cost element, which is a vital contributor to its bottom-line. An example of this could be Waitrose.Focus strategies cost focus / differentiation focus These strategic choices are for firms with reduce rear segment. These are achievable only if the target segments 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 (Porter, 1985).These are generic strategies across industries and the manner in which these are executed also varies for different industries. internet and the Industry StructureIn recent times, Michael Porters five forces model has expanded in scope to include internet and its influence industries. In his article Strategy and the Internet published in Harvard Business Review in 2001, Porter argues that Internet tends to influence and alter industry structures in ways to dampen overall profitability, and it has a levelling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained. He states that the seemingly low cost of doing online business is actually artificially depressed as it does not account for many key activities such as inventory and warehousing which are needed to deliver value to the customer. But he also determines that internet has increased the possibilities for firms to establish distinctive strategic positionings that tralatitious information technology tools could not offer. He concludes that including internet offers a new dimension to a firms operations and is unavoidable as a tool in carrying out business. But if real economic value is to be created then internet initiatives must be integrated with the traditional competitive strategy as internet per se will rarely be a competitive advantage (Porter, 2001). Alternative model Strategy from inside-outThis perspective is exactly opposite to Michael Porte rs Five Forces model. Models based on this perspective are focussed on internal strengths and capabilities for devising a competitive strategy rather than scouring external opportunities. The starting point is an assessment of firms resources or competences that have been acquired over a period of time. Whats more, if one such resource is not existing within, then how to acquire it? Market positioning is sought in alignment with a firms resource based strategy. Selected market positions must leverage the existing resource base, not ignore it.for success resources should be leading and markets following (Wit and Meyer, 2004, p. 252).Two main models have been proposed by leading practitioners of managementCompetence based view andCapabilities based viewThis viewpoint does not consider just physical resources, but also intangible resources or competences that get uniquely composed within an organisation during its operational span. These could vary from competence in Internet-driven s upply-chain management to offline quality process. Firms seeking leadership position make sure that its core competences or capabilities are upgraded on a periodic basis so that competitive advantage is maintained. This is termed as the dynamic capabilities view (Teece, Pisano and Shuen, 1997). It is emphasised that a firm needs to take a long-term view of its competences and take all actions to strengthen these competences. This perspective does not advocate an ad-hoc approach that results in building up of unrelated competences.On the flip side, the challenge is in dismantling of existing competences and building of new competences as market demand changes. One good example of this is the mass-production mastered by American automobile companies could not be transformed swiftly into lean production practiced by Japanese firms such as Toyota, leading to erosion of market share and competitive advantage for giants such as General Motors and Ford. companies become that that their co re competences can be their core rigidities, locking them out of new opportunities (Leonard-Barton, 1995).The perspective is further refined by Miller, Eisenstat and Foote (2002) as they propose the terms asymmetries and efficiency configurations. According to them, a firms asymmetries are its skills, knowledge, processes relationships, proper ties, or outputs an organisation possesses or produces that its motivated competitors are unlikely to acquire or copy in a cost or time-effective way (Miller et al 2002). However these can be of disadvantage to a firm unless carefully fostered and tell.by leveraging them via an appropriate market focus, companies may be able to aspire realistically to attain competitive advantage (Miller et al 2002). This is the essence of efficacy configuration which is a system of reinforcing elements incorporating core capabilities and the organisational design infrastructures (Miller et al 2002). They argue that the development process of inside-out str ategy is emergent and iterative in nature and is characterised by trial and error. Three imperatives suggested by them for deriving sustainable competitive advantage out of an capabilities model are that firms need to (1) discover asymmetries and their potential (2) create capability configurations by design and (3) pursue market opportunities that build on and leverage capabilities (Miller et al 2002). ConclusionBoth perspectives have their supporters. It is for a firm to decide the perspective that it wants to take for building its competitive strategy. It is suggested that the inside-out perspective has more depth. The argument is that although market-orientation and ability to capitalise on external opportunities are critical factors in a firms success, both (1) market-sensing and (2) customer-linking are distinctive capabilities that get cultivated within a firm over a period of time (Day, 1994). At the same time, Barney (1991) argues that resources become the foundation of co mpetitive advantage only once they meet four conditions. They should be (1) valuable, (2) rare, (3) difficult to imitate, and (4) difficult to substitute (Barney, 1991).Appendix I Outside-in versus inside-out perspectiveSource Wit and Meyer, 2004, p.255Appendix II ReferencesBarney, J.B. (1991) Firm Resources and Sustained Competitive Advantage Journal of Management, Vol. 17, No. 1, 1991, pp.99-120Cummings, S. (1993) Brief Case The kickoff Strategists Long Range Planning, Vol. 26, No. 3, June pp. 133 135Day, George S. (1994) The Capabilities of Market-Driven Organisations Journal of Marketing, October 1994, Vol. 58, No. 4, pp. 37-52Leonard-Barton, D. (1995) Wellsprings of Knowledge Harvard Business School entreat, Boston, MAMiller, Danny Eisenstat, Russel and Foote, Nathaniel (2002) Strategy from the inside out building capability-creating organisations atomic number 20 Management Review, Vol. 33, No. 3Porter, M.E. (1980) Competitive Strategy Techniques for Analysing Industries a nd Competitors New York The Free PressPorter, M.E. (1985) Competitive Advantage Creating and Sustaining Superior Performance New York The Free PressPorter, M.E. (1996) What is Strategy Harvard Business Review, Vol. 74, No. 6, November-December, pp. 61-78 Porter, M.E. (2001) Internet and Strategy Harvard Business Review, March accessed from Harvard Business Publishing online http//www.hbsp.harvard.edu/hbsp/index.jspPrahalad, C.K. and Hamel, G. (1990) The Core Competence of the Corporation Harvard Business Review, Vol. 68, No. 3, May-June, pp. 79-91Teece, D.J., Pisano, G. and Shuen, A. (1997) active Capabilities and Strategic Management Strategic Management Journal, Vol. 18, No. 7, August, pp. 509-533Wit, Bob De and Meyer, Ron (2008) Strategy Process, Content, Context An International Perspective Thomson, 4th EditionBrief 211514Page 1 of 8