Michael Porter is one of the gurus of contemporary management. In his book Competitive Advantage, he transformed theory and practice of business strategy teachings around the world. The book is brilliant and incredibly simple, so reading is a must. In it, Porter analyzes the complexity of the new competitive landscape in its five main forces. Also, it introduces a simple model with three generic strategies (low cost, differentiation, and focus) that help leaders around the world design their strategic positioning. Porter models help business managers of all sizes predict competitive behavior and master the art of competitive intelligence. The book is the foundation of several later works on topics such as competition and differentiation, bringing a disciplined approach to helping companies win. Read it carefully and lovingly, as this book will help you rethink the whole strategy of your business or new business that you intend to start. Have fun with Michael Porter.
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The 5 Forces That Move The Competition:
In the same market, companies always compete for customer revenues and to achieve a dominant position. Therefore, the competence of competitive intelligence has become essential for companies seeking to win in an increasingly competitive and challenging market. Porter explains that the movements of a competitive market are guided by five fundamental forces, they are:
The threat of new entrants: The threat of entry occurs when new entrants arise to compete for a piece of the market within a segment (market share). New entrants stimulate competition and can be a problem for an established company. The threat of entry may be reduced depending on the entry barriers that exist within an industry. For example, if a company is in a market that is highly regulated by the government, being able to adhere to this complex regulation is an entry barrier that, to be overcome, will require an investment of resources and time.
The intensity of rivalry among competitors: The greater the struggle between existing companies to achieve greater market penetration (market share), the greater the difficulty of a competitive strategy. In this case, the battle takes place in several aspects: advertising money, competitions for price, research and development and quality of service. For example, if a company lowers the final prices of its product to the consumer to gain more market share, other companies need to respond to this initiative to ensure its current penetration. That can, for example, sacrifice business profitability and cause industry-wide problems;
Substitute goods pressure: When products from other segments begin to compete for customers and their money, substitution can occur, changing the dynamics of the market. When, for example, the smartphone begins to impact the sale of laptops, we have a classic example of pressure from substitute products;
Buyers Bargaining power: The more bargaining power the buyer has, the lower the profits of a certain segment. It can be done through the demand for lower prices, more quality and more options for customer choice.
Suppliers Bargaining power: The greater the bargaining power of suppliers to raise prices or reduce the quality of goods and services offered, the less control a company has over its market penetration and profitability. By understanding these five forces, it is possible to understand the competitive dynamics of any market and thus plan the strategy according to what it asks for.
The 3 Types Of Competitive Strategies:
Once you have understood Porter’s five forces, it’s time to understand the generic competitive strategies for you to create the one for your company. In general, competitive strategies follow three paths:
Cost leadership: In this scenario, your business must have the lowest operating costs and costs per commodity in its segment. It requires constant focus on cost reduction across all areas of the business, to ensure you have competitive pricing. When your positioning is based on the lowest price, you defend yourself from the risk of having a small portfolio of customers, and thus your dependence on your customers is diluted with a high volume of buyers. An example of a company that has adopted this model is Ford. Its founder, Henry Ford, became known for the invention of the production line assembly that allowed mass production at low cost. Ford said you could have a Ford of any color, as long as it was black, to keep its process and its costs under control. One of the challenges of this model is the lack of customization and limitation in the portfolio of products offered;
Differentiation: In a strategy of differentiation, your company needs to have a unique product perceived by the market with superiority. Your products can be differentiated by design, by creating your brand, by your customer service and sales model, or even by your unique technologies. One car manufacturer that invested in differentiation was Mercedes Benz, which was designed as synonymous with luxury vehicles unparalleled compared to the rest of the other manufacturers. Differentiation acts by reducing the alternatives of consumer buying, and this causes that one can charge more for the products, thus generating more profits. The main challenges of this model are cost structures that are usually more expensive since the customer seeking differentiation requires greater investments in research and development of new technologies, marketing, and design (Apple is also an excellent example of differentiation, both in design marketing);
Focus on a particular segment, product, or market: The ultimate competitive strategy is to choose a specific buyer profile, geographical area, or product niche that allows you to achieve scale gains. Pepsi, for example, is a case of a company that has managed to restructure itself by adopting a strategic focus. She cut her product lines to focus on only two segments: Drinks (Pepsi Cola) and snacks, snacks (Frito-Lay). This focus has allowed the company to grow to become the second largest packaged food company in the world regarding revenues.
Analyze Your Position In The Market Before The Competition
To predict competition movements and strategically plan based on their differences, Michael Porter proposed a model of analysis that has become one of the most popular tools for contemporary management. It is also based on the understanding of the market by four pillars:
Evaluating Future Goals: The first step is to understand the strategic objectives of your company and competitors. By having clarity about this, it is simpler to predict whether your competitors are comfortable in their current positions or if you are a threat. Also, knowing the goals of your competitors helps you evaluate potential collision points in the future.
Evaluating Assumptions: You have to understand your competitors’ perceptions about you and other market players. Understanding what they expect from you can help you create plans and derive a better competitive strategy. They may find you want to dominate a particular segment, fight for prices, or invest in differentiation.
Evaluating current strategies: You also need to be clear about your competitors’ current strategies and understand what they are doing right now. That helps you anticipate what is possible and what next strategic steps you can expect.
Capacity Assessment: In addition to strategy, you need to understand a competitor’s ability to execute a strategy, based on their strengths and weaknesses, in order to be able to foresee the next steps of the competition. Although at first, this analysis seems challenging, Porter teaches how to get this information in the market.
Read Marketing Signs To Create Your Strategy. Send Signals To Gain Competitive Advantage
At all times, the market and the competitors give signs of their strategy and the good manager must be able to read these signals accurately. When your competitor announces new investments, products, market expansions or new features, they do so to communicate a message to consumers and in some cases to confuse competition. Therefore, it is essential to be aware of all this information and from them try to anticipate if your competitors will give you a spin that can catch you by surprise. Large companies like Apple announce new products even before they are available on the market. Rumors are also formed throughout the specialized press. These signs cause euphoria in the market, after all, customers tend to expect a new improved product before making a purchase. If you understand the dynamics of these signals, you can also use them to confuse competition or respond to potential threats.
New Markets Bring New Challenges
At all times, new industries and markets are emerging based on innovations introduced to the consumer. In a new industry, it takes longer for the rules of competition to be clear, and this gives companies a range of experimental competitive strategies. In emerging industries, companies have only limited information on competitors, most often coming only from customer reviews and trading conditions. However, there are some things we can know for sure about emerging markets. They have high upfront costs and businesses need capital to establish themselves. In a new market, the volume of production is small, and this generates high costs, besides the need for training of inexperienced employees. In new markets, gains come with scale, and you have to understand how companies are pursuing it. Another challenge for companies is to find their first customers and convince them, often educating them about the potential of the product or service, which tends to have high costs associated with marketing.
Knowing When To Exit
Eventually, products will be commoditized, and the profits of a certain line will always tend to shrink over time. Companies go into decline when a substitute product arises, usually through technological or sociological innovation. Products evolve, and the consumer’s need also changes by stride, making what he previously needed superfluous. An example of an industry that has undergone a sociological shift is the cigarette industry, once the harm of the product has been discovered.
When a segment is declining, traditional companies tend not to want to abandon it, as there are also exit barriers. Companies rely on specialized assets in factories, labor, and even marketing. Therefore, in some cases, maintaining production may be more profitable than discontinuing a product line. Fixed exit costs, such as long-term contracts with suppliers and equipment rentals, can make it difficult for a company to exit a specific market.
Moreover, there is the question of interrelationship. A company may be so integrated into a larger strategy that abandoning a product line could impact the strategy as a whole or erase its own identity. To understand how to overcome exit barriers, one must develop leadership and become the only surviving company in that segment. With dominance, it is possible to discontinue products without being threatened. Another path is a niche strategy, finding a section that remains stable and then building the position in this segment. The last strategy is the quick sell-out, which is based on selling the business at the beginning of its decline, which maximizes the value of the company’s assets and increases the gains from this sale.
Today, more and more companies are competing globally, offering their services and products worldwide. Multinational companies, however, have even greater challenges when we talk about competitive strategies. They have far more competitors and market particularities than a locally operating company. When talking about a global market, each country has different laws for work, import, management practices and various other particularities. It may be difficult for a company to understand new markets and adapt to them. It is also crucial to know the competitive landscape of each country of operation, understanding the local competitors. Many foreign governments, for example, offer public financing to national companies or have protectionist rules that change the dynamics of that market. Therefore, it is crucial to understand the political and cultural context of the market to win. Some common strategies to win in a global market are:
Emphasize relations with market governments to reduce barriers to global competition, such as import or export duties;
Concentrate on a specific segment and compete globally for it. This segment should be the one that has the lowest barriers to global competition so that the company can achieve a competitive advantage over those that try to compete across the industry without adopting a segmentation;
Look for countries where regulation is complex, moving away from outside companies. In this case, it is necessary to drastically adapt their products so that they fit the regulation and preferences of that market, which creates a great differentiation, making it a competitive advantage.
Integrate Your Business Vertically
To increase efficiency and reduce costs, one of the best alternatives is to adopt vertical integration. It relies on making as many processes as possible internally, without relying on suppliers or any kind of outsourcing, covering everything from production to assembly, distribution and sales. This generates large savings and makes the company simplify many before-cost processes. On the other hand, vertical integration also implies strategic costs. Technological changes may create situations in which the internal supplier provides a lower product or service that is available on the market. For this reason, great care must be taken in designing your vertical integration plan, always given factors not exclusively related to the efficiency gains that it may entail. You do not want to have an internal vendor become obsolete as this can compromise the quality of your products and services.
This book is a masterpiece of contemporary management. Understanding how your company positions itself in the marketplace is challenging, but understanding Porter’s five forces make it much clearer to know what’s happening on the market and what changes can affect your life. Also, before designing any differentiation strategy, it is crucial to understand the main generic strategies to plan your position then. A good competitive strategy is based on understanding every market dynamics and being always informed so that your company wins. Go ahead, buy this book and put it on your bookshelf to always consult!