Terms in this set (7)

In the years that followed, Michael Porter's explication of the five forces that determine the long-run profitability of any industry has shaped a generation of academic research and business practice.

In this article, Porter undertakes a thorough reaffirmation and extension of his classic work of strategy formulation, which includes substantial new sections showing how to put the five forces analysis into practice.

The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. That value may be drained away through the rivalry among existing competitors, of course, but it can also be bargained away through the power of suppliers or the power of customers or be constrained by the threat of new entrants or the threat of substitutes. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation.

In exploring the implications of the five forces framework, Porter explains why a fast-growing industry is not always a profitable one, how eliminating today's competitors through mergers and acquisitions can reduce an industry's profit potential, how government policies play a role by changing the relative strength of the forces, and how to use the forces to understand complements. He then shows how a company can influence the key forces in its industry to create a more favorable structure for itself or to expand the pie altogether.

The five forces reveal why industry profitability is what it is. Only by understanding them can a company incorporate industry conditions into strategy.
What gives your company a competitive edge is strategically valuable resources (the ones enabling enterprise to perform activities better or more cheaply than rivals). These can be physical assets (a prime location), intangible assets (a strong brand), or capabilities (a brilliant manufacturing process). For example, Japanese auto companies have consistently excelled through their capabilities in lean manufacturing.

Strategically valuable resources have five characteristics:
1) They're difficult for rivals to copy. Some resources are hard for rivals to copy because they're physically unique; for example, a desirable real estate location. Others must be built over time, such as Gerber's brand name for baby food.
2) They depreciate slowly. Disney's brand name was so strong that it survived almost two decades of benign neglect between Walt Disney's death in 1966 and the installation of Michael D. Eisner and his management team in 1984.
3) Your company—not employees, suppliers, or customers— controls their value. Your company does not lose a critical resource when a key employee leaves.
4) They can't be easily substituted for. Because of easy substitution, the steel industry lost a major market in beer cans to aluminium can makers.
5) They're superior to similar resources your competitors own. A maker of medical-diagnostics test equipment bested rivals at designing an easy interface between its machines and people who use them. Armed with this capability, it expanded into doctors' offices, a fast-growing segment of its market. There, office personnel, not just technicians, could operate its equipment.


To keep your edge sharp, build your strategies on resources that pass these five tests. Regularly invest in those resources. And acquire new ones as needed, as Intel did by adding a brand name—Intel Inside—to its technological resource base.
The capitalist system is under siege. In recent years business has been criticized as a major cause of social, environmental, and economic problems. Companies are widely thought to be prospering at the expense of their communities. Trust in business has fallen to new lows, leading government officials to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.

A big part of the problem lies with companies themselves, which remain trapped in an outdated, narrow approach to value creation. Focused on optimizing short-term financial performance, they overlook the greatest unmet needs in the market as well as broader influences on their long-term success. Why else would companies ignore the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of suppliers, and the economic distress of the communities in which they produce and sell?

Companies could bring business and society back together if they redefined their purpose as creating "shared value"—generating economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress.

Firms can do this in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company's locations. A number of companies known for their hard-nosed approach to business have already embarked on important initiatives in these areas. Nestlé, for example, redesigned its coffee procurement processes, working intensively with small farmers in impoverished areas who were trapped in a cycle of low productivity, poor quality, and environmental degradation. Nestlé provided advice on farming practices; helped growers secure plant stock, fertilizers, and pesticides; and began directly paying them a premium for better beans. Higher yields and quality increased the growers' incomes, the environmental impact of farms shrank, and Nestlé's reliable supply of good coffee grew significantly. Shared value was created.

Shared value could reshape capitalism and its relationship to society. It could also drive the next wave of innovation and productivity growth in the global economy as it opens managers' eyes to immense human needs that must be met, large new markets to be served, and the internal costs of social deficits—as well as the competitive advantages available from addressing them. But our understanding of shared value is still in its genesis. Attaining it will require managers to develop new skills and knowledge and governments to learn how to regulate in ways that enable shared value, rather than work against it.
Basically, strategy is about two things: deciding where you want your business to go, and deciding how to get there. A more complete definition is based on competitive advantage, the object of most corporate strategy: "Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation." Michael Porter

Competitive strategies involve taking offensive or defensive actions to create a defendable position in the industry. Generic strategies can help the organization to cope with the five competitive forces in the industry and do better than other organization in the industry. Generic strategies include 'overall cost leadership', 'differentiation', and 'focus'. Generally firms pursue only one of the above generic strategies. However some firms make an effort to pursue only one of the above generic strategies. However some firms make an effort to pursue more than one strategy at a time by bringing out a differentiated product at low cost. Though approaches like these are successful in short term, they are hardly sustainable in the long term. If firms try to maintain cost leadership as well as differentiation at the same time, they may fail to achieve either.
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