Assignment 20
RMO619
Sample-PorterBookReview-Monil.docx.docxPorter Book Review
Spurring from the concept of competition and competitive strategy in his book, Michael Porter analyzes the complexities of any given industry with the five forces and introduces models that help business managers and entrepreneurs to understand and analyze the competitive landscape and gain a competitive/strategic advantage over rivals. The book comprises of three sections, namely, General Analytical Techniques, Generic Industry Environments, and Strategic Decisions. The first part builds upon the techniques to analyze the industry structure and the position of the business against the competitors by presenting the analysis of the five forces that act on the industry and their implications. In Part II, the focus drifts from general to more specific sorts industries, namely Fragmented, Emerging, Declining and Global industries; expanding on which strategies are successful for different sorts of industries and its drawbacks. Part III lays out the framework that can be used to build a competitive strategy not only to respond to changing competitive forces within the industry but also as a sustainability mechanism. Throughout the book, Porter explains that the strategy used cannot be as successful as intended unless the businesses respond strategically to competitive threats and opportunities, which is why understanding the competitive landscape bears as much importance as developing a strategy.
The ultimate goal of any organization is to be profitable and be sustainable at the same time. According to Michael Porter, "Every firm competing in an industry has a competitive strategy, whether explicit or implicit." (Porter, 2004). To achieve the ultimate goals, all organizations need to have some strategic mechanism that helps it gain some sort of advantage over their competitors. This direction can be a result of a targeted action plan or indirect actions of different departments that work to achieve organizational goal. The author portrays the scenario by the "Wheel of Competitive Strategy" where policies, goals, and objectives are the spokes of the wheel that must work together in order to achieve them. Senior management is responsible for creating the strategy by assessing the weakness and strengths of the organization, threats, and opportunities in the industry and environment in the organization.
Porter's five Competitive Forces
1. Bargaining power of suppliers
Suppliers being the providers can significantly impact a firm's returns. Based on how much the firms rely on the suppliers, they bear the bargaining power. If the competition is scarce and there are limited suppliers, then, suppliers can push the prices, thus impacting firms profit margin. One such example is, Samsung is the supplier of the OLED displays to Apple. Because of the high capacity production and the demand in the market by other competitors, Samsung controls the prices and reduces the margin of profitability.
2. The threat of new entrants
The threat of the new competitors arises in the market when the entry barriers in the industry are low and is easy to compete within a segment of the market. Because of the entry, the competition will increase for the existing companies and will have to implement strategies to counteract. Example, if the organization is in a highly regulated industry like finance, the entry barrier would be high for the new entries and to overcome, it will require more time and resources. In capital intensive industries like the railroad manufacturing industry, the capital demand is so high that it acts as a barrier to entry for new entrants.
3. Bargaining power of consumers
This factor indicates that if the consumers have more bargaining power, it will impact the profits of the organization because the consumers can demand lower prices or switch to competitors who offer same products or services at a lower cost. The buyers are switching to competitors, exerting pressure on the organization impacting not only its profitability but also its market share. Example here can be Apple exerting pressure on Samsung to reduce the prices on the iPhone displays and switch to LG instead since it comprises a large portion of the sales. The retail industry is one such industry where customers have high bargaining power.
4. The threat of substitute products or services
Related products and service offerings that still suffice the market need at a lower price create pressure and challenge for firms. When this occurs, the company faces up to a certain degree of risk from the replacement products and lose profitability and possible market share. Switching costs, loss of market share, and profitability are some impacts driven due to this factor.
5. Rivalry among existing firms
This factor is related to intense competition between existing companies within any given industry to achieve higher market dominance or penetration. This competition can be related to prices of the products, research and development, quality of services, and offering a new product. For the established firms the competition is not about entry but instead is of maintaining dominance with expanding the market share. For example, in the mobile industry, Apple and Samsung have fierce competition. The launch of every new iPhone or Android phone has an intent to gain market share and increase revenue for the firm.
Porter provides three strategic approaches that can help any firm cope with these five industry forces, namely overall cost leadership, differentiation, and focus. With Cost leadership strategy, firm competes based on price. Lower cost and expense structure allow the firm to offer the products and services at a lower price, thus eliminating competition on price and gaining market share. However, this strategy demands that firms have a relatively higher market share, easy access to low-cost materials from suppliers. Differentiation strategy is the one where firms compete on offering unique and different products to meet the market and customer demands. This strategy is more adopted within industries that have a rapidly changing environment and where things become obsolete if attention is not given to what is current in the industry and what people prefer more. Most firms in the tech industry adopt this strategy and invest more in the research and development to come up with the latest innovative products. One of the critical drawbacks of this strategy is that it might prevent the firm from gaining higher market share. This drawback also applies to the Focus competitive strategy in which firms cater to a specific group of customers as supposed to customer masses. By focusing on niche marketing, firms can either compete on price or based on differentiation.
I feel the text explains the concept of competitive forces and strategies to cope with these forces very well. Compared to past decades, things have drastically changed with technology and so has customer preference and taste. Increasingly it has been a big challenge for firms to keep up with changing times rapidly. Porter's five forces help the businesses and firms to understand their industry and competitive landscape thoroughly. I am working as a mobile developer for a fintech company. Combination of financial and technology industries have given rise to many fintech startup firms that offer unique technological solutions to customers and clients of the financial industry. Applying Porter's five forces to fintech industry indicates, that there is a higher barrier to new entry, suppliers have customers do possess a bargaining power, but depending on the firm's position, customer and supplier bargaining power can be tackled. However, since the financial industry is highly regulated, fintech companies also are exposed to regulation. Besides, most fintech companies are startup required a massive influx of capital in the initial phase of the firm's life cycle before they breakeven or are profitable. These two factors block many new entrants coming into the industry and posing competition to existing firms. Besides, the threat of substitute products and services is high for fintech industry where there is always a risk that competitors can offer a better value proposition to customers while offering a similar product or service. Both the financial and technological industry has intense rivalry amongst the existing firms, which is why existing firms within the fintech industry also face intense competition. From amongst the strategic techniques that Porter suggests coping with the competition, from the observation, I feel the firms could adopt either differentiation or focus strategies. Since the space fintech industry is in, differentiation strategy allows the firms to compete by offering unique products that their competitors might not be able to offer or adopt a focus strategy where firms can choose to target either mobile or cloud or specific platform space. For example, the organization I work for has explicitly chosen to adopt a focus strategy and target the mobile space where the customer is looking for more accessibility through their smartphones.
References:
Porter, M. E. (2004). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
