CREATING A DEFENDABLE POSITION

Author: 

Jochen Gary

The University of Hull, Business School
Strategic Analysis

Date: 28 | 11| 2002

Structure

1. Motivation 1

2. Basic ideas  2
2.1. Porter′s five forces  2
2.2. The three strategies 2

3. Differentiation creates a defendable position 7
3.1. Competitive Rivalry 7
3.2. Suppliers  8
3.3. Buyers  9
3.4. New entrants  10
3.5. Substitutes 11

4. Concllusiion 12

5. List of references 12

1. Motivation 

Competitive advantage is the basis for most strategic decisions and its’ creation a key issue of management. The most important concepts of competitive strategy are Michael Porter′s "five forces" and "generic strategies", published in his books Competitive Strategy (1980) and Competitive Advantage (1985). The first sections will describe his basic ideas and explain how the five forces are connected to the generic strategies. This is followed by arguments in which way one strategy helps to create a defendable position in an industry.

2. Basic ideas 
2.1. Porter′s five forces 

A company is not isolated, but exists in a complex network. "The five forces framework helps identify the sources of competition in an industry or sector"¹ and the important factors in the environment of a company are: Competitive Rivalry, purchasing power of supplier, purchasing power of buyer, threat of new entrants and of substitutes² 

Figure 1 - Five Forces³ 

[...]

2.2. The three strategies 
2.2.1. Fight back with strategy 

To "find a position in the industry where the company can best defend itself against"⁴ the "competitive forces" is a key issue of management. But to achieve this "defendable position"⁵ a strategy must be accomplished, regarding processes, structure and policy. "Strategy is the direction and scope of an organisation over the long term, which achieves advantage (...)."⁶ There are three generic strategies⁷ building on different competences: overall cost leadership, differentiation and focus. The criteria on which separation is based are the target market and type of advantage ( Figure 2). The strategies are mutually exclusive. Though only products are mentioned in the following, the concepts could also be applied to services.

Figure 2 – The three generic strategies⁸

[...]

2.2.2. Cost leadership 

The cost leader is operating with the lowest costs of all and there can only be one in a market. The company can sacrifice its profit margins, finance production through subsidies from other units or be the lowest cost producer⁹. Activities to achieve cost efficiency are the exploitation of economies of scale (mass production), the reduction of inventory and time-to-market or the exploitation of the experience curve (best practices)¹⁰. The cost leader sells standardized products in the whole market with the same value like competitors, but at lower costs. So profits should be above the average ( Figure 3).

[...]

1 Johnson (2002), p. 112.

2 Porter (1980).

3 Adapted from Porter (1980), p. 4, and Johnson (2002), p. 113.

4 Porter (1980), p. 4.

5 Porter (1980), p. 29.

6 Johnson (2002), p. 10.

7 Porter (1980), p. 35.

8 Adapted from Porter (1980), p. 39, figure 2.1.

9 Bowman (1996), p. 38.

10 Parts from Bowman (1996), p. 38-40.