Table of Contents
Explanation of Porter’s approach
Evaluation of Porter’s approach
Practical application – Cochlear Limited
List of references
Globalisation and fast technological change lead to an intense competitive pressure on markets in general. In order to achieve above-average returns within this dynamic environment it is essential for a firm to maintin its competitive position and its ability to compete on the long run (Hanson et. al 2008, p. 7).
Therefore, competitive business-level strategies combine specific actions and organisational desgins which are aimed at outperforming competitors (Hunger & Wheelen 2003, p. 77). Since a firm’s value chain and all other activities are set up according to the chosen strategy, the choice and formulation of a strategy is of fundamental importance (Hanson et. al 2008, p. 112). Porter’s five forces as well as the generic strategies are one of the major contributions in that context. Accordingly, this essay examines Porter’s concepts in the following order:
firstly Porter’s approach of competitive advantage strategy is explained, secondly, an evaluatiation of different arguments for and against Porter’s ideas follows. Thirdly, a critical appraisal of why this approach is better or worse than competing theories is given. Finally, the approach is applicated to the real-life example “Cochlear”.
Explanation of Porter’s approach
Porter’s contributions concerning the identfication of organisational strategy are part of the industrial organisation view which underlines the determining effects of the industry environment on organizational performance (David 2007, p. 84). His ideas can be divided into two core concepts: structural analysis of industries on the one hand, and generic strategies on the other hand.
Structural Analysis of Industries
According to Porter (1998) the state of competition within an industry has the most important influence on the industry profitability and a firm’s (possibile) performance. Moreover, he states that the intensity of competition and therefore the attractiveness of any industry is determined by the cumulative strengths of the five competitive forces. Below, these forces as well as the reason why they have to be considered in terms of analysing the environment are described:
1. The threat of potential new entrants due to an expected increase in competition.
2. Bargaining power of buyers since buyers in a strong position are able to lower prices and call for unacceptable demands.
3. Bargaining power of suppliers because the more powerful suppliers are the more they have the possibilty to increase prices and reduce service levels or quality at the same time.
4. Threat of substitute products or services due to a limitation of flexibility of the existing firms.
5. Rivalry among existing competitors because the intensity of competition determines average industry profitability and the dispersion of created value.
(Viljoen & Dann 2003, p.131-132)
These forces account for the level of profitability within an industry since the parameters of return on investment, price, cost and needed investments of firms, are positively or negativly influenced by them (Porter 2004, p.5). Besides, it is important to underline that this strucutral analysis of industries has a broad focus because among established companies also buyers, suppliers, new entrants and substitutes are under consideration. One should also be aware of that specific forces have different relevance in each industry and might also change gradually over time (Porter 1998, p. 6). Furthermore, Porter clearly distinguishes between the basic structure of an industry mirrored by the five forces and factors that only have an influence on the short run and therefore are not shaping determinants of an industry (Porter 1998, p. 6). Given this framework, firms choose according strategies in order to control the five forces and shape the structure of the industry for their own benefit (Porter 2004, p. 7).
Generic competitive strategies
Porter (1998, p. 35) distinguishes between three generic strategies which are implemented by firms in order to achieve a sustainable competitive advantage within their industry and differentiate its own position from those of competitors. Namely they are:
1. Cost Leadersip
Making use of these strategies, whether singly or in combination, a firm is able to defend itself sucessfully against the five forces (Porter 1998, p. 35). Porters approach of generic competitive strategies is therefore directly related to his structural analysis of industries. On the one hand, the strategies differ in terms of target which can be industrywide (broad) or particular segment only (narrow). On the other hand, the strategic advantage can be achieved through a firm’s low cost position or differentiation. Besides, each of the generic strategies has specific advantages and risks that should be analysed carefully with respect to the company and its environment. In Porter’s view (1998), being ‘stuck in the middle’, that is not being able to perform one of the generic strategies explicitly, does not lead to a competitive advantage and often results in poor financial performance.
Cost Leadership Strategy
The cost leadership strategy has a broad target and a firm following this strategy serves a lot of industry segments or it might even serve different industries at the same time (Porter 2004, p. 12). Products or services are standardised and offered to the industry’s most common customers. Lower costs which are achieved through scale and absolute cost advantages from various sources indicate that the company is able to perform activities differently than its competitors (Porter 1996, p. 62). Nevertheless, cost leader’s must also involve certain levels of differentiation in their products since otherwise no value for the customer can be created. A firm following this strategy always has to focus on cost reductions which can be realized through ‘investments in efficients-scale facilities, tight cost and overhead control and cost minimisations in such areas as service, sales force and R&D’ (Hanson 2008, p. 115)
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- Barbara Bilyk (Author), 2009, Identifying organisational strategy, Munich, GRIN Verlag, https://www.grin.com/document/137522