Basic Tools And Frameworks For Analyzing Commerce Essay

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The relationship between competition and challenges for sustainable growth in the country, industry or a firm is an argument and a basic element for the development of policies, strategies and adaptation to strategic changes. The purpose of this paper is to review the existing frameworks for analysing and understanding competitiveness and especially their application within an industry. In order that, this initiative to study and measure the attractiveness of the industry, to develop and find the proper implementation, it is necessary to build the field and infrastructure through which it will be possible to understand and measure indicators such as attractiveness, rivalry among firms, competitive position in the industry and the strategic choices. Based on this review, it is given the way in which each industry can be studied and, above all, to test the extent of application of the model and the theory of Porter in the Albanian business environment.

Key words: industry, strategy, competitivenes, Porter`s forces, diamond model


The important objective for this paper is to provide a complete framework that helps in understanding the competitiveness, attractiveness and competitive strategies within an industry. Field of study and application will be the industry due to the development and the impact of every industry on the economic growth of the country. It is evident that, the high competitive rivalry among firms has a positive impact to the client. While a good analysis of the industry influences positively on the success of the company. Assessment of the industry attractiveness, the choice of competitive strategies by the firm and the factors that affect the growth of competitiveness of the company are the main areas of study.


This section reviews various competitiveness frameworks and how these have been applied within an industry. The frameworks of industry analysis and its competitiveness can found in the literature divided into three categories:

Tools providing an explanation and understanding of competitiveness (5 forces of industry,

Diamond model, double diamond model).

Frameworks for measuring competitiveness (The model of three dimensions: Customer

values, Shareholder values and Ability to Act and React, the Total Value Competitiveness).

And those who integrate the explanation and measurement analysis (APP model).


Despite the attention that has been devoted to the concept of competition and written literature, competition remains a vague concept because there is no single definition. According to Waheeduzzan and Ryans (1996), concluded that competitiveness could be viewed as "a cause, an outcome, and as a means to achieve the objectives" while as for other authors, understanding the competition belongs to the eyes of "spectator" which can be any of the stakeholders that surrounds or is part of the company (Flanagan et al., 2005). According to the logic of inclusive characteristics, Man et al. (2002) suggest the definition of competition through four characteristics such as: long-term orientation (focus on long-term performance than temporary possession of competitive advantage), control (continuous management of resources and capacities), relativity (company's competitive position against other rival firms) and dynamism (including dynamic processes to generate profits). According to Lu (2006), "Competition is a broad concept beyond the traditional financial indicators: profitability, productivity or market share." In the same line of thought and coherence, based on financial performance indicators, Momaya and Selby (1998), define the competition among companies within an industry as the vehicle that satisfies customer needs as a result of the combination of the product or service characteristics such as: price, quality, innovation, satisfying the needs of people, offers high levels of return and potential growth"(Momaya and Selby, 1998).

Thus, this concept is the subject of many other definitions and misinterpretations in some cases because competition is a multidimensional concept. In this context, many authors have been involved in debates about the competition, bringing a complete framework related with this dimension and the features characterizing it:

There is no unique definition and hence the term is subject to misinterpretation and confusion between authors viewpoints (Porter 1990, Chaharbaghi & Feurer 1994, Cho & Moon 2000, Momaya 2004, BalkytÄ- &TvaronavičienÄ- 2010).

According to the authors' perspectives on competition and key words used in their definitions, we can say that there are various variables that measure the level of competition among firms, industries and countries (Blake, Croot, & Hastings 2004, Henricsson & Ericsson 2005).

The concept of competition extends the analysis of studies and may be applied at national, industry and firm levels (Nelson 1992, Momaya 2004).

The factors that influence competitiveness change with time and context (Chaharbaghi & Feurer 1994, Cho & Moon 2000).

Competition is seen as the promoter of the process through which assets may be transformed into performance. Since the definition and measurement of the level of competition varies, Buckley et al.1988 distinguished three different dimensions in order to understand and explain the competition: the ability to perform well, providing resources and management process. In the coming years, this view of competition, developed from the World Economic Forum (WEF) and the International Institute for Management Development (IMD), was published in the periodical report 1993 World Competitiveness Report as formula of competition in all the world: Assets x Processes = Performance.

Despite that, there is no unique definition of competition; this concept is an important part of management and economic analysis, together with other indicators such as profitability, market share or productivity. Thus, the competition has been and remains an attractive concept for different levels of study including firm level competitiveness, industry (micro level) and national (macro level) (Nelson, 1992).


The industry is arena in which competition takes place. In this environment, there are a large number of factors, both with the competitive forces that structure the industry, determine the intensity of competition, the ability of the organization to be positioned against its rivals and affect the profitability of the company.

Industry analysis model proposed by Porter, takes into account the 5 forces: (1) competitive rivalry among firms, (2) threats of new entrants, (3) threats of substitute product or service, (4) the bargaining power of suppliers and (5) bargaining power of buyers.

In addition, others authors suggest that the evolution of Porter theories refers to the existence of a sixth force that affects the industry analysis and competitive strategic choice. This sixth force refers to the level of interaction with complementary products (Brandenburger & Nalebuff, 1990; Grove, 1996; Ghemawat, 2000). The importance of this factor was developed further in the authors' model Hax and Wilde (2001). One of the strategies they suggest is "lock-in" under which the company is seen as a system, not only in traditional customer-product connection, but including suppliers and complementary products. While, according Besanko, Dranove and Shanley (2000), the sixth force may be the impact of the government as a regulatory agent.

According to Porter, in every industry, despite of the extent and competition intensity, regardless of what it provides or produces, there are operating 5 core competitive forces, the power and their influence varies from industry to industry, even from country to country.

Many authors are agreed with the validity of the model of five competitive forces, referring some of the basic aspects of the strategic planning process:

• The model helps in decision-making process related with the entry or the exit from the market in a particular industry and the comparison with competitors.

• Combined with the analysis of the external environment, the model serves as a forecasting tool for the industry profitability, creates scenarios and generates income for future periods.

•In collaboration with the statistical and dynamic analysis, the companies can identify opportunities which can follow to achieve competitive advantage.

•This model takes into account the demand and supply of the product/service of the rival companies as well as substitute products, the relationship between cost and production volume, market structure and company`s behavior according to the nature of the competition.

Although, the five competitive forces model was widely accepted and served as the starting point for the evolution of new theories of management, the model Porter had some criticism among which we can mention:

The model does not include and does not take into account the strategic alliances that firms can create and the electronic connections through information systems. However, Porter (2001) explains the role of the Internet as a leading supplier of information related with customers and rival firms, without having to change the model.

The model is suitable to be used in markets with a simple structure similar to the perfect competition but in reality it seems to be impossible to achieve this condition.

Whittington (2001) raises questions, how Porter (1980) concentrates the industry analysis in accordance with five competitive forces, leaving aside the role of the government and the labor market.

The Michael Porter theories (1980, 1985) belong to the school that industry structure and the positioning are the key elements to generate higher profits. According to Porter, the position within an industry affects maximizing opportunities to create competitive advantage. In contrast, Hax (2002), through Delta Model explains that greater importance should be given to the used strategy than positioning. Critics from the same author refer to the answer of the questions: Which industry do the managers of the company analyze? According to the traditional model of Porter, managers must concentrate at the industry in which they actually operate. While, according to the Delta Model, the industry analysis includes the key clients` industries and this of complementary products. As a result, the nature of the industry analysis is influenced by the selection of the strategic choices of firm.

The rivalry among firms. It is important for firms to increase their knowledge and understanding level of competition within the industry. In this way, competitors test the strengths of each other, fight for positions and use their resources to gain competitive advantage (Kume, 2010) with the aim of being profitable and durable on the market. It seems that the rivalry between firms resembles a game for a better position, using competition tactics through pricing or laying new products.

Threat of new entrants. The firms' number is the main indicator that shows the degree of concentration and performance within the industry. In the long run the number of competing firms is influenced by the ease with which they can enter and exit from the market. In the five forces model of Porter, the new entrants refers to the threat of new firms that are potentially ready to enter in the market and is also one of the main forces which shapes the structure of the industry (Porter, 1980). The new entrants threats depends on appropriate entry barriers as well as the new firms expected reaction from existing companies in the industry

The bargaining power of suppliers and buyers. The analysis of factors which affect the relative power of manufacturer-supplier relationship is analog with the analysis of producer-buyer relation. Therefore, these two forces can be considered together because they are closely related to each other because of the existence of the company simultaneously in the role of the supplier and the buyer. According to the Porter model, it is important that, from the used strategy, the company have to establish a balance between power suppliers and power purchasers.

Suppliers. The selection of suppliers is an important factor for the success of the company (Marvin & et al, 2004; Lasch & Janker, 2005; Shahroudi &Rouydel, 2012) because the quality and cost of products / services that the company offers is directly connected with quality and cost of products / services purchased from suppliers. The supplier selection is one of the critical activities for the company due to (1) the number of suppliers and their diversity, (2) the cost of raw materials which manufacturing companies of up to 70% of product cost (Demirtas & Ustun , 2008), (3) the impact that they submit to the performance of the company (Aguezzoul & Lade 2007). The bargaining power of suppliers refers to the ability to change easily the input prices and reducing the quality of products and services they offer. The power of suppliers depends on: (1) the number of suppliers, (2) the lack of substitute products weakens the buyer position related with the suppliers, (3) the amount of the purchase, (4) the association of suppliers and their integration.

The bargaining power of buyers. According to Porter (1980), the buyers influence the industry through their ability to impose low prices. The power of buyers depends on the following circumstances: The number of buyers. The cost to change the supplier, the standardization or differentiation of the requiring product, the raw material cost occupies a considerable part of the total cost, the level of information.

Substitute products. Firms in an industry can compete with firms in other industries which offer substitute products. These are the products that satisfy the same needs and desires but which differ due to specific characteristics. Despite, these substitute products do not belong to the industry and stand outside it, their existence has an impact on the price setting of products.

Customers often feel more comfortable using the substitute product as the main product and leaving the company's product as a substitute or even completely neglected.

Factors to be taken into account when analyzing the industry and the threat of substitute products or services are: The consumers` stability and loyalty toward the product, the price level of substitute products, the level of meeting the needs by the substitute products and the ease with which buyers can use them, customer costs to switch to the substitute products etc.

Under the highlight of this analysis, the level of competitive forces influence determines the intensity of competition in every industry. As a result, the profitability and attractiveness of investing in each of the industries stand in inverse relation with the strength of each model force. The greater the power of factors is, the smaller the expected profitability is.


The most applied and debated framework on competitiveness is the 'Diamond Framework', introduced by Porter (1990). This model represents an effective methodology to analyze the competition and competitive advantage within an industry (Zhao et al, 2011).

He investigated why firms based in a particular nation are able to create and sustain competitive advantage against the world's best competitors in a particular field. Porter concluded on a wide range of factors that influence, determine and explain this international success and categorised these factors under four determinants, which in turn were famously arranged in the shape of a diamond.

Source: Porter, 1990

Figure 1. Porter Diamond Model

The model includes factors, grouped in endogenous and exogenous variables (Cho, Moon & Kim, 2008) that help industry to create and maintain competitive advantage.

 The first determinant, Factor conditions, covers factors related to human, physical and knowledge resources. Moreover, these factors are divided into basic factors such as raw material, climatic conditions, water resources and advanced factors which are created from the reinvestment and innovation process and according to Porter (1998) these form the basis of sustainable competitive advantage (Smit, 2010).

The Demand conditions describe the size, structure and sophistication of the home market demand for the products and services of a particular industry. Based in this determinant, Porter focuses on diversity and demand changes than in its similarity to explain the competition between countries. According to him, except the size of the demand, the complexity of buyers and the demand composition affects the way how firms perceive, interpret and respond to customer needs. Related and supporting industries reflect the presence or absence of internationally competitive related and supporting industries of a particular industry in a nation.

Related and supporting industries refer to supplier and distributor network that work together with the industry, giving support to the company in the international arena (Porter, 1990). In this sense, vertical and horizontal interaction of companies, at the same or related industries, creates competitive advantage where we can mention, cost-effective delivery of inputs or technological development.

The fourth and final determinant, Firm strategy, structure and rivalry, includes the strategies and structures of firms as well as the nature of domestic rivalry. The presence of a strong rivalry between firms is an immediate incentive for the creation and the sustainability of competitive advantage. Porter (1990) states that competition in an industry is a result of the convergence of managerial practices, organizational models and resources for competitive advantage.

The role of the government is considered by Porter (1990) as one of the factors that have sparked more debate. The debate over the role of this factor is related to the position of the government toward the business environment. Porter argues that the role of government helps and supports the companies to create the appropriate environment to realize the competitive advantage. There are opinions that reducing the impact of the government paying more important to the "invisible hand" and self-regulation of the market.

Porter points out a number of activities to be followed by governments to support domestic competition. Some of these activities are based: direct and indirect subsidies, encouraging changes, stimulating innovation, focusing on the specialized factors and educational level of the workforce, antitrust law, promotion and encouragement of investments.

The role of chance plays an important role and is defined as the force that lies outside the power firms and influence of government, driven by developments such as: inventions, political decisions of other countries, significant changes in world financial markets or exchange rates; costs resulting from the termination of the inputs.

As we mention above, the single diamond of Porter face a lot of critics due to the limited domestic variables (Cho & Moon, 2000). Another model, named "the double diamond model", developed by Rugman and D'Cruz (1993), suggests that managers build upon both domestic and foreign diamonds to become globally competitive in terms of survival, profitability,

and growth. While the Rugman and D'Cruz North American diamond framework fits well for Canada and New Zealand, it does not carry over to all other small nations, including Korea and Singapore. Thus, Moon, Rugman, and Verbeke (1998) adapted the double diamond framework to a generalized double diamond which works well for analyzing all small economies.


How the firms compete and which are the used strategies are the important questions raised during the industry and firm behavior analysis. Understanding the behavior of the firm serves as input to improve practices related with the competition (Ormanidhi & String, 2008) in order to achieve a high performance and sustainable competitive advantage.

Competitive strategies are an important choice for every business (Allen & Helms, 2006) to create a unique and valuable position by integrating various activities (Porter, 1996).

The industry model of Porter and generic strategies are considered as important pillar between management theories through which we can explain firm behavior towards competitors in a particular industry. The competitive strategies proposed by Porter are: cost leadership, differentiation and focus

Cost leadership. Strategy "low cost" places strong emphasis on organizational efficiency. This strategy, known as cost leadership, includes the process by which a company is able to produce or distribute goods and services at a lower cost than competitors within the industry. Porter defines the cost leadership strategy as marketing of standard products (Porter 1985) combined with aggressive prices (Porter 1980).

Differentiation strategy refers to the development of a unique product or service (Porter 1985, Torgovicky et al., 2005) due to the specific features. There are many ways and dimensions through which firms can differentiate their products from rival companies. Despite the way, the company achieves the competitive advantage; the important dimensions remain life expectancy and the risk of feature imitation that creates uniqueness.

Based in these strategies, the question that has sparked much debate and controversy is if the company can simultaneously apply the generic strategies. The center of this debate consists at the dilemma on the exclusion or inclusion of generic strategies between each other.


Competitiveness is vague concept that may be defined and measured in a number of ways. There are various frameworks of industry analysis and its competitiveness which can be found in the literature divided into three categories: Tools providing an explanation and understanding of competitiveness, frameworks for measuring competitiveness and those who integrate the explanation and measurement analysis.

The purpose of this paper is to review the existing frameworks for analysing and understanding competitiveness and especially their application within an industry.

Based on the review, this paper introduces a simple structure through which it will be possible to understand and measure indicators such as attractiveness, rivalry among firms, competitive position in the industry and the strategic choices. According to Porter, the joint influence of the industry`s forces determines the intensity of competition and average profitability