Competition is central to the success or failure of a firm in an industry. Organisations through their choice of strategy seek to obtain the most favourable position within their industry. They configure their resources and competences in order to gain a competitive advantage. According to the (American Marketing Association, 2007), a competitive advantage exists when there is a match between the distinctive competences of a firm and the factors critical for success within the industry that enable the firm beat the competitors.
Jobber (2006) offers that competitive advantage can be gained through being the lowest cost producer and/or differentiation, providing a higher added value service or product.
Decisions regarding competitive strategy, on a practical level can be difficult to make. This is because of the wide range of factors and forces that influence strategic choice decisions. Organisations are constantly challenged with matching current capabilities with opportunities in the market place. whilst managing an ever changing external environment and competition environment.
Fortunately, models such as Michael Porter’s 5 forces, generic strategies and Cliff Bowman’s strategy clock, can help in simplifying the complexity that exists in markets, and in making strategic choice decisions. De Wit Meyer (1998), offers that they provide a means by which the competitive environment can be examined, and they help in point-pointing those factors critical to competition.
This essay will begin by examining the Porter’s Five Forces model, which analyses industry structure and attractiveness and immediate competitive bases, then goes looks at how to obtain and sustain competitive advantage using Porter’s generic strategies and Bowman strategic options, then concluding with a short critique of these models.
According to (De Wit Meyer, 1998) the Five Force model, concerns itself with the immediate competitive environment, industry structure and attractiveness of an industry. The model provides a unique understanding of industry structure, underlying economic and technical characteristics, and the forces that shaping industry competition.
The attractiveness of an industry, according to (Johnson and Scholes, 1999), defined as the ability to earn above average profitability, is related to the combined strength of five key forces, which are present in any given industry, (See Appendix 1.1). According to the model success and overall profitability depend on how well an organisation manages; the bargaining power of buyers, bargaining power of suppliers, threat of new entrants and new substitutes and rivalry amongst existing competitors.
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It proposes that organisations through their choices on how to respond to the five different forces can influence and shape their environment, to their favour. (De Wit Meyer, 1998). Obviously organisation would manipulate a force, to where a known competence lies within an organisation. Through influencing one of force, an organisation can radically change its position, as costs, prices and profits, are related to the forces.
The model can be effective in providing insight into the factors, which are critical to competition in an industry, but also in identifying possible areas where new innovations could be introduced, which can affect overall industry profitability.
This essay will look briefly at each force, to determine where possible competitive advantages can be developed, starting with the bargaining power of suppliers.
Suppliers provide inputs: raw materials, goods and services as part of an organisation’s overall value chain activities, (Jobber, 2006). Competitive advantages can be gained in the way that organisations manage these inputs from suppliers. For example, an organisation seeking to obtain cost leadership position for competitive advantage, may select or influence suppliers to seek out low cost raw materials, or obtain cost efficiencies support the organisation’s strategy for the lowest absolute and relative cost base.
According to (Mintzberg, 1998), the nature of concentration of suppliers can affect the attractiveness and profitability of an industry. For example if an industry is highly concentrated, with only a few large suppliers; then bargaining power of supplier is high. Conversely, if suppliers are fragmented, smaller, then their bargaining power is low. This can affect an organisation’s choice of strategy, where and how it competes. Other supplier factors, e.g. high switching costs for moving between suppliers, branded suppliers sought after by the consumer, can also limit the scope and choice of competitive strategy.
An organisation can gain competitive advantages in their supply chains and alter industry forces to their favour, (Hamel and Prehald, 1989). For example, organisations can collaborative with suppliers through joint venture agreements. A retailer may enter into a joint venture with a manufacturer with the joint venture becoming a real source of competitive advantage. Each organisation may share knowledge and skills together, building on existing core competences; avoiding peripheral areas of each organisation. Organisations can gain potential differentiation and cost efficiency advantages.
Also, in the way an organisation arranges itself with its suppliers. Many manufacturers have reduced their number of suppliers, to a smaller number of preferred suppliers, which are then asked to produce higher quantities at lower costs, producing scale economies, (Johnson and Scholes, 1999). These types of strategies can affect the nature and bases for competition.
Another force to be considered as part of competitive strategy is the threat of new entrants. There can be many barriers that organisations face in entering a new industry.
Organisations can create barriers, e.g. for example through strong branding (differentiation), new entrants might find it difficult to compete with (e.g. confectionery food industry). In some industries e.g. pubs or car dealerships exclusive distribution agreements and channels, have been set up which can provide sources of competitive advantage, which can’t be easily imitated. Organisations entering the market may not be able to get distribution for their products distributed as easily or on such preferential terms.
Legislation and government action, e.g. patents can also act as a barrier. Organisations may have specific patents, which give advantage, or the industry may be highly regulated, creating further barriers.
(De Wit Meyer, 1998) stresses that new entrants can have a major impact upon the overall industry. For example, a new entrant bringing a new innovation, which undercuts entry barriers and intensifies competition.
Organisation can enter industries with short-term profit objectives, entering with low prices to gain market share, which can create retaliation by existing competitors, leading to price wars; with long-term profitability of an industry affected. Sustainability of competitive strategies can be affected by new entrants.
The fourth factor, which can affect competitive advantage and industry attractiveness, is the threat of new substitutes. Substitutes, take the place of existing products or services, or are need based substitutions, e.g. taking public transport vs. car. Organisations with new or better products or services clearly affect existing firms competitive strategies. According to (Johnson and Scholes, 1999), substitutes can put ceilings on prices, which can affect those organisations pursuing premium led strategies such as differentiation, as they may find it difficult to justify higher prices and being able to invest in future research and development.
As we have seen, the five-force model provides many insights into the industry and where and how organisations can compete in an industry. When organisations make a strategic choice there can be long-term implications to the industry structure. Movements by competitors e.g. to gain a competitive advantage can invite retaliation from other competitors, affecting the overall profitability of the industry.
Competitive decisions are also influenced by the market conditions and changes in the market. Market growth rates, the size and nature of other competitors, objectives of other competitors e.g. to achieve scale, long runs of production. It is clear that how competitors go about obtaining their favourable position, can have long lasting consequences. Two companies competing for cost leadership positions, can have major affects on price and industry profitability.
Industry dynamics, competitive structure and forces determining attractivenesss have relevance in the strategic choice decisions, on where and how to compete. This essay will now consider Porters generic strategy and Bowman, examining how competitive advantages can be created and sustained, using these models.
According to Porter (1980), generic strategies allow organisations to assess their relative positions within their industries. Firms that can then position themselves well and earn high rates of return (even above industry averages) even where industry structure is unfavourable, and the average profitability low. Above average performance is achieved in the long run through sustainable competitive advantage.
Generic strategies are concerned with achieving overall, rather than specific competitive positions. Each strategy involves fundamentally different routes to competitive advantage. (De Wit Meyer, 1988) states that organisations can have a myriad of strengths and weaknesses, however these come down to 2 to 3 main elements, whether an organisation has I) relative cost advantage or ii) differentiates, aiming at the broad market or specific segment(s) level.
As we saw in the five forces framework cost advantages and differentiation, according to Porter (1980) can stem from industry structure; the organisation’s ability to manage the five forces better than competition. Therefore, in order for an organisation to compete effectively and gain a sustainable competitive advantage, they must make a choice on which base it is to compete. Porter (1998) contends that unless an organisation adopts one of the traditional generic strategies, (e.g. differentiation or cost leadership) it risks becoming stuck in the middle. (De Wit Myer, 1998), refers to “stuck in the middle”, is where an organisations possesses no competitive advantage. The organisation would stand little chance of success, against other organisations who have clearly defined strategies (e.g. they know how they are going to obtain profit in the market or meet the customer needs better through costs, through a focused generic strategy for example), and are therefore better positioned to compete in any given segment. According to Porter (1990) being stuck in the middle will eventually lead to under performance in that industry.
(Porter, 1998), offers that there are three generic strategies (which can be used singly or in combination, for creating a strong profitable position in the long term. They are: I) Overall Cost Leadership ii) Differentiation iii) Focus. (See Appendix 2.1)
The first type of generic strategy is cost leadership. This is where a firm sets out to be the lowest cost producer in its industry, exploiting all cost advantages across the organisation.
The organisation seeks to drive down absolute and relative costs within its value chain. Jobber (2006) offers may ways that costs can be minimised, e.g. through “tight cost and overhead control”, or “cost reductions from experience curve effects”, “economies of scale”, “gaining access to low cost raw materials”, “technology”, but also through minimising costs in selling (e.g. sales force, distribution), product or service design, marketing (e.g. advertising) and in research and development. The organisation mission would be to be the only lowest cost producer, relative to competitors, within its industry.
It is believed by Porter (1980) that if a company can maintain an overall cost leadership position, then it can obtain a profitable and sustainable position (despite the presence of strong competitive forces), providing it sets prices at a similar level to the industry average.
(De Wit Meyer, 1998) offers that being the low cost producer provides a strong position in the market. During price wars for example, the organisation is already operating at lower cost base than other competitors, hence may be able to absorb the fall in profits more easily, as costs are already lower. Also, this position may offer some protection against other competitive forces including buyers, suppliers, entry and substitutes.
According to (Johnson and Scholes, 1998), an organisation, which chooses to pursue the cost leadership strategy, must be prepared to sell the product at near or close to other competitors, if it is to achieve this position in the market. Also, consumers are unlikely to buy a sub-standard product paying similar prices to rivals. The organisation has a choice over how to price, e.g. at similar prices or lower, providing it can recover its costs and meet investment needs.
Finally, Porter (1980) asserts that in order for it to sustain its competitive advantage in the long term, the company would need to be the only cost leader. If there are other companies pursuing cost leadership positions, as discussed earlier, this could have a major impact on the pricing structure, and profitability of the industry. The cost leader must maintain its cost leadership position and encourage other competitors who are taking this route, to abandon plans, otherwise price wars will affect the profitability of the industry over the long term. (De Wit Meyer, 1998) cites the tobacco industry as an example of this, which experienced a decline of profits after new entrants, known as “generics” entered the branded tobacco market, forcing overall prices down and industry profits.
Another route to competitive advantage and obtaining a defendable position offered by Porter (1989), is differentiation. A differentiation strategy is where a firm seeks to be unique in its industry, along certain dimensions that are widely valued by buyers. According to Jobber (2006), this is where an organisation selects one or more attributes from the choice criteria of its buyers, which is perceived to be very important, then uniquely positions itself based on this attribute, thus meeting the needs of buyers, more effectively than competition. It is rewarded for its uniqueness, with a premium price.
The means of differentiation differs between industries. It can be a result of the product itself, the delivery system by which it is sold, the design, brand image, features level of quality better. If you take the airline industry – (Bevan, 1999) offers that many of the differentiated competitors, use brand, marketing, superior service delivery, and added value services on-board for differentiation.
Providing the product or service is sold above the cost required for differentiating and making the product or service unique, the organisation can gain a favourable and defendable position in the industry (Porter, 1980). It is important that the area of differentiation is sustainable, highly valued by the customer and hard to imitate. Through differentiating – one can build brand loyalty with customers and possibly reduce sensitivity by consumers to price factors. Differentiation can provide some protection against the five forces also.
In order to be successful in the differentiation strategy, and to be sustainable, the organisation needs to keep a focus on its costs, (Johnson and Scholes, 1999). The organisation should seek to keep costs at close levels with competitors, perhaps reducing costs in areas not linked to its area of differentiation. Costs can erode premium pricing and profits, and limit investment for differentiating.
Finally the third generic strategy is focus. Porter (1980) explains that this where a focuser selects a certain segment or segments and develops a strategy totally devoting to serving them. By focusing, costs are minimised and the organisation perhaps can optimise its organisation to meeting their needs better than competition.
The organisation exploits differences between segments, providing a solution that meets their needs. To be successful in a focus strategy, there must be significant differences between the general market and the segment(s) identified. This could for example, be with the airline segmenting business and consumer markets, recognising needs differ between segments.
Porter (1998) provides, that an organisation can follow either a differentiation focus – which exploits the special needs of its target market or a cost focus – exploiting differences in cost behaviour between segments. The main difference with focus strategies is that you are targeting a specific segment(s) compared to serving the industry as a whole.
If a firm can achieve sustainable cost leadership (cost focus) or differentiation (focus) in its segments and the industry attractive there is a good chance of overperforming. Many focusers, providing they are aiming their focus strategies at different segments, can exist profitability.
As stated before, a competitive advantage is only sustainable if it is not easily imitated. The focuser must differentiate or lead in cost, in ways that other organisations would find it difficult to imitate if it is to be sustainable in the long run.
As you can see, Porter outlines three main generic strategies that provide different routes to gaining competitive advantage creating defendable positions in the long term.
Bowman’s strategy clock offers a similar type of approach to understanding relative competitive position and competitive advantage routes. However, Bowman (See Appendix 1.3) compares price (although cost advantages and cost leadership are considered in price setting) and perceived added value by the consumer (which is similar to the generic strategy of differentiation), to determine strategies available.
This part of the essay will look at three routes from Bowman – No frills, Hybrid
and low price, as the other strategic routes have been discussed fully earlier.
No frills price based strategy, (route 1), according to (Johnson and Scholes, 1999) is when an organisation offers low price and lower perceived value, focusing towards either broad market or price-sensitive segment(s) This shows similarities to cost leadership (focus), generic strategies. The organisation removes areas, which are of limited value to the buyer, e.g. no frills airlines cut back on those differentiated elements offered by other airlines. Buyers may choose this type of product or service, knowing the lower perceived value of the product or service, but are constrained by budget, requiring low prices (e.g. shoppers at Aldi).
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This strategy can be an effective strategy for competitive advantage, but note the producer needs to be able to obtain significant cost advantages to support pricing, to be successful. The segment size, e.g. price conscious buyers, needs to be large enough for the organisation to serve and make a profit. Other organisations may also enter this market area and imitate. (Dana and Vignali, 1999) cites the Airline industry as an example, where differentiated airlines began launching no-frills airlines to imitate and compete in this sector of the market in the 1990’s.
A low price strategy (option 2) is where an organisation offers low prices but offers a product or service at a similar or slightly below its competitors, e.g. similar levels of quality. Here again, unless the organization obtains cost leadership position, potential profits can be eroded by other competitors following the organisation in low prices, leading to price wars, and lower industry profitability.
Contrary to the generic strategy model, Bowman offers another strategy, which contradicts competitive advantage advice given by Porter. A hybrid strategy is proposed, where an organisation differentiates, offers lower prices and pursues a low cost base to achieve this. According to Porter (1980), unless a firm chooses one of the generic strategies (e.g. cost leadership) it risks becoming “stuck in the middle” having no competitive advantage at all, according to the generic strategies model.
(Johnson and Scholes, 1999), cites with the Bowman hybrid strategy, the organisation differentiates through providing a product or service, which is of added value to the buyer based on their choice criteria, whilst achieving a low cost base to be to offer lower prices, whilst still being able to invest in developing differentiation for its buyers.
There are few examples of organisations where this has been a successful route, notably organisations such as IKEA, who offers products of good perceived quality, whilst at the same time achieves a low cost base (Mintzberg, 1998). A few questions arise from this strategy: I) why would an organisation seek to offer prices lower than competitors – when it is able to offer prices close or at parity with competitors maintaining profits and margins and ii) this strategy may work for those organisations which are seeking to gain a foothold in a market, by offering a good quality product at lower prices. It is however, debatable, about how competitors may react. Organisations may further differentiate the market, the existing cost leader may reduce prices to compete, which could have a disastrous impact on profitable of the industry in the long term.
There are differing views as whether organisations can resolve the two opposites – differentiation and cost leadership. Porter’s generic strategies are a fallacy according to (De Wit Meyer, 1998); who claims that the best firms are those, which compete using a diverse strategy approach to the market. It rejects the idea that organisations have to follow traditional well-defined generic strategies to obtain long term competitive advantages. Whereas (Porter, 1990) advises against organisations mixing strategies, e.g. hybrid strategies because, of the risk of becoming “stuck in the middle”, having no advantage overall against other competitors.
De Wit Meyer (1998) substantiates that some of the best firms are those that resolve the two opposites of differentiation and cost, citing examples including Bennett on, who provide fashion (high perceived value, differentiation) at low cost, and Cook, successful at providing low prices ad high quality at the same time. There are many other examples, which may suggest that hybrid strategies are possible.
This may suggest that the generic strategy model oversimplifies markets and industries, with a one-size fits all approach. The examples outlined above would suggest that certain industries can accommodate less traditional strategies such as hybrid strategies in pursuit of competitive advantage.
There are limitations in the other models too. For example, the five forces framework may deem an industry to be unattractive based on the forces at work shaping the industry environment. However, the forces are not always indicative of business success. De Wit Meyer (1998) provides examples such as when Korea entered the chemical industry, despite warnings of low industry attractiveness, it successfully turned profits, relying on its competences, where it had a competitive advantage, rather than being deterred by the characteristics of the industry. Other organisations have gone into industries which appeared attractive, but failed to obtain substantial profits despite a perceived good positioning.
Each model would appear to be limited its flexibility to cope with changes in the industry environment. A strategy developed by one company, is not made in isolation to what is taking place in the external environment, changes in the cultural and political environment, internally, and with stakeholders can determine success or failure of strategy. Industry attractiveness and competitive positions change. Indeed the models do not offer approaches to examine possible competitor retaliation, which can again affect the overall industry and company success or failure.
As we saw earlier, examples in the business world appeared to contradict that, only organisations following specific traditional routes e.g. cost leadership or differentiation could be above average performers. Perhaps newer, more flexible models are required.
As (De Wit Meyer, 1998) put it, competitive positions reflect a never-ending battle. An industry may be stable for another years, but abruptly ended by a competitive move. Constant scanning of the environment appears necessary, if an organisation is to keep up with the changes in its external environment, obtain competitive advantages and remain in defendable positions within their industries. Obtaining and sustaining competitive advantage appears to be a constant challenge, these models appear to provide some help in meeting this challenge.
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