Selasa, 20 Januari 2015

IDENTIFYING COMPETITIVE ADVANTAGE



      Porter five forces analysis is a framework to analyze level of competition within an industry andbusiness strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of an Industry. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. This analysis is associated with its principal innovator Michael E. Porter of Harvard University.
Porter referred to these forces as the micro environment, to contrast it with the more general termmacro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competenciesbusiness model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: the threat of substitute products or services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc. Porter's five forces is based on the Structure-Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries. Other Porter strategic frameworks include the value chain and the generic strategies.

                      


Threat of new entrants

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents (which in business refers to the largest company in a certain industry, for instance, in telecommunications, the traditional phone company, typically called the "incumbent operator"), the abnormal profit rate will trend towards zero (perfect competition).
The following factors can have an effect on how much of a threat new entrants may pose:
  • The existence of barriers to entry (patentsrights, etc.). The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
  • Government policy
  • Capital requirements
  • Absolute cost
  • Cost disadvantages independent of size
  • Economies of scale
  • Economies of product differences
  • Product differentiation
  • Brand equity
  • Switching costs or sunk costs
  • Expected retaliation
  • Access to distribution
  • Customer loyalty to established brands
  • Industry profitability (the more profitable the industry the more attractive it will be to new competitors)

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Coke's expense. Another example is the substitute of traditional phone with a smart phone.
Potential factors:
  • Buyer propensity to substitute
  • Relative price performance of substitute
  • Buyer switching costs
  • Perceived level of product differentiation
  • Number of substitute products available in the market
  • Ease of substitution
  • Substandard product
  • Quality depreciation

Bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many alternatives. The buyer power is low if they act independently e.g. If a large number of customers will act with each other and ask to make prices low the company will have no other choice because of large number of customers pressure.
Potential factors:
  • Buyer concentration to firm concentration ratio
  • Degree of dependency upon existing channels of distribution
  • Bargaining leverage, particularly in industries with high fixed costs
  • Buyer switching costs relative to firm switching costs
  • Buyer information availability
  • Force down prices
  • Availability of existing substitute products
  • Buyer price sensitivity
  • Differential advantage (uniqueness) of industry products
  • RFM (customer value) Analysis
  • The total amount of trading

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to thefirm can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:
  • Supplier switching costs relative to firm switching costs
  • Degree of differentiation of inputs
  • Impact of inputs on cost or differentiation
  • Presence of substitute inputs
  • Strength of distribution channel
  • Supplier concentration to firm concentration ratio
  • Employee solidarity (e.g. labor unions)
  • Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Intensity of competitive rivalry

For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Potential factors:

Usage

Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist." They might use value chain or another type of analysis in conjunction.Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naїve.
According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. (See industry information.) A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).

Criticisms

Porter's framework has been challenged by other academics and strategists such as Stewart Neill. Similarly, the likes of ABC, Kevin P. Coyne  and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:
  • That buyers, competitors, and suppliers are unrelated and do not interact and collude.
  • That the source of value is structural advantage (creating barriers to entry).
  • That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.
An important extension to Porter was found in the work of Adam Brandenburger and Barry Nalebuff of Yale School of Management in the mid-1990s. Using game theory, they added the concept of complementors (also called "the 6th force"), helping to explain the reasoning behind strategic alliances. The idea thatcomplementors are the sixth force has often been credited to Andrew Grove, former CEO of Intel Corporation. According to most references, the sixth force is government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993. It is based on Porter's model and includes Government (national and regional) as well as Pressure Groups as the notional 6th force. This model was the result of work carried out as part of Groupe Bull's Knowledge Asset Management Organisation initiative.
Porter indirectly rebutted the assertions of other forces, by referring to innovation, government, and complementary products and services as "factors" that affect the five forces.
It is also perhaps not feasible to evaluate the attractiveness of an industry independent of the resources a firm brings to that industry. It is thus argued (Werner 1984) that this theory be coupled with the Resource-Based View (RBV) in order for the firm to develop a much more sound strategy. It provides a simple perspective for accessing and analyzing the competitive strength and position of a corporation, business or organization.

Porter's Generic Strategies

These three approaches are examples of "generic strategies," because they can be applied to products or services in all industries, and to organizations of all sizes. They were first set out by Michael Porter in 1985 in his book "Competitive Advantage: Creating and Sustaining Superior Performance."
Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable products and services) and "Focus" (offering a specialized service in a niche market). He then subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus". These are shown in Figure 1 below.

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage – in other words, developing the "edge" that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy:
  • Increasing profits by reducing costs, while charging industry-average prices.
  • Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs.                                                                                                                                                                                                                                                                                                                                                                  The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low-cost producers who may undercut your prices and therefore block your attempts to increase market share.
    You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
    • Access to the capital needed to invest in technology that will bring costs down.
    • Very efficient logistics.
    • A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors.
    The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of "continuous improvement."

    The Differentiation Strategy

    Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value.
    To make a success of a Differentiation strategy, organizations need:
    • Good research, development and innovation.
    • The ability to deliver high-quality products or services.
    • Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings.
    Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments.

    The Focus Strategy

    Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low-cost or well-specified products for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors.
    As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own.
    But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies' offerings.)
    The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers' needs).                       

    Supply chain management

Supply chain management (SCM) is "the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole."[2] It has also been defined as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.

  • Supply Chain Management (SCM) is the management of the relationship between the supplier's supplier and the customer's customer through the supply chain participants (Distributor/Wholesaler and Retailer) between them, mainly using information flow and logistics activities to gain Competitive advantage and customer satisfaction.
A supply chain, as opposed to supply chain management, is a set of organizations directly linked by one or more upstream and downstream flows of products, services, finances, or information from a source to a customer. Supply chain management is the management of such a chain.
In many cases the supply chain includes the collection of goods after consumer use for recycling.

Functions

  SCM is a cross-functional approach that includes managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end consumer. As organizations strive to focus on core competencies and becoming more flexible, they reduce their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other firms that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing managerial control of daily logistics operations. Less control and more supply chain partners led to the creation of the concept of supply chain management. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and the velocity of inventory movement.
Main functions of Supply Chain Management are as follows:
  • Inventory Management
  • Distribution Management
  • Channel Management
  • Payment Management
  • Financial Management
  • Supplier Management
  • Transportation Management
  • Customer Service Management

Importance

Organizations increasingly find that they must rely on effective supply chains, or networks, to compete in the global market and networked economy. In Peter Drucker's (1998) management paradigms, this concept of business relationships extends beyond traditional enterprise boundaries and seeks to organize entire business processes throughout a value chain of multiple companies.
In recent decades, globalization, outsourcing, and information technology have enabled many organizations, such as Dell and Hewlett Packard, to successfully operate collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities (Scott, 1993). This inter-organisational supply network can be acknowledged as a new form of organisation. However, with the complicated interactions among the players, the network structure fits neither "market" or "hierarchy" categories (Powell, 1990). It is not clear what kind of performance impacts different supply network structures could have on firms, and little is known about the coordination conditions and trade-offs that may exist among the players. From a systems perspective, a complex network structure can be decomposed into individual component firms (Zhang and Dilts, 2004). Traditionally, companies in a supply network concentrate on the inputs and outputs of the processes, with little concern for the internal management working of other individual players. Therefore, the choice of an internal management control structure is known to impact local firm performance (Mintzberg, 1979).
In the 21st century, changes in the business environment have contributed to the development of supply chain networks. First, as an outcome of globalization and the proliferation of multinational companies, joint ventures, strategic alliances, and business partnerships, significant success factors were identified, complementing the earlier "just-in-time", lean manufacturing, and agile manufacturing practices. Second, technological changes, particularly the dramatic fall in communication costs (a significant component of transaction costs), have led to changes in coordination among the members of the supply chain network (Coase, 1998).
Many researchers have recognized supply network structures as a new organisational form, using terms such as "Keiretsu", "Extended Enterprise", "Virtual Corporation", "Global Production Network", and "Next Generation Manufacturing System". In general, such a structure can be defined as "a group of semi-independent organisations, each with their capabilities, which collaborate in ever-changing constellations to serve one or more markets in order to achieve some business goal specific to that collaboration" (Akkermans, 2001).
The security management system for supply chains is described in ISO/IEC 28000 and ISO/IEC 28001 and related standards published jointly by the ISO and theIEC. Supply Chain Management draws heavily from the areas of operations management, logistics, procurement, and information technology, and strives for an integrated approach.

Creation era

The term "supply chain management" was first coined by Keith Oliver in 1982. However, the concept of a supply chain in management was of great importance long before, in the early 20th century, especially with the creation of the assembly line. The characteristics of this era of supply chain management include the need for large-scale changes, re-engineering, downsizing driven by cost reduction programs, and widespread attention to Japanese management practices.

Integration era

This era of supply chain management studies was highlighted with the development of electronic data interchange (EDI) systems in the 1960s, and developed through the 1990s by the introduction of enterprise resource planning (ERP) systems. This era has continued to develop into the 21st century with the expansion of Internet-based collaborative systems. This era of supply chain evolution is characterized by both increasing value added and cost reductions through integration.
A supply chain can be classified as a stage 1, 2 or 3 network. In a stage 1–type supply chain, systems such as production, storage, distribution, and material control are not linked and are independent of each other. In a stage 2 supply chain, these are integrated under one plan and is ERP enabled. In a stage 3 supply chain is one that achieves vertical integration with upstream suppliers and downstream customers. An example of this kind of supply chain is Tesco.

Globalization era

The third movement of supply chain management development, the globalization era, can be characterized by the attention given to global systems of supplier relationships and the expansion of supply chains over national boundaries and into other continents. Although the use of global sources in organisations' supply chains can be traced back several decades (e.g., in the oil industry), it was not until the late 1980s that a considerable number of organizations started to integrate global sources into their core business. This era is characterized by the globalization of supply chain management in organizations with the goal of increasing their competitive advantage, adding value, and reducing costs through global sourcing.

Specialization era (phase I): outsourced manufacturing and distribution

In the 1990s, companies began to focus on "core competencies" and specialization. They abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements, by extending the supply chain beyond the company walls and distributing management across specialized supply chain partnerships.
This transition also refocused the fundamental perspectives of each organization. Original equipment manufacturers (OEMs) became brand owners that required visibility deep into their supply base. They had to control the entire supply chain from above, instead of from within. Contract manufacturers had to manage bills of material with different part-numbering schemes from multiple OEMs and support customer requests for work-in-process visibility and vendor-managed inventory (VMI).
The specialization model creates manufacturing and distribution networks composed of several individual supply chains specific to producers, suppliers, and customers that work together to design, manufacture, distribute, market, sell, and service a product. This set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands and risk involved in it.
Specialization era (phase II): supply chain management as a service
Specialization within the supply chain began in the 1980s with the inception of transportation brokerages, warehouse management, and non-asset-based carriers, and has matured beyond transportation and logistics into aspects of supply planning, collaboration, execution, and performance management.
Market forces sometimes demand rapid changes from suppliers, logistics providers, locations, or customers in their role as components of supply chain networks. This variability has significant effects on supply chain infrastructure, from the foundation layers of establishing and managing electronic communication between trading partners, to more complex requirements such as the configuration of processes and work flows that are essential to the management of the network itself.
Supply chain specialization enables companies to improve their overall competencies in the same way that outsourced manufacturing and distribution has done; it allows them to focus on their core competencies and assemble networks of specific, best-in-class partners to contribute to the overall value chain itself, thereby increasing overall performance and efficiency. The ability to quickly obtain and deploy this domain-specific supply chain expertise without developing and maintaining an entirely unique and complex competency in house is a leading reason why supply chain specialization is gaining popularity.
Outsourced technology hosting for supply chain solutions debuted in the late 1990s and has taken root primarily in transportation and collaboration categories. This has progressed from the application service provider (ASP) model from roughly 1998 through 2003, to the on-demand model from approximately 2003 through 2006, to the software as a service (SaaS) model currently in focus today.

               THAT ALL,THANK YOU FOR READING:-)

                                                                                                                          

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