Porter's strategies: basic strategies, basic principles, features

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

A large circle of entrepreneurs, mostly owners and managers of small businesses, make business decisions based on their own premonitions. Often rely on intuition, and their choice is not in any way backed by hard numbers or analysis. Many of them justify this situation by the lack of financial resources for market research, but using the appropriate methods and concepts, you can carry out the mentioned analysis at home. One such method, which does not require the involvement of specialized companies and large amounts of money, is Porter's competitive strategies - a method that should be part of any business plan.

What is this?

As the name suggests, the concept is by Michael E. Porter. He is a well-known economist, consultant, researcher, teacher, lecturer and author of a large number of books. Many concepts, strategies and theories have been created regarding problems related to business, society and the economy. Analysis by competitiveMichael Porter's strategies should be applied before attempting to enter a new market, as the concept is intended to assess the attractiveness of the sector and is based on 5 different factors that are related to the enterprise environment:

• supplier bargaining power,
• market power of buyers,
• competition within the sector,
• the threat of new manufacturers,
• the threat of substitutes.

Where to start the analysis?

The correct analysis of the basic strategies according to M. Porter should begin with the definition of the sector in which the enterprise should operate. It should be borne in mind that a sector is a narrower concept than an industry and means a group of companies producing substitute products in the same market. After defining the sector, it is necessary to determine its size, which is most often expressed as the sum of the annual turnover of all enterprises in the sector in this market.

Establishing accurate data in practice is an extremely difficult task, especially if the analysis is carried out independently. A lot of information, however, can be found on the Internet or just think about it and determine the size of the sector, as large or small.

Final steps

The penultimate step in calculating the competitive strategy according to M. Porter is to determine the dynamics of the sector. How fiercely do manufacturers compete to create more and more new technologies or products that they offer, how similar are they to each other? Dynamicscan be defined, for example, in the range from 1 to 10.

The final stage of describing the external environment of the enterprise according to Porter's leadership strategy should be thought in advance.

Highlights

The life cycle of a sector is taken into account as the life cycle of both a product and an enterprise, and in addition, it resembles a pattern of human life. It consists of the following phases:

• introduction,
• development,
• maturity,
• decline.

In the individual phases, the sector is characterized by different features, as outlined below:

• introduction,
• uncertainty and risk of activity,
• overcoming barriers to entry into the sector,
• core value of technology and innovation,
• limited competition,
• limited flow of information,
• experience effect,
• price changes,
• non-commercial activity, negative liquidity,
• heavy capital needs to fund activities.

In the second stage of development in the life cycle, Porter's strategy matrix considers the following phases:

• fast growing demand,
• entering the market of new companies,
• rapid growth in yields,
• growing competition,
• a sharp drop in prices,
• increasingly intense company activity (still negative liquidity),
• still high capital needs.

Stagematurity includes:

• great marketing value,
• stop growth in consumer demand,
• intense competition (also international),
• price cuts,
• customer legibility,
• revenue drop,
• decrease in profitability of production and trade,
• release capacity growth,
• need to improve technology.

At the stage of decline appear:

• market stagnation,
• price stabilization,
• selling at survival levels
• exit the company sector,
• remains a few companies serving the market
• bypass competition,
• low income, low liquidity,
• sale of assets.

The correct definition of the stage of the life cycle of the sector is extremely important for all its participants, both current and future. This allows much more accurate forecasting of the current and future profitability and development potential of the enterprise.

Competition within the sector

First, according to Porter's strategy, it is necessary to start with the definition of competition and an assessment of the current competition in the industry. It is best to check what the main players in the sector are and analyze their market share. You can find information on this topic on the Internet by watching the company's results and sales dynamics.

Then it is worth determining the level of rivalry between the participants. Here you should also pay attentionattention to the marketing actions taken by individual companies, and whether their actions are in the nature of an open struggle in the field of pricing, promotion, or rather, they concentrate on advertising their own strengths.

Threat of new competitors

The next important point in Porter's strategies is the threat of new competitors, that is, all companies that can enter this market. Here, one should also take into account those enterprises that are just being created. It is easier for them, as new competitors, to enter this market, due to the fact that, as a rule, there are more of them, and they mainly compete with each other. Therefore, we do the study of potential competition based on the analysis of barriers. Assessing this risk, it is necessary to identify and assess the barriers to entry into the market. The higher they are, the lower the risk of new items appearing in the competition.

Principles

Porter's strategies take into account economies of scale - if companies in this market receive significant advantages in scale, the risk of new zones is low. New entities must operate for a long time in adverse conditions, until the final entry into the market, to achieve a level comparable to existing companies on the market.

Porter's strategy considers the possibility that sometimes a company can be built for next to nothing, and sometimes it requires a huge investment of capital. The higher the capital requirement in a given business sector,the less the threat from new members.

Know-how - some industries that require specific knowledge, where companies are usually present on the market for many years.

Getting such knowledge for new competitors can be difficult or very costly, which greatly increases the barrier to entry in this market. In addition, some technologies may be protected by patents, thereby preventing competitors from using them for many years.

The cost of switching suppliers is also taken into account in Porter's strategy - the easier it is for a client to change providers, the more likely it is that new competitors will appear on the market to take customers away from companies present on the market.

Product differentiation among competitors - if today's competitors offer consumers unique products under strong brands, the barriers to entry for new entrants will be higher than if everyone has interchangeable products in the range that are almost the same for the final recipient.

Government Barriers

Legal barriers - governments of different countries introduce various kinds of rules, in some sectors they cause a significant restriction of access to this market. In the case of many sectors, rules are also put forward that people must comply with in order to be able to work in specific markets. The more restrictions and requirements arising from the rules in business, the less the risk of new ones.competitors.