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Industry Pushes and the Common Strategies

Chapter 2

2. 0 Literature Review

In this section, the author will review the books concerning Michael Porter's Five Competitive Industry Causes and the General Strategies. This research centres on the housing marketplace and draws parallels to studies done by others. The writer will critically measure the advantages and weaknesses of the model.

2. 1 Background

Numerous studies have been done throughout the world to build up and market real estate projects suitable for different demographic segments. The studies on the Sri Lankan housing market are mostly insurance policy papers/reports, departing a void in regards to studies regarding market strategies and competition.

Countries like Singapore and Malaysia have well organised strategies resulting in a vibrant housing market available to all of this research will give attention to drawing parallels on this subject matter. (Jones Lang LaSalle, Research Record).

The California State has used Porter's Five Causes Model to comprehend the industry's elegance and competitiveness. The primary trend appears to be the increasing rivalry among firms and the loan consolidation of capital in the industry (William, Mack, 2005). The writer intends to draw parallels to the Sri Lankan context.

The literature on attaining competitive advantage at business device level has been growing over the years and the writer has attemptedto relate academics theory and the tools and ideas of Porter's Five Competitive Makes and the Universal Ways of finding a winning market technique for the housing marketplace in Sri Lanka. Although in the international world the aforementioned models have been used extensively in research on housing industry, no such work is out there on Sri Lanka.

2. 3 Michael Porter's Five Pushes Model

The Five Competitive Pushes and the General Strategies model originated by Michael E. Porter in his book 'Competitive Strategy: Approaches for Analyzing Sectors and Competition' in 1980.

Since then it is becoming an important tool for analyzing an organizations structure and strategic functions. Porter's models derive from the necessity for a commercial strategy to meet up with the opportunities and dangers in the organizations exterior environment. Competitive strategy should be based on a knowledge of industry buildings and just how they change (Porter, 1980).

The ultimate aim of a competitive strategy is to permit a business to defend against competitive makes or in the alternative influence such makes in its favour. The key is to move below the surface and analyse the resources of each competitor. Examination of such underlying causes will show the critical durability of firms and clarify areas that produce greater profits and highlight areas that show guarantee of either opportunities or risks (Porter, 1980).

As discussed in Physique 3, Porter has discovered five competitive makes that shape every industry and market, which determine the intensity of competition and the success and appeal of a business (Porter, Michael. E, 1979: 137- 145). The author use the model to cope with the issues below to develop an absolute market strategy for the enclosure business in Sri Lanka.

(i) The necessity to evaluate the suppliers to understand bargaining electricity and supplier/seller collaboration.

(ii) The necessity to study the pressures of buyer's bargaining vitality and buyer/seller collaboration.

(iii) The necessity to consider the risk of new entrants and the options of new players coming into the market.

(iv) The awareness of the threat of substitutes and attention to endeavors by outsiders to succeed buyers over to their respective products.

(v) Looking into the competitiveness within the industry to keep abreast of market position, increased sales and market share, to truly have a competitive border over rivals. A classic example of competitive rivalry is the battle between Coca Cola and Pepsi (Draft, 1988: 251).

To understand the talents and weakness of the model each one of these industry pushes must be examined.

2. 3. 1 Bargaining Ability of Suppliers

Supplier bargaining power is likely to be high when the market is dominated with a few large suppliers, when there are no substitutes because of their product, the suppliers and customers are fragmented and customer bargaining vitality is low and switching costs in one supplier to some other are high (Porter, 1980).

The supplier integrating forward to obtain higher prices and margins is a chance. This threat is especially high when, the buying industry has a higher success than the delivering industry, forward integration provides economies of scale for the dealer, the buying industry hinders the providing industry in their development, for example, reluctance to simply accept new produces of products and the buying industry has low obstacles of entry.

In such situations, the buying industry often activities high pressure on margins using their suppliers. The relationship to powerful suppliers can potentially reduce tactical options for the organization.

2. 3. 2 Bargaining Electric power of Customers

Similarly, the bargaining ability of customers establishes how much customers can impose pressure on margins and quantities.

Customers' bargaining vitality may very well be high when they buy large quantities and there's a concentration of clients, the supplying industry comprises a sizable range of small providers, the providing industry operates with high set costs, the merchandise is undifferentiated and can be replaced by substitutes, turning to an alternative product is relatively simple which is not costly, customers have low margins and are price sensitive, customers could produce the product themselves, the merchandise is not of tactical importance to the client, the customer knows about production costs and the likelihood of the client integrating backwards.

2. 3. 3 Risk of New Entrants

When your competition in an industry is high it is easier for other companies to enter the industry. In such situations, new entrants could change major determinants of the market environment (e. g. market stocks, prices, customer devotion) anytime.

There is often a latent pressure for response and modification for existing players. The risk of new entrants will rely upon the degree to which there are barriers to accessibility.

These are usually economies of level, high initial opportunities and fixed costs. Cost features of existing players are usually because of the experience curve ramifications of operation with totally depreciated belongings, brand loyalty of customers, secured intellectual property like patents, licenses etc. , scarcity of important resources, e. g. licensed expert staff, access to raw materials controlled by existing players, distribution channels are manipulated by existing players existing players have close customer relationships, e. g. from long-term service contracts and the high switching charges for customers, legislation and federal government action.

2. 3. 4 Risk of Substitutes

Threats from substitutes is present if there are alternate products with lower prices and better performance variables which can potentially attract a significant proportion of the marketplace, thus lowering potential sales quantity for existing players.

This category also relates to complementary products. Similar to the threat of new entrants, the risk of substitutes depends upon factors like brand commitment of customers, close customer interactions, switching costs for customers, the relative price for performance of substitutes and the current trends.

2. 3. 5 Competitive Rivalry between Existing Players

This force represents the level of competition between existing players in an industry. High competitive pressure, ends up with pressure on prices, margins and therefore on profitability of every solitary player.

Competition between existing players may very well be high when, there are many players around the same size with similar strategies, there is not much differentiation between players and their products resulting in high price competition, market growth rate of a player is possible only at the trouble of a competitor and the obstacles for exit are high.

2. 4 Five Makes Analysis

The Five Causes Analysis can provide valuable information for three areas of corporate planning defined below.

2. 4. 1 Statistic Analysis

The Five Causes Analysis enables deciding the appeal of a business. It provides insights on profitability. Thus, it supports decisions about access to or leave from an industry or market segment. Additionally, the model may be used to compare the impact of competitive causes on one's own group against that on challengers. Opponents may have different alternatives to respond to changes in competitive causes from other different resources and competencies. This might influence the composition of the whole industry.

2. 4. 2 Dynamical Analysis

In combo with a PEST Analysis, which reveals drivers for change in an industry, Five Makes Analysis can show you insights in to the potential future elegance of the industry. Expected politics, economical, socio-demographical and technical changes can affect the five competitive pushes and so have impact on industry buildings.

2. 4. 3 Analysis of Options

With the knowledge about power and power of competitive makes, organizations can form options to affect them in a manner that enhances their own competitiveness. The effect is actually a new strategic way, for example, a new positioning and differentiation for competitive products and tactical partnerships. Thus, the model allows a organized and structured examination of market composition and competitive situation and can be employed to particular companies, market sections, industries or locations.

2. 4. 4 Influence of Five Forces

After the research of current and potential future point out of the five competitive pushes, managers can seek out options to impact these makes in their organization's interest.

Although industry-specific business models will limit options, one's own strategy can change the impact of competitive pushes on the organization. The target is to lessen the power of competitive forces.

2. 5 Michael Porter's Common Strategies Model

According to Michael Porter a company's advantages ultimately belong to one of two headings; cost benefits and differentiation. Making use of these talents in a wide or narrow range can cause effective cost management, differentiation and focus (Porter Michael. E, 1980: 35-40).

Each of these strategies runs its risk. In mention of a low cost strategy, others too may lower their costs to compete. Regarding differentiation too, rivals may change customer profiles to latch onto the marketplace segment. With regard to the concentration strategy, opponents may make an effort to make changes to the target segment to attract a larger market. (Thompson Arthur. A. , Strickland A. J. , Gamble John. E. and Jain Arun. K. , 2009: 115 - 138). In this study the emphasis group is the center income market segment.

Competitive strategies give attention to ways in which a company can achieve the most helpful position (Pearson, 1999). Therefore high success can be achieved through achieving the cheapest costs or the best prices vis- -vis the competition, called 'cost control' by Porter and 'differentiation', is the way in which companies can earn a cost prime (Porter, 1980).

As described in Figure 4, there are three general strategies available to companies to realize competitive advantage, specifically overall cost command, differentiation and concentration (Porter, 1980).

These three strategies need a total dedication and organizational preparations which could be diluted when there is more than one primary target. The essential universal strategy is to outperform competitions, which means a firm could earn high comes back. Success of 1 of the universal strategies will help a firm get yourself a just return (Porter, 1980).

Companies can perform competitive benefit essentially by differentiating their products and services from those of competition and through low costs. Companies can focus on their products by a wide target, in so doing covering the majority of the marketplace, or they can give attention to a narrow concentrate on in the market (Lynch, 2003).

Each competitive strategy will be evaluated to comprehend the strengths and weakness of the model.

2. 5. 1 Cost Leadership

Companies using cost management strategy try to become the lowest-cost producers within an industry. Lowest costs would earn the best profits where competing products are essentially undifferentiated and sell at a standard selling price.

In certain occasions, the company may charge the average price while following low cost authority strategy and reinvest the excess profits into the business. Companies like Ryan Air and Easy Jet and ASDA and Tesco adopt a cost authority strategy (Lynch, 2003).

2. 5. 2 Differentiation

Porter (1980) argues that companies utilizing differentiation strategy will incur extra costs. These costs can include high advertising to market a differentiated brand image for the merchandise, which is both a cost and an investment. McDonalds for example is differentiated by its very brand and brand images of Big Mac and Ronald McDonald.

While differentiation has many advantages some problematic areas include the difficulty in ascertaining if the extra costs entailed in differentiation can in fact be retrieved from the client through premium costs. Additionally, successful differentiation strategy of a firm may attract opponents to enter the company's market section and replicate the differentiated product (Lynch, 2003).

2. 5. 3 Concentration

Porter initially shown focus among the three generic strategies, but later identified focus as a moderator of both strategies. Companies use this plan by concentrating on areas with the least amount of competition (Pearson, 1999).

This strategy can be applied by focusing on a specific specific niche market in the market and offering specialised products, hence the name 'area of interest strategy' (Lynch, 2003).

This strategy provides companies the likelihood to charge reduced price for superior quality, known as 'differentiation concentrate' or by supplying a low price product to a little and specialised group of purchasers, termed 'cost focus'. Ferrari and Rolls-Royce are typical examples of specific niche market players. Both have a niche of premium products available at a premium price.

2. 6 Evaluation of Porter's Common Strategies

Firms can make from one of the three common strategies to compete available on the market, regardless of the framework of industry (Porter, 1980).

Kay (1993) and Miller (1992) have cited empirical types of successful companies like Toyota and Benetton, that have adopted several universal strategy. Both these businesses used common strategies of differentiation and low cost simultaneously, which led to their success.

Companies that are successful at making use of the cost command strategy tend to be positioned to capitalize on a value proposition which emerges of their low priced emphasis, like the traditional success storyline of Tesco in the UK.

Interestingly, an emphasis on cost management in this sense can become a form of differentiation. Successful implementation of a cost leadership strategy would reap the benefits of process engineering skills, products made for ease of production, access to inexpensive capital, small cost control and incentives based essentially on quantitative focuses on. McDonald's for example, achieves low costs through standardised products and centralised buying of equipment, etc.

Unlike cost management strategy, there may be empirical evidence to support the differentiation strategy (Pearson, 1999). Hall (1980) investigated sixty-four American companies and the findings of the analysis uncovered that companies carrying out a differentiation strategy had superior performance compared to those companies that were not following same.

The focal point for the business seeking a differentiation strategy ought to be the customer, rather than by itself the competitors. Remember that for a differentiation strategy to be successful, the idea of differentiation recognized by customers as valuable should coincide with the distinctive competence of the business (Pearson, 1999).

For example, Orange succeeded by providing the most basic requirements for cellular phone communication, bettered the competition and created a differentiation in the minds of the consumers. (Barwise et al, 2004).

Notably, only a number of small and mid-sized companies use the topic strategy (Lynch, 2003). Application of Porter's universal strategies to the Portuguese Crystal A glass, the Mould and Porcelain confirmed that organizations following differentiation strategy tended to attain higher performance in accordance with organizations which did not show the presence of the non-classical differentiation based on a time structured inclination. (Strategic Orientations of Making Organisations in the Euro Market: Data from Portugal; Available Online).

Notably, most successful companies exhibit a number of kinds of differentiation, along with varieties that are straight associated with cost command and focus orientation. This is one of the gray areas in the evaluation of general strategies that fact can be different and more subtle than the stark contrasts that are highlighted by Porter (1980).

Kim et al (2004) have argued that Porter's generic strategies of differentiation and cost control will be applicable to e-business firms in a wide sense, as the focus/niche strategy will never be as practical for e-business firms, compared to their traditional counterparts.

2. 7 Exploration of information for Porter's Universal Strategies Analysis

The information essential for conducting the common strategies analysis can be found in company and competition websites.

Annual records of companies may be used to analyse the human relationships between costs and profitability and what sort of particular strategy is affecting the firm's efficiency.

Marketing communication tools used by the business and competitors could also reflect the common strategies. Adverts can be considered a useful source of information to analyse the strategy that is being pursued by the business, and exactly how that differs from that of your competition.

Journal articles, trade magazines and reputable newspaper articles are of help sources of information to analyse industry developments, customer personal preferences in a given market and the strategies that are being pursued by the companies in a specific industry.

2. 8 Marriage between Porter's Common Strategies Research and the Five Forces Model

The three general strategies suggested by Porter (1980, 1985) can be effectively utilised to defend against competition in the business environment. The industry pushes take the form of competitive rivalry, barriers to entry, threat of substitutes, buyer electricity and supplier vitality, explained below (Lynch, 2003).

2. 8. 1 Competitive Rivalry

If the competition on the market is fierce, the good thing about a cost command strategy would be that competitiveness in cost. However, cost authority strategy is not the most desirable, as competitors may put extreme price pressures, forcing all players to reduce their prices considerably.

Differentiation may be a much better strategy as devoted customers may stick with the company. It could also be hard for competition to cope with specialised needs of customers who are part of a niche segment on the market.

2. 8. 2 Obstacles to Entry

A company using anybody of the three strategies would think it is easy to build barriers for new entrants. The training curve of cost leaders within an industry, along with the economies of level through experience curve results, would often make it impossible for potential entrants to compete on price, as the older organization can further lower prices without comprising its profitability.

High customer commitment towards a company's brands, which holds true for the differentiation strategy, can play a essential role in discouraging potential entrants. Customers often prefer to get with a niche player due to a certain central competence that only that particular player is providing on the market.

Also companies that make use of the emphasis strategy as time passes often create a thorough understanding of their customers' needs, which is a very difficult activity for a potential entrant. In this way, focus can act as an entry hurdle too.

2. 8. 3 Threat of substitutes

It is the differentiation and differentiation-focused strategies that effectively decrease the threat of substitutes. Threat of substitutes is reduced in case of the differentiation strategy due to customer devotion to the unique aspects of a specific product or service, which no alternative product will offer in the customer's mind. In case there is the later strategy, the nature of the business's products and center competence of the organization reduce the risk of substitutes.

2. 8. 4 Buyer Power

The electricity of clients changes in accordance with the three generic strategies. Cost leaders have the initial ability to offer cheap options to large and powerful clients. However, the circumstance is different for companies making use of the differentiation and focus strategies. Buyers in case there is these two strategies would have less electricity as there are few alternatives available to them.

2. 8. 5 Supplier Power

Suppliers can exercise their power primarily in case there is differentiation and concentrate/niche strategies. Companies making use of these strategies be capable of pass the purchase price raises of suppliers with their final customers, through the high quality prices strategy.

2. 9 Talents and Weaknesses of Porter's Models

Porter's style of Five Competitive Makes allows a systematic and structured research of market framework and competitive situation. The model can be applied to particular companies, market sections, industries or parts.

The power of competitive causes determines the inflow of investment and drives the dividends to free market levels. The five competitive causes such as access, threat of substitutes, bargaining electric power of buyers, bargaining power of suppliers and extreme competition among rivals reflecting that competition in industry moves beyond established players.

Porter identified these five competitive pushes patterns every industry and every market. These pushes determine the level of competition and hence the success and attractiveness of a business. The aim of corporate strategy should be to alter these competitive makes in a manner that improves the positioning of the business.

Porter's model facilitates examination of the driving a vehicle forces within an industry. Predicated on the information derived from the Five Causes Research, management can decide how to influence or even to exploit particular characteristics of these industry.

Therefore, it's important to determine the scope of the marketplace to be analyzed in an initial step. Following, all relevant pushes for this market are discovered and analyzed. Hence, it is not necessary to evaluate all elements of all competitive makes with the same depth.

The Five Causes Model is dependant on microeconomics. It takes into account resource and demand, complementary products and substitutes, the partnership between volume of creation and cost of creation and market set ups like monopoly, oligopoly or perfect competition.

After the examination of current and potential future talk about of the five competitive makes, managers can seek out options to effect these forces in their organization's interest. Although industry-specific business models will limit options, the own strategy can transform the impact of competitive causes on the organization. The objective is to reduce the power of competitive forces.

The model is based on the thought of competition. It assumes that companies make an effort to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this target, it dos not necessarily consider strategies like proper alliances, electronic linking of information systems of all companies along a value string, electronic enterprise-networks or others.

As for the limitations part, nothing in this world is alone PERFECT, so is this five forces model. Sometimes, it is better if some new player enter the market. It gives way to fresh thinking and catches the interest of the clients, in addition to benefits like infrastructure development. Again, it is better if a reasonable volume of substitutes are valuable in the market, as it makes one think how to raised his product and get the hearts of the customers.

In mention of the general strategies it became clear over time that the truth is there were some tones of grey in the variation between differentiation and cost, compared to the dark-colored and white that is projected in theory. It is very difficult for most companies to completely ignore cost, no matter how different their product offering is. Likewise, most companies won't admit that their product is actually the same as that of others (Macmillan et al, 2000).

It is very important to analysts to note that Porter's general strategies should be considered as part of a broader strategic analysis. The general strategies only provide a good starting point for discovering the principles of cost control and differentiation and may not provide relevant proper routes in the case of fast growing markets (Lynch, 2003).

It is important to perform other analyses like PESTEL analysis to analyse how the generic strategy being employed by a company should change in accordance with external factors. Other useful analyses would include SWOT examination of the key success factors etc.

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