Throughout the history of business, some companies have performed better than others. Whether it’s the result of innovation, a pricing model that the market is comfortable with, or a sound business strategy, these companies grow and succeed over time. While the published work of Michael E. Porter – a pioneer in the field of business strategy and one of the thought leaders on management – helped bring to light the foundational concepts of corporate strategy, many business leaders still haven’t learned its importance.
Nilesh Waghela, a retired independent business advisor who helped clients with their business strategies, knows that the key to grasping and defining strategy starts by understanding the competition. Competitor analysis is the core of Porter’s work, highlighted by strategy concepts such as the Five Forces model and the Generic Strategies.
Porter’s Five Forces
The Five Forces model helps explain why different levels of profitability are witnessed in various industries. This model identifies five forces that play a vital role in shaping the performance of every market and industry. They are:
- Industry Competition: The more competitors a company has in its industry (which likely translates to more products and services on offer), the lesser its power. Conversely, where there’s reduced competition, a company has more power to charge higher prices for its products and services.
- The Power of Suppliers: The number of suppliers in an industry, the uniqueness of the inputs they provide and the cost of switching suppliers are all aspects a company must consider. The presence of fewer suppliers means they (the suppliers) have the power to set higher costs for their input. However, with many suppliers to choose from, a company may find it easier to switch between two or more, meaning it can save on input costs and boost its bottom line.
- The Threat of New Entrants: If the entry costs into an industry are low, an established company could find its position significantly challenged. Where the barriers to entry are high, existing companies find it favourable as they can negotiate better prices and terms.
- The Threat of Substitutes: The presence of substitute products and services poses a threat to a company’s ability to establish a strong position in its market. Having close substitutes means customers have alternatives to choose from; as a result, a company’s position can be weakened.
- The Power of Customers: How many customers there are, their profiles, and how easy (or hard) it is to find new customers are all aspects a company should consider. A powerful client base can negotiate better rates on products and services, which can erode a company’s power in the market.
Generic Strategies
The Generic Strategies are ways a company can gain a competitive advantage (an edge) over its competitors and establish a strong position. These strategies are:
- Cost Leadership: Companies that pursue this strategy aim to keep their costs low by using efficient processes and securing low costs for raw materials.
- Differentiation: With this strategy a company produces a differentiated (or exclusive) product, making it more attractive than those produced by its rivals. Success here requires investment in innovation, research and development.
- Cost Focus: Companies that adopt a cost focus strategy target their products or services at a niche segment of the market and offer them at low prices. For this to work, they must define the niche market clearly and thoroughly understand the needs of consumers.
- Differentiation Focus: This strategy requires a company to target a niche segment with a unique product or service. The aim is to build strong brand loyalty among users. Therefore, the company must improve the product continuously to stay exclusive.
The determination of the right strategy must be guided by a company’s understanding of its strengths and weaknesses. Many companies opt for a hybrid strategy that makes use of various components of the generic strategies. Doing this is essential in a rapidly changing business environment that requires firms to respond quickly.
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