Competitive Strategy by Michael Porter

COMPETITIVE STRATEGY

Introduction

Competitive Strategy is a plan of action to have an organization achieves its objectives. It is a broad programme of goals and activities as well as environmental interactions and resource deployment to have a firm attain corporate success.

Generally, strategy deals with three key issues namely:

* Organization objectives.

* Resources and their deployment.

* Organization environment.

CASE 1

COMPETITIVE STRATEGY BY MICHAEL PORTER

According to Michael Porter, competitive strategy searches for a favourable position for a firm within the industry. It aims at establishing a profitable and sustainable position against the forces that determine industry competition while at the same responding to the environment.

The structural analysis of industries.

Michael Porter postulates that in any industry, there exist five competitive forces which are:

* The entry of new competitors.

* The threat of substitutes.

* The bargaining power of suppliers.

* The bargaining power of customers.

* The rivalry among existing competitors.

The collective strength of these five forces determines the ability of firms in the industry to earn, on average, rates of return on investment in excess of the cost of capital. These forces are able to influence the prices, costs, and the required investment of firms in the industry.

The power of buyers influences the prices of products that firms can charge as does the threats of substitutes. They also influence the cost of investment because powerful buyers demand costly service.

The bargaining power of suppliers determines the cost of raw materials and other inputs. The intensity of rivalry influences prices as well as the cost of competing such as plant, product development, advertising, and sales force. The threat of entry places a limit on prices and shapes the investment required to deter entrants.

When carefully considered the five forces

* Allow the firm to see through the complexity of completion.

* Pinpoint those factors that are critical to competition.

* Identify those strategic innovations that would most likely improve the industry and its own profitability.

Some organizations however are known to engage desperate measures in order to attain competitive advantage. These moves may wreck the entire industry in the long run. Firms that are prone to this practice are mainly in the second tier or those that wish to engage in 'dumb' competition. A leader should therefore balance his/her own competitive position against the health of the industry as a whole. Long run profitability is achieved through development of new ways of competing such as innovation.

Value, supply, demand and profitability

The company's competitive strategy is aimed at increasing profits, satisfying the needs of their customers, maintaining the supply of goods and services. In order for the customers to continue buying the product, they need to attach some degree of value to the product. The greater the attached value, the more the buyer is willing to pay.

At other times the profits are determined by the demand of the product. The higher the demand, the higher the price, and consequently,