Michael Porter and competitive Analysis Michael porter has made perhaps, the most significant contribution to the

thoughts on strategic management in last two decades. His competitive strategy, Published in 1980 was followed up by Competitive Advantage in 1985.his work provided foundation for developing many subsequent concepts on strategy. Most prominent among these concepts have been his model of competitive analysis, his set of generic strategies and his notions of value chain. Porters model of competitive analysis: Porters model of competitive analysis identified five forces in an organizations competitive environment that influence competition. This is shown below diagrammatically.

Porters Model of Competitive Analysis Threats of New entrants

Bargaining power Of Suppliers

Industry competitiveness intensity of rivalry

Bargaining power of Buyers

Threats of Substitutes

Threats of New Entrants: in the market place, as in any club. New entrants come in overcoming entry barriers. These barriers to outsiders entry take many forms. Some of these are identified below: Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantage Government policy Expected retaliation

In a growing market, in early stages of development, the entry barriers are relatively easy to scale. As the market matures, with leading established brands, the entry becomes so much more difficult. However, in recent times, with globalization, the multinational companies have penetrated many markets, including those in India aided by their financial muscle and their aggressive marketing. The manner in which Akai or Aiwa have steam rolled their products in established consumer electronics market, is indicative of how the entry barriers are scaled by determined new competitors. Threats of substitutes: threats of substitutes can come in form of products or processes. Major determinants of these threats are identified below:

Relative price p-performance of substitutes Switching costs Buyers propensity for substitute

Substitutes have often ruined the company prospects. In early fifties, synthetic rubber Limited, a company promoted by kilachands with very prestigious collaboration with global company firestone promoted a plant for manufacture of synthetic rubber using the alcohol based technology. Even before the company could establish its market presence, discovery of crude oil. On shore and offshore, In India brought to prominence the petro chemical based synthetic rubber technology. Mafatlal promoted Nocil, which effectively sealed the fate of relatively expensive alcohol, based synthetic rubber technology. Aggressive marketing by substitute products can also threaten an existing companys share in the market. Indian petro-chemical Ltd, (IPCL), a government of India owned company dominated the market for two decades before Reliance Industrys entry in the market. Reliance adopted aggressive price competition selling their products high destiny polyethylene (HDPE) and low-density polyethylene (LDPE) products at prices below the IPCL prices. Not used to competitive environment and with bureaucratic slow decisionmaking process. IPCL was forced to concede its market share to more aggressive Reliance Industries Limited. Bargaining power suppliers: the bargaining power of suppliers puts pressure on a companys production processes and compels it to review its competitive advantage. The suppliers of relative scarce raw material and minerals have always dictated the price supply norms in the market and made the companies vulnerable. Some factors determining the supplier power are listed below: Differentiation of inputs Switching cost suppliers and firms in the industry Presence of substitute inputs Supplier concentration Importance of volume to suppliers Cost relative to total purchase in industry Impact of inputs on cost or differentiation Threat of forward and backward integration in the industry

Many instances can be cited about the suppliers threat in Indian industrys environment. Electric power supply in India has been parenialy inadequate and erratic. Power tariffs also differ from region to region. In power intensive industries like cement and aluminum, the competitive advantage of the firm is lost with enhanced cost of power. Many of the industries have settled for relatively expensive in house power generation to ensure power supply and counter the suppliers threats. Vertical integration is also a threat. In one of the case cited above. Reliance industries Ltd, has gone in for petroleum refinery. The fed stock, which is a bye product of the processes

of refining, is supplied by Reliance to its own petro-chemical plants and to those of its competitors. This will certainly compromise the competitive advantage of companies like IPCL, who while competing with Reliance in the market will be dependent on it for critical input supply. Bargaining Power of Buyers: the bargaining power of buyers has a major influence on the competitive advantage that a firm may enjoy. The buyers bargaining power may have its moorings either in bargaining leverage that the buyer may have or on its price sensitivity. Determinants of both these are indicated below. Buyers concentration versus firms concentration Buyers volume Buyers switching costs relatively to firm switching costs Buyer information Ability to backward integrate Substitute products

Determinants of Buyers price sensitivity Price/total purchase Product differences Brand identity Impact on quality/performance Buyer profits Decision makers incentives

Many of the determinants of the buyers bargaining power are commonly known and experienced by businesses. Big buyers always call shots. Dependence on a single buyer or a single product for bulk of revenue earnings has always made a firm vulnerable. A leading printing press in Mumbai depended on a large volume magazine publisher for nearly half of its revenue. The investment decisions by the printing press were made, keeping the needs of the publisher in mind. The press ran into severe problems when the publishing company decided to go backward integration and establish its own printing press. Automobile industry world over has fostered development of ancillary industries. These satellite units survive and grow by total dependence on the automobile manufacturer. A shift in requirement of or preference of the buyer is often the cause of collapse of the ancillary manufacture. Within industry competition and rivalry: whereas the four components of porters model discussed above refer to threats emanating from the external environment, the rivalry and intensity of competition within the industry in itself is a major variable defining the competitive advantage for a firm. Some of the rivalry determinants are as follows. Determinants of Industry Rivalry

Industry growth Fixed cost/ value addition Intermittent over-capacity Product differentiation Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stake Exit barriers

A number of traditional industries have time and again gone through attrition for a few firms within the industry. Textile industry in India has gone through the effect of extensive internal rivalry. With rigid government controls on exit, many of the uneconomic and noncompetitive firms became non-competitive. With intermittent over capacity, cement companies in India has also resulted in elimination of few through strategies of consolidation and of merger. Industry rivalry is leading to strategic merger of very large companies to retain the strategic advantage. Management Consulting and Accounting firms of Coopers and Lybrant merged with Price Waterhouse to form the Price Waterhouse Coopers, which became the largest consultant company in the world. Similarly, the merger of global oil companies Exxon with Mobil has been one of the largest mergers in annals of corporate strategy. Porters Generic Strategies: Porter argued that there are but two Basic types of competitive advantages a firm can possess: low cost or differentiation. These combined with the scope of a particular business the range of market segments targeted produce three generic strategies for achieving above average performance. These are Cost leadership Differentiation and Focus

We now examine at length three specific strategies recommended by Michael Porter and ones referred to earlier. These are Cost efficiency and cost leadership Differentiation Focus

Cost Efficiency and Cost Leadership Strategy

In competitive market overall efficiency and low cost producers win. Cost leadership provides the cutting edge in competitive market. With cost efficiency, the firm has greater flexibility in pricing in the market place. Following two case studies explain how businesses acquire strategic advantage in the market place. John D. Rockfeller and Standard Oil Case Study- A cost Advantage Dimension We have already seen how John D. Rockfeller acquired total monopoly for standard Oil through well-designed vertical integration strategy. There is an interesting story about John D. Rockfeller and his insight in strategic cost reduction. Once, John D. was visiting the Cleveland refinery. While going through the packing department of the refinery he stopped and observed the process with a keen eye. Oil in those times was used for heating and domestic consumption besides being made use of industrial products like lubricants. Oil was packed and distributed in sealed barrels. The packing process was simple. Workers would take an empty barrel, pour the refined oil in the barrel and fill it up to the brim, put a lid on the barrel and seal it by putting ten rivets on the lid and barrel. After watching the process for a while, Rockfeller asked the worker about the number of rivets put. When told that it was ten, he asked a very simple, inconspicuous question, why ten? Apparently the worker did not have the answer. When the production supervisor, production manager and research department were brought in the picture no one had a convincing answer to why ten? Question. The general impression created by their responses was that it was ten because it was always ten before and that it was industrys standard practice. Rockfeller asked a counter question. Why not seven? The research department tried a seven riveted barrel and when this was rolled on the floor, oil spilled out there from. To respond to why not eight? question, a barrel with eight rivets was prepare and tried out. Though there was no spillage of consequence, there still were isolated cases of oil leaks from the barrel. When rivets were tried out, a perfect, spillage proof packing was confirmed. From Cleveland, Rockfeller went to New York and patented nine-riveted barrel. For the rest of the decades in the century, while globally oil was supplied in ten-riveted barrel, Standard Oil supplied oil in nine-riveted barrel. By putting one rivet less. Standard Oil is supposed to have saved over US Dollar eight hundred million (at nineteenth century prices) in production cost. Japanese companies have since mid-sixties taken a large chunk of world automobile, electronic goods and other markets. Japan has been acknowledged efficient and low cost,

top quality products producing nation. From quality Circles to Kaisen, Japan has introduced to the world concepts in efficiency enhancement and cost reduction. The following case study of Japanese car manufactures is illustrative of Japanese acumen and spirit of innovation. Japanese Car Companies- A Case Study in Innovation and Efficiency. Some of the most innovative ideas about products and innovations have emerged from Japanese car manufacturing companies. In early seventies, following the OPEC triggered oil price increase, Japanese small cars flooded the American markets. While the gas station prices of petrol increases from 20 cents a gallon to over US $ 1.30, the American buyers looking for reasonably priced, fuel efficient car found that American auto industry did not have such an option. They turned to, predominantly Japanese and few German manufactured cars. Undervalued and Yen and German Mark vis--vis US Dollar helped these manufacturers penetrate the lucrative American car market. Though the American Auto makers brought their own small cars to the market by mid-seventies. Dominance of Japan continued in eighties. American auto makers entered in to strategic alliances with Japanese auto makers to manufacture Japanese cars in the United States. In January 1987, the G-7 decided to withdraw support to the over valued US Dollar in international market and agreed to let it slide in value. The Dollar / Yen rate, then prevailing at 151 Yen to a Dollar began to slide. By 1993, the rate would slide down to 79 Yen to a Dollar. The revaluation of Yen threatened the Japanese car manufacturers. The Dollar price of Japanese cars increased for American buyers. Maintaining the Dollar price implied fast reducing margins. The Japanese manufacturers looked for all possible ways to reduce the cost of car. A very imaginative way was tried out by the Japanese car-company, Honda. Nearly 50% of its production was exported to North America. Finished cars were transported by the company owned ships, across the pacific, to America. The sailing took up to 10 days. Honda fitted its ships with assembly lines and loaded semi-finished cars on the deck in Japan. While the ship sailed to America, the cars were worked on. The manufacturing would complete hours before the ship arrived at the Western American port. By assembling the cars on the high seas, the company significantly reduced its finished goods inventory and reduced the unit cost of the car. Later, as the Yen appreciation continued, Japanese car companies shifted their manufacturing units to other countries of South East Asia. Like Indonesia and Malaysia and took advantage of cheaper labor and under valued currencies of these countries to retain their market share in the United States.

Cost efficiency is often wrongly associated with cost saving. Often companies acquire cost leadership by increasing and not reducing expenditure. False senses of cost savings pervade some organisations leading to a situation, which is characterized by the old wisdom of being penny wise and pound foolish. Expenses on research & development (R&D) and on training and human resource development (HRD) are essential. Well designed R&D efforts yield results, often only in the long run. Similarly< HRD is a long term rewarding effort. Impatient to see immediate return on these expenses and unable to get these many companies prune these in wake of liquidity pressures. This would be a wrong thing to do. Parkinsons law applies to cost reduction exercise. Managers want to cut those costs, which are apparent and do so without considering implications of such cost cutting exercise. Cutting down expenses on coffee on the house, transport or on telephone hardly make a dentin unit cost of the company and have negative ramification on overall employee morale. While Kotak Mahindra, a leading finance company cut coffee on the house expenses, the story got into and got blown up in financial press and caused avoidable embarrassment to the management of the company. For cost reduction strategies, firms have to focus on critical cost, saving of which have significant impact on unit cost. For power-intensive production processes, as in aluminum and cement industry, energy efficiency goes a long way in acquiring cost leadership. Reliance industry has over last few years accessed cheaper international credit and used the funds so mobilized to liquidate local high cost debt. There has been a substantial reduction in Reliances finance cost as a result. In strategies designed to have cost control, besides identifying critical input cost reduction. Productivity enhancement measures also need be considered. Better utilization of production capacity and existing manpower contribute to unit cost reduction. One manufacturing company entered in to an agreement with the workers union to increase in wages against working in relays during mid-shift hours, avoiding standard mid-shift breaks. Continuous production without breaks increased productivity and reduced unit cost even when it increased the wage bill. Cost efficiency is becoming critical in competitive markets. As we saw in the case of DuPont ratio in previous chapter, margins and volumes account for profitability. With constant asset turnover, the firms rely on margins. With competition, prices reduce and margins come under pressure, to preserve their margin in face of price reduction, the firms have to reduce unit cost to be competitive.

Differentiation: Differentiation is a major strategy variable. The strategy makes the business different. A business may differentiate itself in many many ways. The product may be different. The process may be different. The systems may differ and so do the structures. Innovation popularized by the economist Schumpeter, may provide differentiation and significant strategic advantage. Many innovative strategies have brought rewards to the business. We may start discussion on differentiation with innovation. Innovation: Innovation is very wide term. Innovation often defines the culture and the image of the business. No field of business activity can be devoted of examples of innovation. Product innovation: Product innovation has often dominated strategic thinking. The innovation of Laptop computer changed the character of the industry. What began with a Laptop has now become a palm held computer. Innovation has propelled the growth of electronic industry. Television today has many differentiating features, which create identity of one brand against the other. Spilt image (PIP. Picture within picture), superior sound system (dome technology), flat screen, and larger screen with better resolution, built in 220 channels are few examples of how product differentiation has influenced television. With the side innovation in electronic and computer technology, product differentiation has been extended to many fields. Whether it is communication or music, entertainment or education, product differentiation gives strategic advantage. Through its window based operating system. Microsoft has emerged as number one company in the world. Intel through Pentium chips has changed the basic structure of the industry. Internet browsers, search engines like Yahoo, e-mail, Outlook Express have become household words. Voice mail, direct national and international dialing, mobile phones, satellite telephony, call transfer facilities, wake up alarm, built in telephone number memory, speaker phone, conference call, video conferencing are many of the innovations that have changed the basic nature of telephone. A single smart card is used as a credit card used as an automated teller card, it is used as a phone card, used as electronic transfer card for payment in super markets and is also used as electronic key to enter homes or offices. E-commerce is rewriting the rules of marketing. Amazon.com is the biggest bookshop in the world rediff.com provides information that one obtained through a dozen telephone calls. Indian corporate is looking at e-commerce as an alternative to the market place.

Innovations in electronic and communications have been most notable. However, in every field product innovation is propelling strategic thrust FMCG sector has shifted its strategic thrust Paper or plastic. Pharmaceutical or chemical in every sector growth necessitates product innovation. Viagra is rewriting the norms of social and cultural behaviour. Production process innovation: Product innovation is backed by process innovation. Backed by technology, process innovation is making better products at lower cost. We saw about the process innovation in Japanese car industry. In 1930s and 40s, the assembly lines with large-scale production standardized products. Today superior technology has brought customization even while continuing large scale of production. Processes are designed to produce different products for different customer groups. An interesting example of strategic advantage through process innovation is that of printing industry in Sivakasi Sivakasi printers a case study in processes innovation. During early 1980s, the printing industry in India changed radically. New technology absorption brought about a decisive move away from traditional letterpress printing to offset printing. The industry moved from mechanical to photomechanical processes of printing. Multi colour printing two or four offset colour printing machines with large through put became the strength of the printers. In the new processes, offset machines have different cylinders for different colour plates. In pre press processes, after scanning and colour separation, positives are made for each of the four distinct colours. (All colours are eventually mix of three colours- red, blue, and yellow and black for adding depth) image is transferred on four plates. These plates are wrapped around individually cylinders. In the process of printing, the image on the plate is transferred to paper through a number of intricately designed and placed printing rollers. Modern offset printing can print from 10,000 to 60,000 images an hour. Printing takes little time. However, for the printer, major time is spent in washing and preparing the machine before the printing and washing the machine after the printing. All cylinders and rollers have to be thoroughly cleaned with solvents and a range of chemicals to remove any residue of colour from the earlier printing before a new job is loaded. This is also necessary because the sequence of printing is altered from job to job. Similarly after the job is finished, the machine has to be thoroughly cleaned again. Pre printing clean up and wash, called make ready, and post printing clean up and wash often take up to four hours. The time loss is more expensive foe one or two colours printing machines because multiple wash are involved for printing the same job.

In Sivakasi, printers, mostly from the same family, have adopted a novel process to solve the problem of down time. Four printing shops will have one colour offset machine each. Each one runs the designated colour printed forms are passed on from shop to shop-in order of the designated colour. In this process, one-machine prints only yellow, another only red and so on. No wash or clean up is required after the job because no colour change is involved. And machines print non-stop for twenty-four hours a day, seven days a week. Even when the quality of printing in Sivakasi is not the best by reducing the expensive down time and by taking up large volume jobs, Sivakasi has reduced cost of printing substantially and has been able offer very competitive printing rates. Most of the printing of the cheap posters and calendars that are seen in the wayside shops in towns and cities across India, originate in economical printing presses of Sivakasi. A new trend in production processes has emerged in recent years. Organisations are now relying on outsourcing for bulk of their production process needs. In house processes are tied up with those of suppliers and are fine tuned through computerized processes. Such outsourcing has reduced need for carrying inventories and given flexibility in production scheduling. Another discernable trend, noteworthy also in India, is to outsource service requirements. Services like securities, cleaning and maintenance, washing, catering and contracted out, with specialist handing the service, quality improves even when cost reduces. Innovation in marketing processes: Some very innovative practices in marketing processes have propelled the success of organisations. Sears, the retailing giant, we looked at in the beginning of this segment, initiated its business in 1850s through catalogue-based Mail-order selling accounts for significant part of marketing efforts today. E-commerce in many ways is the new avatar of the old mail order selling. Avon (perfumes and toiletries) and Tupperware (air-tight plastic containers and kitchen accessories) have built large markets by direct-to-customers marketing processes eliminating the middlemen (the whole seller and the retailer) in the chain. Housewives take up the agencies of these products; organize parties calling ladies in the neighborhood. After an hour or two of fun and food, the product is displayed and demonstrated by the company representatives orders are booked and alter delivered by the company. Following Avon and Tupperware, anyway have built large direct to customer distribution base and extended its reach in many countries. All these organisations now have global operations. Innovation in financial processes

Eighties have witnessed innovation in financial processes for corporate businesses. With introduction of new financial products and instruments in money and capital markets, businesses have tried out new strategies for sourcing finance. Financial restructuring has become a major area for innovation. The traditional debt: equity balance is fine tuned to companys advantage. Debt swap, interest swaps and exchange rate swaps are creating new markets and new climate for funding ventures. Old expensive debt is routinely replaced by cheaper debt by Indian corporate entities. Commercial papers are replacing traditional bank finance in meeting working capital needs. As in many other areas, a reliance industry has created a distinct identity for itself in strategic innovation in financial practices. Following is a case study of Reliances innovative financial processes. Reliance Industry- Innovative in Financial Processes Reliance is better known as accompany that brought the equity cult in middle income India. Reliance used effective strategy in financial structuring for funding its rapid growth through capital markets. In eighties, the government owned financial institutions and banks were very rigid on applying debt to equity norms to the borrowers. Reliance was envisaging a debt financed rapid growth for itself. It adopted a very innovative strategy to confirm to the norms of lending institutions and still raise the needed financial resources. Towards this end, it adopted the convertible debenture route. A convertible debenture is debt at the point of issue. The debenture holders have an option of converting its debt claim to equity at the pre-decided time in future, at pre-committed price. Reliance kept on modifying its capital structures on continuing basis. The Reliance approach is explained through a simplified table and calculations below. Please note that these are assumed hypothetical numbers and modality associated thereof and do not represent the actual raised by Reliance.

Action

1st Round

2nd Round

3rd Round

Equity capital at the beginning of 0 100 400 the round Conversion of convertible debenture providing additional 300 1,200 equity Total equity 100 400 1,600 Raise additional institutional debt using the norm of debt: equity of 200 600 2,400 2:1 Total debt 200 800 3,200 Total resources available 300 1,200 4,800 Issue convertible debentures equal to total available resources 300 1,200 4,800 Total resources at command 600 2,400 9,600 Of which debt (including convertible debentures 500 2,000 8,000 outstanding) Effective debt: equity ratio that would prevent further institutional 5.1 5.1 5.1 borrowing It is interesting to note that by the switch from debt to equity and again to debt, Reliance would raise exponentially its access to resources from Rs. 600 to Rs. 16,200 and then to Rs. 67,200 from one round to the other. The strategy would have run in difficulty if holders of the convertible debenture at the time of conversion would opt for continuance of debt and not convert to equity. To avoid such situation, Reliance maintained its profitability and paid handsome returns to its shareholders in form of dividend and bonus shares. From those days of constantly modifying capital structure, Reliance has now reached a stage that makes it convenient to raise resources through share offering in Indian markets and through issue of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs). Reliance has now access to relatively cheaper national and international debt and has been successfully replaced more expensive debt with cheaper debt. This has significantly reduced the finance cost for Reliance and increased its competitive strength. Innovation is present as a strategy alternative in any and all businesses. Changing environment necessitates that every organisation is a learning organisation. In an interesting concept It is asserted that organisations. Where rate of learning internally is greater than the environment change outside, grow. Organisations, which do not keep pace with change decay. s