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Michael Porter's model of strategic diagnosis

of the industry the company operates

The strategic approach of Michael Porter deepens competitive dynamics maneuvers


waste disposal and street designATEG specific features of each company. In his view, the choice of a
strategy depends primarily on the nature and intensity of competition that manifestation in your sector
considered. Meanwhile, Porter defines generic strategies booklet is a starting point in the particular
design, with original character and the strategy of each company.
The model is based on the analysis of five factors that have influence in the competitive sector
specific actappeared. Each factor and their combination characterized dome- niul activity in terms of
intensity of competition and, ultimately determine sector profitability - measured by the yield on long-
term capital.

new potential
enter the sector

new threat
arrive sector
power
negotiation power
providers The competitors in the negotiation of customers
providers sector Customers
- rivalry
incumbents

threat
products
nounituţie

Made by
substitution

1. Analysis rivalry between existing firms in the industry.


Competition is more intense when:
- many competitors operating in the field, that competitive forces almost equal - there is a leader
- and occupy strong positions;
- were registered slow pace of development of the industry - a growing field that is less stressful;
- It occupies a significant share of fixed costs in the cost structure specific domain - the capacity
of production and logistics older who require special investment that can be recovered only by
higher production volumes and higher market share;
- record high cost of storage products - the tendency to reduce stocuri- lorprin practicing low
sales prices, which intensifies competition on prices;
- there is a weak differentiation of the products offered by competitors - differentiating attributes
is not an important criterion for customer purchase option, enabling them to easily migrate
from one manufacturer to another;
- the existence of large barriers out of the sector, which does not allow release of the pressure-
competitive competitor by leaving the industry in case of decline;

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- producers existence of overcapacity, which stimulates them growing producţii- and increase
market share;
- registration of important strategic stakes such as the repositioning over a lucrative conquest of
potential market segments, mergers and acquisitions with expected favorable effects
These conditions cause frequent outbreak of "wars" of prices and advertising need to
implement strategies for diversification and renewal of products offered and increasing cost
competition.

2. Entry of new competitors in the area of activity in terms of the degree of threat posed
by them.
one area It is not attractive if in the future he can easily enter the new competitors that will
bring production capacity and additional resources and will fight to increase market share and sharing
the profits. Entering the industry will be easier if barriers to entry and the trend towards competitive
relationship between existing competitors are less obvious or reduced.
A depth of analysis involves study of potential related inputs and outputs within the industry,
in terms of level barriers in both cases. So:
- if both barriers - input and output - are small, stable income, but small because firms
enter and exit easily without restriction sector, there is a high risk in terms of the degree of
competition;
- if barriers to entry are low, and the output large firms enter easily when conjuncture is
favorable, but out hard in these conditions, product demand exceeds the absorption capacity of
the market, reducing the profits for all competitors;
- best and attractive sector is where barriers to entry are high and the output are small;
thus, easily penetrates and leaves the field in case of recession;
- if both barriers are high, profit potential is high, but at high risk for leaving the sector
is hampered when the growth rate of activity and the possibilities of obtaining profits are stable
or start to decrease.

3. The analysis of the threat of substitute products.


one area It is not attractivethat is characterized by the existence of actual or potential substitute
products. They cause the formation of "ceiling" prices that can be achieved due to the fact that some
migrates existing demand for substitute products. The company should keep under review the
evolution of prices for replacement. A decrease in their de- ends a decrease in demand and, according
to this price and profit for the substitution of products sinned (base).

4. Capacity analysis of customers' bargaining


One area of activity It is not attractive when customers have greater bargaining power. They
will try to get as low selling prices, product quality after-sales services and commercial facilities
outstanding. This causes strong competition in the sector and lower profitability.
Bargaining power of customers is greater when:
- better orient;
- buy significant quantities in relation to sales of the manufacturer;
- purchased products have a significant share in the total expenditure of the client;
- products offered are standardized or poorly differentiated;
- transfer switching costs are low;
- product offering on the market is higher than the existing demand;
- purchased product is not too important for the customer, enabling them to renounce it;
- producers are price sensitive due to lower unit margins of profit.

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To defend, manufacturers can choose those customers who have the least power or change
negotiations are suppliers. Or, they can offer products with superior characteristics, which customers
can not refuse too easy.

5. Analysis of capacity to negotiate FURNImorning.


one area It is not attractive if the company providers are able to raise prices resur- selor offered
to reduce the amount delivered.
Bargaining power of suppliers is higher when:
- no replacements;
- product offered by the supplier is important for the customer;
- switching costs are high;
- products offered by the provider have a high degree of differentiation;
- They are well organized;
- There are a limited number of suppliers;
The best way of protection for buyers is to establish lasting relationships with suppliers and
each other to beneficial use of multiple sourcing.

Michael Porter proposes three generic types of economic strategies:


1. The strategy of smaller CartTuri (domination by costs).
The activity is directed toward achieving the lowest cost of production and distri- Buti, so
prices traded products fall below the competition and ensure winning uneand bigger market share. This
strategy is based on experien- curve ce. Enterprises applying such a strategy must have a technological
potential, pro- ductile high supply and logistics. This requires large investments for modern production
equip- ment, trade policy and aggressive distribution, allowing obţine- bad a large part of the market.
It implies gaining experience by increasing production cumu- late in order to reduce production costs,
continuously improve the organization of production, distribution system less costly and strict control
of indirect costs. The company does not require special marketing capabilities. Apply a mass marketing
based on produce- bad comercilizarea widely distributed and a product in an attempt to draw all the
categorization loped users. This strategy requires the discovery and exploitation of all possible sources
of competitive advantage of cost, such as: using exclusive manufacturing technology, preferential
access to sources of raw materials, etc., and avoid product features too costly, not customers really
needed.
A IThereby strategy is advantageous because it protects against undertaking applies:
- aggression competitors - ownership cost advantage allows achieving high profit margins
uniform;
- strong customer - they can exercise power only if you manage to find your company concuren-
proposing lower selling prices;
- strong suppliers - can cope with higher prices of raw materials, energy and resources-their
purchased machines.
Risks strategy of domination by costs:
- technological progress, which annihilates the effect of past investments and gaining
experience;
- strong focus on cost reduction, which affects the assimilation capacity and bad preocupa- in
manufacturing new products and initiating changes in the market;
- the emergence of other companies with lower costs of products, which is a major threat to the
company that has focused all concerns to achieve reduced costs;
- competitors maneuvers that by adopting a policy of differentiation succeed in operating the
sentence segmentation (eg. Yamaha, Honda);
- inflation, which erodes the company's ability to establish itself in the market by low prices.

2. Strategy diferenţiere.

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The company aims to create a special advantage, based on a single factor to be felt in the whole
area and much appreciated by customers, so they are willing to offer a premium price to use
thisadvantage. In this regard, the company will focus on delivering superior performance, to provide
leadership in the sector, in terms of one of the following attributes: quality of the products, after-sales
service and their clienţi- proposed facilities, the technology used, product originality, timeliness of
delivery, ability to adapt to changing environments and customer requirements etc. Using this strategy
requires intuition and creativity, enhanced capabilities in terms of the strengths that dis- put that
company compared with its competitors. It is possible only when acteristics characterizes the product
other than those that meet the basic need for which was created, or tele atribu- to provide firm
leadership are essential in the purchasing decision of customers. The strategy best suits the products
discovered or reputation. The company needs special marketing capabilities to enable it to identify and
understand individual customer requirements and elements of differentiation from competitors and
stbilirea possibilities for getting to meet them. Apply a targeted marketing based on differentiating
between categories of customers and creating products and marketing mixes for each target market.
The company needs special marketing capabilities to enable it to identify and understand individual
customer requirements and elements of differentiation from competitors and stbilirea possibilities for
getting to meet them. Apply a targeted marketing based on differentiating between categories of
customers and creating products and marketing mixes for each target market. The company needs
special marketing capabilities to enable it to identify and understand individual customer requirements
and elements of differentiation from competitors and stbilirea possibilities for getting to meet them.
Apply a targeted marketing based on differentiating between categories of customers and creating
products and marketing mixes for each target market.
Such a strategy is advantageous because it protects enterprise that apply:
- competitors - a poor variable price sensitive cross customer and their loyalty to the brand;
- power suppliers - high profit margins uniform grants protection on the increase in raw material
prices;
- risk of substitute products, which is low;
- threat of new entrants in the sector is low.
Risks differentiation strategy:
- not give a high market shares;
- danger of imitation is great - in these circumstances the company applying such EU's strat- egy
to be able to regularly provide new features to counter imitation products;
- trivializing the product due to its life cycle, which annihilates the effect of differentiation
strategy.

3. The strategy of concentration.


Consist the company focus on a narrow segment of the market - niche (a group of customers,
a type of product sold, geographic area, etc.) and employment in this segment an irreplaceable position.
Knowing very well the specific needs of this segment, the company will choose either the cost
domination strategy is a strategy of domination by differentiation. In the first case, the company
specializes in a particular clientele seeking to achieve a competitive cost advantage. In a market where
products are sold in large quantities, there is a place for a company able to provide a competitive
advantage through sales in small quantities to customers marginal. Possibly because small quantities,
the average cost of small business is less than the average cost of the large firm (see figure below)

cost
environment

the average cost of small business

the average cost of the large firm


edge.

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edge. small edge. big

Such a firm can not be develop by increasing production capacity, and only by opening new
branches geographically dispersed sales and specializing in small quantities.
In the second case, the company will select a demanding clientele in terms of attributes differ-
the discriminatory quality, after-sales service, technology used etc. This is because when productions
will mass and mass production, there is always a market segment that can operate a business that wants
to avoid standardized production and provide more sophisticated products that provide their owners a
particular image (eg. car Rolls Royce, Mercedes). For company will claim its customers with an added
cost that exceed the additional costs to ensure differentiating characteristics conferred products.
So the firm will choose a strategy of domination by costs in a market Oreintal to attributes of
differentiation and differentiation strategy of domination by a market-oriented reduced costs products.
The essential element of the strategy is to identify the concentration of the niche company that
RA can be successfully opera- and knowledge of target customers. Such a strategy can be used best
company wishing to enter the market.
Any strategic process must be based on one of three orientations. On this basis the company
will adopt a certain behavior from competitors, adapted to specific environmental conditions and
internal potential, developing a strATEG particular element of originality.
M. Porter's approach avoids the type behaviors, which could become a commonplace
dysfunctional (because of all the companies that use them). By this, it is superior O- dele bAzat on
portfolio activities.