Relationship. Almost all countries of the world participate in them to one degree or another. At the same time, some states receive large profits from foreign economic activity, are constantly expanding production, while others can barely contain the available capacity. This situation is determined by the level of competitiveness of the economy.
Relevance of the problem
The concept of competitiveness is the subject of numerous discussions in the circles of people who make corporate and government decisions. management decisions. The growing interest in the problem is due to various reasons. One of the key ones is the desire of countries to take into account the economic requirements that are changing within the framework of globalization. Michael Porter made a great contribution to the development of the concept of state competitiveness. Let's take a closer look at his ideas.
General concept
The standard of living in a particular state is measured in terms of national income per person. It increases with improvement economic system in the country. Michael Porter's analysis showed that the stability of the state in the foreign market should not be viewed as a macroeconomic category, which is achieved by methods of fiscal and monetary policy. It should be defined as productivity, efficient use of capital and work force. formed at the enterprise level. In this regard, the welfare of the state's economy must be considered for each company separately.
Michael Porter's theory (briefly)
For successful work enterprises should have low costs or endow differentiated quality products with a higher cost. To maintain a position in the market, companies need to constantly improve products and services, reduce production costs, thus increasing productivity. Foreign investment and international competition act as a particular catalyst. They form a strong motivation for enterprises. Together with the international level, it can not only have a beneficial effect on the activities of companies, but also make certain industries completely unprofitable. This situation, however, cannot be considered absolutely negative. Michael Porter points out that the state can specialize in those segments in which its enterprises are most productive. Accordingly, it is necessary to import those products in the release of which companies show worse results than foreign firms. As a result, the overall level of productivity will increase. One of the key components in it will be imports. Productivity can be increased through the establishment of affiliated enterprises abroad. Part of the production is transferred to them - less efficient, but more adapted to new conditions. Profits from production are sent back to the state, thus raising the national income.
Export
No state can be competitive in all production areas. When exporting in one industry, labor and material costs increase. This, accordingly, negatively affects less competitive segments. The ever-increasing exports cause the appreciation of the national currency. Michael Porter's strategy assumes that the normal expansion of exports will be facilitated by the transfer of production abroad. In some industries, positions will undoubtedly be lost, but in others they will become stronger. Michael Porter believes that they will limit the ability of the state to foreign markets, will slow down the improvement of the standard of living of citizens in the long term.
The problem of attracting resources
And foreign investment can certainly significantly increase national productivity. However, they can also provide Negative influence on her. This is due to the fact that in every industry there is a level of both absolute and relative productivity. For example, a segment can attract resources, but it is not possible to export from it. The industry is not able to withstand competition in the field of imports if the level of competitiveness is not absolute.
The Five Forces of Competition by Michael Porter
If the industries of the country that are losing ground to foreign enterprises are among the more productive in the state, then its overall ability to increase productivity is reduced. The same is true for firms that move more profitable activities abroad, because there costs and earnings are lower. The theory of Michael Porter, in short, connects several indicators that determine the stability of the country in the foreign market. In each state, there are several methods to increase competitiveness. Collaborating with scientists from ten countries, Michael Porter formed a system of the following indicators:
Factor Conditions
Michael Porter's model suggests that this category includes:
clarification
Michael Porter points out that the key factor conditions are not inherited, but created by the country itself. In this case, it is not their presence that matters, but the pace of their formation and the mechanism of improvement. Another important point is the classification of factors into developed and basic, specialized and general. It follows from this that the stability of the state in the foreign market, based on the above conditions, is quite strong, although fragile and short-lived. In practice, there is a lot of evidence supporting the model of Michael Porter. An example is Sweden. It profited from its largest low-sulphur iron deposits until the main market Western Europe the metallurgical process has not changed. As a result, the quality of the ore no longer covered the high costs of its extraction. In a number of knowledge-intensive industries, certain basic conditions (for example, cheap labor resources and rich natural resources) may not provide any advantages at all. To increase productivity, they must be tailored to specific industries. These may be specialized personnel in processing industrial enterprises, which are problematic to form elsewhere.
Compensation
Michael Porter's model admits that the lack of certain basic conditions can also act as strong point, motivating companies to improve and develop. So, in Japan there is a shortage of land. The absence of this important factor began to act as a basis for the development and implementation of compact technological operations and processes, which, in turn, became very popular in the world market. a lack of separate conditions should be compensated by the advantages of others. So, for innovations, appropriately qualified personnel are needed.
State in the system
Michael Porter's theory does not include it among the basic factors. However, when describing the factors influencing the degree of stability of the country in foreign markets, the state is given a special role. Michael Porter believes that it should act as a kind of catalyst. Through its policy, the state can influence all elements of the system. The influence can be both beneficial and negative. In this regard, it is important to clearly formulate the priorities of the state policy. The general recommendations are to encourage development, stimulate innovation activities, increased competition in domestic markets.
Spheres of influence of the state
Factors of production are affected by subsidies, policies in the field of education, financial markets, etc. The government determines internal standards and norms for the production of certain products, approves instructions that affect consumer behavior. The state often acts as a major buyer of various products (goods for transport, the army, education, communications, healthcare, and so on). The government can create conditions for the development of industries by establishing control over advertising media, regulating the operation of infrastructure facilities. State policy is able to influence the structure, strategy, characteristics of the rivalry of enterprises through tax mechanisms, legislative provisions. The influence of the government on the level of competitiveness of the country is quite large, but in any case it is only partial.
Conclusion
An analysis of the system of elements that ensure the stability of any state makes it possible to determine the level of its development and the structure of the economy. A classification of individual countries in a specific time period was carried out. As a result, 4 stages of development were identified in accordance with four key forces: production factors, wealth, innovation, investment. Each stage is characterized by its own set of industries and its own areas of activity of enterprises. The allocation of stages allows us to illustrate the process of economic development, to identify problems that companies face.
The author of the method of strategic choice based on the concept of rivalry is Professor M. Porter of the Harvard Business School, who proposed a set of typical strategies based on the idea that each of them is based on a competitive advantage and the company must achieve it by choosing its own strategy.
It must decide what type of competitive advantage it wants to gain and in what area.
Thus, the first component of the strategic choice according to this model is a competitive advantage, which is divided into two main types: lower costs and product differentiation.
Low costs reflect a firm's ability to develop, produce, and sell a comparable product at a lower cost than its competitors. By selling a product at the same (or approximately the same) price as competitors, the firm in this case receives a large profit.
true story. Thus, Korean firms producing steel and semiconductor devices won over foreign competitors in this way. They produce comparable goods at very low cost, using a low-paid but highly productive labor force and modern technology and equipment bought from abroad or manufactured under license.
Differentiation is the ability to provide the customer with a unique and greater value in the form of a new product quality, special consumer properties or after-sales service. Thus, German machine tool firms compete using differentiation based on high technical specifications products, reliability and fast maintenance. Differentiation allows the firm to dictate high prices, which, at equal costs with competitors, provides greater profits.
The second component of the strategic choice is the sphere of competition, which the firm focuses on within its industry. One reason competition is important is that industries are segmented. Almost every industry has well-defined product varieties, numerous distribution and marketing channels, and several types of buyers. Basically, the choice in this component is as follows: either compete on a "broad front", or aim at any one sector of the market. For example, in the automotive industry, leading American and Japanese firms produce a whole range of cars of various classes, while BMW and Daimler-Benz (Germany) primarily produce powerful, high-speed and expensive high-class cars and sports cars, and Korean firms Hyundai and Daewoo focused on small and ultra-small cars.
The type of competitive advantage and the scope in which it is achieved, M. Porter combines in the concept of typical strategies, which are shown in Fig. 4.3.
For example, in shipbuilding, Japanese firms have adopted a strategy of differentiation and offer a wide range of high quality vessels at high prices. Korean shipbuilders have adopted a cost leadership strategy and offer a variety of ship types. good quality However, the cost of Korean vessels is lower than that of Japanese ones. The strategy of successful Scandinavian shipyards is focused differentiation. They produce specialized types of ships, such as icebreakers or cruise ships, which are built using specialized
4.3. Typical competitive strategies according to M. Porter
new technologies. These vessels are sold at a very high price to justify the cost of labor, which is highly valued in the Scandinavian countries. Finally, Chinese shipbuilders, who have recently become highly competitive in the world market, offer relatively simple and standard ships at even lower costs and at lower prices than Korean ones (cost-focused strategy).
An example of competitive strategies in the automotive industry is given by J. Thompson.
So, for example, Toyota is known throughout the world for the low cost of its cars while maintaining a certain, fairly high level of their quality.
Fig.4.4. M. Porter's Model of Competitive Strategies for the Global Automotive Industry (Situation at the End of the 80s - Early 90s)
In turn, General Motors, competing with Toyota in the same market segments, has emphasized the differentiation of its products in terms of a variety of colors and availability of specifications. So, in 1988, 105 Vauxhalls models were offered on the UK market at prices ranging from £ 4,800 to 20,500.
Hyundai is known worldwide for producing low cost small cars (Pony 1.3 and Pony 1.6).
The strategy of BMW and Mercedes is designed to produce high-quality cars for a certain, wealthy segment of the population. At the same time, the difference in the type of additional specifications makes it possible to achieve exclusivity of the car being sold for a specific customer order, and the high image of the companies themselves allows them to occupy a stable market share.
Thus, the concept of model strategies is based on the idea that each strategy is based on competitive advantage and that in order to achieve it, the firm must justify and choose its strategy.
The scheme for making a profit by a firm, depending on the chosen typical strategy, can be represented as follows (Fig. 4.5).
In terms of cost leadership strategy, there are many ways to reduce costs while maintaining industry average quality. However, some ways to reduce costs are associated with moving along the experience curve, increasing the scale of production to achieve maximum savings.
On fig. 4.6 is an example of an experience curve. A lower cost level is achieved as the volume of production increases.
Rice. 4.5. Typical Strategies and Profitability
Rice. 4.6. Experience Curve
production, i.e., repeated production of the same type of product will lead to finding more effective method its production.
The philosophy of economies of scale in production is based on the so-called experience curve. It was proposed in 1926 when, through empirical analysis, it was found that the cost of producing a unit of output falls by 20% every time output doubles. According to this theory, increasing the market share of the company is emphasized, since this allows you to increase production volumes and move down the curve in the direction of decline. production costs. This is how you can achieve a higher level of income and profit margins and, consequently, greater competitiveness of the enterprise in the market.
In turn, the transfer of production skills and the distribution of areas of activity allows a diversifying enterprise to receive from joint activities higher profit than that which would have received independently operating industries. In this case, economies of scale arise when it becomes possible to reduce the costs of managing disparate industries through centralized management, as well as reduce costs in any link in the production process due to existing internal relationships. Although this strategic fit can occur at any point in the production process, it is most often seen in three main ways.
On fig. Figure 4.7 shows economies of scale in industry.
Unit cost
Rice. 4.7. Economies of scale in production
If the output on this curve corresponds to point X, then at the cost of output you are inferior to the firm whose position corresponds to point Y on the graph.
The main idea behind these two effects is that they imply that sales volume is an important prerequisite for achieving low production costs. This path to achieving better results involves capturing and holding a large share of the market. As a consequence, when multiple firms compete, competition for market share can greatly undermine any low-cost advantage if prices are lowered by firms seeking to achieve certain sales volumes (Figure 4.8).
Rice. 4.8. Cost reduction and price reduction
How does low cost give a firm a competitive advantage if its products are basically the same as those of other manufacturers in the industry? Low cost can allow a firm to:
First, to conduct, if necessary, price competition;
Secondly, to accumulate profits that can be reinvested in production to improve the quality of products, while the price of these products will correspond to the average price in the industry.
Thus, it is not the low cost itself that creates competitive advantages, but the opportunities that it provides to improve the competitiveness of products.
There are several types of risks associated with a cost leadership strategy.
First, an overemphasis on efficiency can cause a firm to become unresponsive to changing customer demands. In particular, in many industries, consumer requirements have become more modern and individualized. A low-cost manufacturer who produces a standard, non-branded product may one day find that the customer base for his product is reduced by competitors who are adjusting and improving their products to meet the demands of the times.
Second, if the industry is indeed a consumer goods industry, then the risk from a low cost strategy is much higher. This is because in this case there can be only one cost leader, and if the firms compete exclusively on price, then the second and third cost leaders provide only marginal advantages.
Third, many ways to achieve low cost can be easily copied. Competitors, for example, may acquire the most efficient scale plant, and as the industry matures, the experience curve effect will be canceled out, since most firms have already gained the full benefit of accumulated experience. But perhaps the greatest threat comes from competitors who are able to price at the industry's marginal cost because they have other, more profitable product lines that more than cover fixed production costs.
If we talk about the strategy of differentiation, then it means that it is necessary to be different from others in some way. The key to success in differentiation is uniqueness, which is valued by customers. If buyers are willing to pay a high price for these unique features, and if costs are controlled by the firm, then the price premium will result in high profitability.
Understanding the needs of the customer is central to this strategy. The firm needs to know what is valued by customers, provide exactly the required set of qualities and, accordingly, set the price. If the firm is successful, then a certain group of buyers in this market segment will not consider products offered by other companies as a substitute for its products. The firm thus creates a group of loyal customers, almost a mini-monopoly.
A successful differentiation strategy reduces the intensity of competition often found in consumer goods industries. If suppliers raise prices, "loyal" buyers with little price sensitivity are more likely to accept the final price increase offered by the manufacturer of the exclusive product. Moreover, customer loyalty acts as a kind of barrier for new manufacturers to enter the market and replace this product with other similar products.
However, the differentiation strategy is not a risk-free strategy.
First, if the basis of differentiation, that is, what a firm wants to be different from others, can be easily copied, other firms will be perceived as offering the same product or service. Then competition in this industry is likely to turn into price competition.
Second, firms that focus on broad differentiation may be marginalized by firms that focus on only one particular segment.
Thirdly, if the strategy is based on the process of continuous product improvement (with the goal of always being one step ahead of its competitors), then the company risks simply being at a disadvantage, as it will bear the maximum costs of research and development, while competitors will use the results of its activities in their own interests.
Fourth, if the firm ignores the costs of differentiation, then raising prices will not increase profits.
The term "differentiation" is widely used both in the field strategic planning as well as in marketing. However, it can also be used in a narrower sense in determining the firm's position in the industry. In most industries, companies do not offer products that are exactly the same as competitors. For example, they may differ in style, in the distribution network used, in the level of after-sales service. If such differences lead to the fact that the company can charge a higher price than the industry average price, then we can assume that the company is differentiating, using the terminology of M. Porter. However, in most cases, such differences give us only an idea of the position in the industry of a particular firm.
Since there are few "pure" industries, most firms in an industry are inevitably forced to offer something slightly different from others in order to stay in the game. Such firms will therefore not be differentiators if they cannot charge a higher price.
A focus strategy involves choosing a narrow segment or group of segments in an industry and meeting the needs of that segment more effectively than competitors serving a broader market segment can. The focus strategy can be applied by both a cost leader serving a given segment and a differentiator that meets the special requirements of a market segment in a way that allows high prices to be charged. So firms can compete broadly (serving multiple segments) or focus narrowly (targeted action). Both options for the focus strategy are based on the differences between the target and the rest of the industry segments. It is these differences that can be called the reason for the formation of a segment that is poorly served by competitors that carry out large-scale activities and do not have the ability to adapt to the specific needs of this segment. A cost-focused firm may outperform a consumer-oriented firm by its ability to eliminate "excesses" that are not valued in that segment.
Moreover, broad differentiation and focused differentiation are often confused. The difference between the two is mainly that a broadly differentiated company bases its strategy on widely valued differentiators (e.g., IBM in computer manufacturing), while a focused manufacturer seeks out a segment with specific needs and fulfills them. much better.
The obvious danger of the focus strategy is that the target segment may disappear for any reason. In addition, some other firms will enter this segment, surpassing this firm in focus, and lure buyers, or for some reason (for example, tastes will change, demographic changes will occur), the segment will shrink.
However, there is a certain attraction in the idea of focusing on a narrow target market segment and the ability to tailor your product to the needs of specific consumers. If the firm understands this correctly, it can greatly benefit from it. But if a firm was once a manufacturer of a large number of different products for a wide range of consumers and decided to definitely focus its efforts on a high-income segment using a strategy of focused differentiation, then this can lead to adverse consequences in the future.
If a firm has discovered an opportunity to profit from selling a product at a higher price to certain consumers, then you can be sure that other firms have also been able to consider this option. Before the firm realizes it, price-sensitive consumers will have a huge number of firms to choose from, ending the firm's ability to charge a higher price. In addition to price pressure, there is another problem related to the level of costs. A firm's shift of interest from a broad market to a limited segment of it usually means a drastic reduction in output. In turn, this can lead to extremely high unit costs if the firm does not cut overhead costs, which should be consistent with lower output and driven by a narrower customer base. Thus, the firm can end its operations using both price and cost pressures.
The biggest strategic mistake, according to M. Porter, is the desire to chase all the rabbits, that is, to use all competitive strategies at the same time. In other words, according to M. Porter, a company that has not made a choice between strategies - to be a cost leader or to engage in differentiation - runs the risk of getting stuck halfway. Such companies try to gain advantages on the basis of both low cost and differentiation, but actually get nothing. Poor performance results from the fact that the cost leader, differentiator, or strategy focused firm will be in the best market position to compete in any segment. A firm stuck in the middle will make a significant profit only if the industry is extremely favorable, or if all other firms are in a similar position. Rapid growth in the early stages of an industry's life cycle may allow such firms to earn good returns on their investments, but as the industry matures and competition becomes more intense, firms that have not made their choice between existing alternative strategies risk being squeezed out of the market.
Following one or another typical strategy makes it necessary for the firm to have certain restrictions (barriers) that would make it difficult for competitors to imitate (copy) the strategies chosen by it. Since these barriers are not insurmountable, a firm is usually required to offer its competitors a changing goal through constant investment and innovation.
Despite the distinctness and diversity of M. Porter's typical strategies, they nevertheless have common elements: both strategies require entrepreneurs to pay great attention to both product quality and cost control. Therefore, it is very important to consider these two strategies not as mutually exclusive alternatives, but as orientations (Figure 4.9).
Rice. 4.9. Differentiation and efficiency
From fig. Figure 4.9 shows that the firm in position A on the graph would undoubtedly seek to pursue a strategy aimed at differentiation, serving a certain segment of the market, offering a product with a unique combination of properties, and would be able to charge a higher price.
The firm in position B follows a purely efficient strategy. Efforts are aimed at reducing costs at all stages of work. The main profit is obtained due to low cost at average prices for the industry.
The firm in position C follows neither strategy. In the words of M. Porter, this firm is "stuck halfway." Lack of differentiation means the inability to raise the price above the industry average, and efficiency leads to higher costs.
The firm in position D is in an advantageous position, as it has advantages in both strategies. The ability of a firm to differentiate leads to the ability to charge a higher price, while at the same time efficiency provides cost advantages. At the same time, it is quite difficult for a firm to use the advantages of two strategies at the same time. This is explained by the fact that usually differentiation leads to the need to improve products, which in turn leads to increased costs. Conversely, achieving the lowest cost in an industry is usually associated with the fact that the firm needs to step back from differentiation due to product standardization. But most often, significant difficulties arise due to the incompatibility, and even contradictory requirements for the organization of production, which each of the strategies implies.
F. Kotler offers his own classification of competitive strategies based on the market share owned by an enterprise (firm).
1. The strategy of the "leader". The “leading” company of the product market occupies a dominant position, and this is also recognized by its competitors. The leading firm has a set of strategic alternatives at its disposal:
Expansion of primary demand, aimed at discovering new consumers of the product, expanding the scope of its use, increasing the one-time use of the product, which is usually advisable to apply in the initial stages life cycle goods;
A defensive strategy that an innovator firm adopts to protect its market share from its most dangerous competitors;
An offensive strategy, most often consisting in increasing profitability by maximizing the experience effect. However, as practice shows, there is a certain limit, above which a further increase in market share becomes unprofitable;
A demarketing strategy that involves reducing one's market share in order to avoid accusations of monopoly.
2. Strategy "challenger". A firm that does not occupy a dominant position can attack the leader, that is, challenge him. The purpose of this strategy is to take the place of the leader. In this case, the solution of two most important tasks becomes key: choosing a springboard for attacking the leader and assessing the possibilities of his reaction and defense.
3. The strategy of "following the leader." A "follow-the-leader" is a competitor with a small market share that chooses adaptive behavior by aligning its decisions with those made by competitors. Such a strategy is most typical for small businesses, so let's take a closer look at possible strategic alternatives that provide small businesses with the most acceptable level of profitability.
Creative market segmentation. A small firm should only focus on certain market segments in which it can better exercise its competence or have greater agility to avoid major competitors.
Use R&D effectively. Since small businesses cannot compete with big firms in the area of fundamental research, insofar as they should focus R&D on improving technologies in order to reduce costs.
Stay small. Successful small businesses focus on profit rather than increasing sales or market share, and they tend to specialize rather than diversify.
Strong leader. The influence of the manager in such firms goes beyond formulating a strategy and communicating it to employees, covering also the management of the current activities of the company.
4. The strategy of a specialist, "Specialist" focuses mainly on only one or several market segments, i.e. he is more interested in the qualitative side of the market share. It seems that this strategy is most closely associated with the focusing strategy of M. Porter. Moreover, despite the fact that the “specialist” firm dominates its market niche in a certain way, from the point of view of the market for this product (in the broad sense) as a whole, it must simultaneously implement the strategy of “following the leader”.
Since the mid-90s of the last century, the theory of “corporate core competencies” by G. Khamel and K. K. Prokholad has become a popular concept for developing strategies. The main ideas of this direction in the field strategic management were published in the well-known in the West book of these authors “Competing for the Future”, published in 1994 and translated into Russian.
Managers who preach this theory see further than traditional business administrators. They use their imagination to create products, services, and even industries that do not yet exist, and then turn their dreams into reality. In this way, they create a new market space in which they can dominate the competition, since this market space was invented by themselves.
To do this, according to G. Hamel and K. K. Prokholad, managers should perceive their company not as a set of enterprises, but as a combination of key basic components, that is, a combination of skills, abilities and technologies that allow providing benefits to consumers. Going not from the market to the product manufactured by the company, but from the product to the market, even if it is completely new - this is the essence of the theory of key competencies. G. Hamel and K. K. Prahalad write: “Diversified companies are like a tree whose trunk and largest branches are the core products, the other branches are divisions, and the leaves, flowers and fruits are the end products. The root system that provides nourishment, support and resilience to the tree form the core competencies. When analyzing competitive products being produced, do not lose sight of the forces behind them. Yes, the crown is an ornament of trees, but we should not forget about the roots.
The key components are the “form of existence”, the result of the collective experience of the organization as a whole, especially when it comes to coordination.
Rice. 4.10. Competences as the roots of competitiveness
dination of actions for the production of a wide range of products and the integration of various technological areas.
Thus, what prevents companies from predicting their competitive future is precisely the fact that management looks ahead through the narrow prism of existing and served markets. But any company, according to G. Hamel and K. K. Prahalad, can be looked at from different points of view, for example, Honda.
Do Honda's management see their company as a motorcycle manufacturer only, or as a company with unique capabilities in the design and manufacture of engines and electric trains? The point of view expressed in the first part of each of these questions is limited and leads to future products and services appearing very similar to those produced and supplied in the past. For example, the opinion "Honda only makes motorcycles" leads to the conclusion that this company should focus on making more modern motorcycles.
The second point of view liberates and suggests a wide range of future products and services, i.e., encourages the company to develop, manufacture and sell cars, lawn mowers, mini tractors, marine engines and generators in addition to motorcycles.
Immediately after its publication, the concept of G. Hamel and K. K. Prahalad was criticized. The main "thesis against" was very reminiscent of the criticism of strategic planning in the early seventies of the last century: the main thing is not to develop a system of key competencies and even have them, and most importantly - to implement them. The examples of Microsoft, which took advantage of the development of Apple, General Motors, whose "strategic architecture" led to a decrease in market share from 46 to 35%, confirmed this position. Core competencies are only a part of competitive success. Stronger arguments are needed. In 1995, they were proposed by M. Tracy and F. Wiersema in their book "The Discipline of Market Leaders" ("Discipline of the market leader"), with a volume of only 208 pages. They presented three value disciplines, or ways of delivering value to the consumer—production excellence, product leadership, and proximity to the consumer. Companies that want to gain a competitive edge and dominate the market must choose only one of these disciplines and strive to excel in it.
1. Manufacturing excellence. An example of companies with such a value discipline are AT & T, McDonald's, General Electric. They deliver to their consumers a combination of quality, price and ease of purchase, with which this market no one can compare. These companies do not offer new products or services and do not cultivate special, non-traditional relationships with their customers. They guarantee low price or unconditional, on demand, service.
The main emphasis is on optimization and rationalization. production processes, tight management, development of close and unhindered relationships with suppliers, intolerance to losses and reward of efficiency, provision of standard basic services without disputes with the consumer and at his first request.
2. Product leadership. Examples of companies that have this value discipline are Microsoft, Motorola, Reebok, Revlon. Companies of this type focus their efforts on offering goods and services that push the existing boundaries of efficiency and quality, introduce fundamentally new consumer properties into their products. The main emphasis is on invention, product development and market exploitation, decentralized management, exceptional creativity and the speed of ideas commercialization, speed of decision-making and the appropriate organization of production processes.
If in the first case, with manufacturing excellence, the key to success is the skillful interweaving of unique knowledge, the application of technology and tough management, then in this case it is overcoming constant tension, ensuring the optimal balance between the modernization of old products and the development of a new generation product.
3. Proximity to the consumer. Examples of such companies with this value discipline are IBM, Cannon, Airbone Express. They deliver value through proximity to the consumer, delivering not what the market wants, but what the specific consumer needs, constantly adapting their products and services to the needs of the consumer at a reasonable price. The main accents are made on the development of long-term relationships with consumers, the adaptation of products and services to the requirements of customers, the delegation of responsibility to employees who work directly with customers. The key to the success of such companies is the combination of the qualifications of employees, the application of modern methods implementation of a wide network of capacities for the provision of products and services.
Just like M. Porter with his competitive strategies, M. Tracy and F. Wirsema firmly argue that in order to compete successfully, a company must choose one of the value disciplines, and not scatter forces and resources, cause tension, confusion and death. However, the choice itself is one of the central moments of the concept and is divided, according to the authors, into three rounds.
Round 1. Understanding the status quo
During this round, senior management must find out what the current position of the company is, that is, determine it from the standpoint of the realities of the external business environment and the resource potential of the company.
Round 2. Discussing realistic options for action
In this round, senior management moves from reviewing the current situation to discussing options for the future. Managers identify opportunities (for each of the options) of value disciplines and estimate the approximate costs for their implementation.
Round 3. Development of specific projects and decision-making
At this stage, senior management passes its schemes to special teams that translate the main ideas into specific projects, and senior management is given the right to make the final decision - the choice of a specific value discipline that will ensure market dominance of the firm with the help of appropriate competitive advantage.
The views of M. Tracy and F. Wiersem turned out to be the seeds that fell on fertile ground, as they returned entrepreneurs to the traditional, understandable presentation of competition as a head-to-head battle based on the principle “my win - your loss”. but modern tendencies world economy turned out to be more complex and multifaceted. That is why neither the concept of G. Hamel and K. K. Prahalad, nor the views of M. Tracy and F. Wiersem could give universal recipes for all occasions.
Michael Porter identifies three basic competitive strategies enterprises:
1. Absolute leadership in costs
2. Differentiation
3. Focus
In some, albeit rare, cases, a firm may successfully implement more than one approach.
The low cost leadership strategy aims to achieve the lowest cost production in the industry. The competitive advantage here is obvious - low costs compared to competitors allow the company to dictate the lower limit of the market price and, as a result, increase its market share. This provides the company not only with greater stability in relation to industry competitors, but also with greater opportunities to counteract the penetration of outside firms and substitute products into the market. The application of this type of strategy is effective when the industry is characterized by a high degree of product standardization, and industry demand is sensitive to price changes.
A firm can become a price leader only if it a) provides better cost management (control over factors of production) and b) is able to transform cost chains in the direction of reducing them. The first can be achieved by intensifying production through technology development, upgrading equipment and disseminating production experience across departments, as well as increasing economies of scale in production by increasing market share and reducing product differentiation. The second can be realized by reducing production costs by simplifying products, using a different technology, using cheaper materials and automating expensive processes, as well as by reducing transaction costs through the use of new methods of promoting goods, moving production to economically favorable regions (proximity to sources of raw materials and buyers, low taxes) and deepening vertical integration both towards suppliers and distribution channels.
However, the firm's focus on cost reduction makes it vulnerable to changes in demand. In the event of technological breakthroughs (creation of a new type of product) and changes in consumer preferences, the firm may lose all demand, despite the low price. In addition, the low price leadership strategy has the disadvantage that it can be easily imitated by competitors, reducing the possibility of its long-term operation, which limits the value of this strategy for the firm.
Cost leadership imposes a number of obligations on the firm to maintain its position: reinvest in modern equipment, ruthlessly write off obsolete assets, avoid specialization in production, track technological improvements. “In order to achieve cost leadership, it is necessary to actively build cost-effective scale production capacity, vigorously pursue cost reduction through experience, tightly control production and overhead costs, avoid small transactions with customers, minimize costs in areas such as research and development, service , marketing system, advertising, etc. All this requires great attention to cost control on the part of management. Lower costs compared to competitors become the leitmotif of the entire strategy, although the quality of the product and service, as well as other areas, cannot be ignored,” Porter writes.
A low-cost position protects the firm from competitors, since this level means that it is able to earn a profit in conditions where its rivals have already lost such ability. The low-cost position protects the firm from powerful buyers, since the latter can only use their power to drive prices down to the level of less efficient competitors. Low costs protect against powerful suppliers, providing the firm with greater degree flexibility as the cost of inputs rises. Factors that ensure a low cost position also tend to raise barriers to entry associated with economies of scale or cost advantages. Finally, a low-cost position tends to favor the firm relative to competitors in relation to substitutes. Thus, the low-cost position protects the company from all five competitive forces.
A low cost strategy is especially important in the following cases:
price competition among sellers is particularly strong;
the product produced in the industry is standard;
Differences in price for the buyer are significant;
most customers use the product in the same way;
The cost of buyers to switch from one product to another is low;
There are a large number of buyers who have serious power to reduce the price.
Risks of a low cost strategy: technological changes that undermine past investments or experience; the ability of new companies or followers to reduce costs by copying experience or investing in latest equipment; the firm's inability to respond to necessary product or market changes due to increased cost concerns; cost-push inflation, which reduces a firm's ability to maintain sufficient price differentials to compensate for brand prestige or other competitive advantages in differentiation.
General requirements for resources, qualifications and organization of production when implementing a low cost strategy:
· Real investments and access to capital;
· Skills technological development processes;
· Careful supervision and control over labor processes;
· Product design that facilitates production;
· Low-cost distribution and marketing system;
· Strict control over the level of costs;
· Frequent and detailed audit reports;
· Clear organizational structure and responsibility;
· Incentives based on clear quantitative indicators.
The second basic strategy is the strategy of differentiating the product or service offered by the firm, that is, creating a product or service that would be perceived within the entire industry as unique. Differentiation can take many forms: by design or brand prestige, by technology, by functionality, by service, by dealer network, or by other parameters. Ideally, a firm differentiates itself in several ways. The differentiation strategy is associated with giving the product specific properties that will ensure the firm's consumer loyalty to its products.
Differentiation strategy in case successful implementation is an effective means of achieving profits above the industry average, as it creates a strong position against the five competitive forces, albeit in a different way than the cost leadership strategy. Differentiation protects against competitive rivalry because it creates consumer brand loyalty and reduces product price sensitivity. It leads to an increase in net profit, which reduces the severity of the cost problem. Consumer loyalty and the need for competitors to overcome the product uniqueness factor creates a barrier to entry into the industry. Differentiation provides a higher level of profit to resist the power of suppliers, and also allows the power of buyers to be moderated, since the latter are deprived of comparable alternatives and therefore less price sensitive. Finally, a firm that has differentiated and earned customer loyalty has a more favorable position than its competitors in relation to substitutes.
The use of a differentiation strategy is effective when there is a high consumer appreciation of the distinctive properties of the product and there are various ways to use it, and the product differentiation itself has many aspects. It can be achieved on the basis of technical excellence, quality, service delivery, value for money (sales on credit). The most attractive differentiation is the one that is difficult or expensive to imitate.
The main task of developing a differentiation strategy is to reduce the total cost of using the product to consumers, which is achieved by increasing the convenience and ease of use and expanding the range of satisfaction of consumer needs. To do this, the firm must focus on identifying sources of value for the consumer, giving the product properties that increase consumer satisfaction, and providing support in the process of consuming the product. All this is due to extensive research and development activities and active marketing activities. Since the success of a differentiation strategy depends on the consumer's perception of the value of the product, the risks of differentiation are:
· the difference in costs between the differentiation firm and the low cost firm, which may become too great to retain the loyalty of buyers who prefer savings to exceptional features of the product or service;
· as consumer experience accumulates, the significance of the differentiation factor for more sophisticated buyers may decrease;
· copying reduces the resulting differentiation, which usually occurs in the process of industry aging.
General requirements for resources, qualifications and organization of production when implementing a differentiation strategy:
· Opportunities to attract a highly skilled workforce, researchers and creative staff;
· Product design;
· High potential of marketing and fundamental research;
· High reputation of product quality or technological leadership of the company;
· Significant industry experience or a unique combination of skills acquired in other industries;
· Close cooperation with sales channels;
· Close functional coordination of R&D, product design and marketing;
· Subjective assessments and incentives instead of quantitative indicators.
Focusing, or concentration, is a type of strategy in which the firm concentrates its efforts on certain group customers, product type or geographic market segment. The competitive advantage generated by the specialization of activities of the firm can be associated both with lower costs and with the uniqueness of products. Even if the focus strategy does not lead to low costs or differentiation in terms of the market as a whole, it allows one of two or both of these positions in the space of a narrower target market. However, if the goals of a low cost or differentiation strategy apply to the industry as a whole, then a focus strategy means focusing on a narrower goal, which affects the activities of all functional areas of the business.
The benefits of such a strategy are due to consumer loyalty, which offsets the effects of economies of scale. A firm can pursue such a strategy if it is able to serve the niche efficiently and the niche itself is small enough not to attract large firms.
Focusing is useful when:
the segment is too large to be attractive;
The segment has good potential for growth;
the segment is not critical to the success of most competitors;
The company using the focus strategy has enough skills and resources to successfully work in the segment;
· The company can protect itself from challenging competitors due to the benevolence of customers to its outstanding ability to serve customers in the segment. Risks of a focused strategy: there is a possibility that competitors will find an opportunity to approach the company's actions in a narrow target segment; the requirements and preferences of consumers of the target market segment are gradually spreading to the entire market;
The segment can become so attractive that it will attract the interest of many competitors.
The following set of risks is associated with focusing:
* increase in cost differentials between competitors operating in a wide range of strategic plan, and the firm pursuing the focusing strategy, leads to the elimination of the latter's cost advantage in serving a narrow target market or the neutralization of differentiation achieved through focusing;
* narrowing the differences between products or services in demand in the target market and products or services in the industry market as a whole;
* a situation in which competitors find narrower market segments within a strategic target market and thereby overcome the advantage of the firm pursuing the focus strategy.
The general requirements for resources, qualifications and organization of production in the focus strategy are a combination of the conditions and measures indicated above for the differentiation and cost leadership strategies aimed at achieving a specific strategic goal.
By general strategies, Porter means strategies that have universal applicability or are derived from certain basic postulates. In his
Rice. 3. Porter's four-cell matrix illustrates the choice of strategy. Quadrant 1, for example, is occupied by small European manufacturing firms cars that have achieved leadership in reducing costs by expanding production and reducing the cost of producing a unit of output. Volvo could be placed in quadrant 2, and BMW, which makes luxury cars for a narrow range of price-insensitive consumers, in quadrant 3B.
In the book “Competition Strategy” M. Porter presents three types common strategies aimed at increasing competitiveness. A company that wants to create a competitive advantage for itself must make strategic choices in order not to lose face. There are three basic strategies for this:
- leadership in cost reduction;
- differentiation;
- focusing ( Special attention). To satisfy the first condition, a company must keep costs lower than those of its competitors.
To ensure differentiation, it must be able to offer something unique in its own way.
The third strategy proposed by Porter suggests that the company focuses on a certain group of customers, a certain part of the product, or in a certain geographic market.
Low cost production is more than just moving down the experience curve. The product manufacturer must find and use every opportunity to obtain cost advantages. Typically, these benefits are obtained through the sale of standard products with no added value, when consumer goods are produced and sold, and when the company has strong distribution chains.
Porter goes on to point out that a company that has won leadership in cost reduction cannot afford to ignore the principles of differentiation. If consumers do not find the product to be comparable or acceptable, the leader will have to make price cuts to weaken his competitors and lose his lead in the process.
Porter concludes that a leader in cost reduction in product differentiation must be on par with, or at least close to, its competitors.
Differentiation, according to Porter, means that the company strives for uniqueness in some aspect that is considered important by a large number of customers. She selects one or more of these aspects and behaves in such a way as to satisfy the needs of consumers. The price of such behavior is higher production costs.
From the foregoing, it follows that the parameters of differentiation are specific to each industry. Differentiation may be in the product itself, in the methods of delivery, in terms of marketing, or in any other factors. A company relying on differentiation must find ways to improve production efficiency and reduce costs.
There are two types of focus strategy. A company within a given segment is either trying to achieve cost advantages or is increasing product differentiation in an attempt to stand out from other companies in the industry. Thus, it can gain competitive advantage by focusing on specific market segments. The size of the target group depends on the degree, and not on the type of focus, while the essence of the strategy under consideration is to work with a narrow group of consumers that differs from other groups.
According to Porter, any of the three main types of strategy can be used as an effective means of achieving and maintaining competitive advantage.
Firms that get stuck halfway.
The following excerpt is taken from M. Porter's Strategy for Competition.
“The three main strategies represent alternatives to robust approaches to competition. One of the negative implications that can be drawn from the foregoing discussion is that a firm that fails to steer its strategy along one of the three paths, a firm that is stuck in the middle, is in an extremely bad strategic position. Its market share is insufficient, it is underinvested, it has to go either to reduce costs or product differentiation on an industry-wide scale to avoid cost competition, or to reduce costs and product differentiation, but within a more limited area.
A firm stuck halfway through is almost guaranteed a low rate of return. Either it loses numerous low-price customers, or it must sacrifice profits to outmaneuver low-price firms. She also loses the ability to lead highly profitable business, i.e., loses the cream, leaving it to firms that have been able to focus their efforts on obtaining high incomes or have achieved differentiation. A firm that is stuck “halfway through” is likely to have a low level of corporate culture and the inconsistency of the organizational structure and incentive system.
A firm stuck "halfway" should adopt a fundamental strategic decision. It must: either take steps towards achieving cost leadership, or at least reach the middle level, which usually entails active investment in modernization and, possibly, the need to spend on gaining more market share, or choose a specific goal, i.e. focus on some aspect, or achieve some uniqueness (differentiation). The last two alternatives are likely to cause a reduction in the company's market share and even sales.
Cost leadership risk
A cost-leading firm is under constant pressure to maintain its position. This means that the leader must invest in modern equipment, ruthlessly replace obsolete products, resist the temptation to expand the range and keep a close eye on technical innovations. Cost reductions by no means automatically follow output expansion, without constant vigilance it is also impossible to reap the benefits of economies of scale.
The following hazards must be kept in mind:
1) technological advances which reduce to: no value of the investments and know-how made;
2) new competitors and your followers who. achieve the same cost advantage by imitation or by investing in modern equipment;
3) inability to grasp the need to change the < induction or market as a result of immersion in problems of cost reduction;
4) inflationary cost growth that undermines a company's ability to maintain a price differential high enough to negate competitive efforts or other advantages of differentiation.
The risk associated with differentiation
Differentiation comes with some dangers. Among them:
1) the cost gap between a company that differentiates its products and those competitors that have chosen a cost leadership strategy may be too large to compensate for it with a special range, services or prestige that this company can offer its customers;
2) the need of buyers for product differentiation may decrease, which is possible with the growth of their awareness;
3) imitation can hide a tangible difference, which is generally characteristic of industries reaching the stage of maturity.
The first circumstance is so important that it deserves special comment.
A company can differentiate its products, but differentiation can only outweigh the difference in price. So, if a differentiated company falls too far behind in cost reduction due to changes in technology or simple inattention, a low-cost company can move into a strong attacking position. Thus, Kawasaki and other Japanese motorcycle manufacturers were able to attack differentiated manufacturers such as Harley Davidson and Triumph by cutting prices significantly.
Focus Risk
There are also various dangers associated with the focusing strategy:
1) Widening cost differentials between companies that have chosen a focus strategy and other manufacturers may negate the benefits associated with serving a narrow target group, or outweigh the effect of differentiation achieved through focusing;
2) differences between the types of products and services required by the strategic target group and the market as a whole can be reduced;
3) Competitors can find target groups within the target group served by the company that has chosen the focus strategy and succeed in their new venture.
Many business practitioners find Porter's theories too general to be used to explain real life situations. Nevertheless, it is undeniable that the relationship between consumer assessment of the quality of a product and price is a central issue. This was reflected in the concept of general strategies put forward by Porter.
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