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Introduction to Dr. Michael E. Porter

Widely recognized as the father of modern business strategy, Dr. Michael E. Porter is a renowned economist and one of the world’s most legendary thinkers on management and competitiveness. His first book, “Competitive Strategy” (Free Press), defined the modern strategy field since its publication in 1980. Throughout his career at Harvard Business School, he has brought economic theory and strategy concepts to bear on many of the most challenging problems facing corporations, economies and societies, including market competition and company strategy, economic development, the environment, and health care. Today, according to Fortune magazine, he has “influenced more executives – and more nations – than any other business professor on earth.”Named a University Professor by Harvard University – the highest recognition that can be awarded to a Harvard faculty member – Dr. Porter and his competitive doctrine continue to spur catalytic change across global business, government and social sectors. Dr. Porter’s early work was on industry competition and company strategy, where he was the pioneer in utilizing economic theory to develop a more rigorous understanding of industry competition and the choices companies make to compete.

                                               From https://sternstrategy.com/speakers/michael-e-porter/

Porter's Five Forces Competitive Model

Porter's Five Forces is a model used to analyze how competitive an industry is and how attractive it might be to enter. It helps figure out where the power is in any business scene. The five forces include: Threat of New Entrants, Bargaining Power of Suppliers,  Bargaining Power of Buyers, Threat of Substitute Products or Services, and Rivalry Among Existing Competitors.

Threat of New Entrants: When new companies enter the industry, they can disrupt the status quo, leading to increased competition and potentially reduced profits. Industries that require high investments for entry have more barriers, deterring new competitors. In such cases, the threat of new entrants is low. For example, the car manufacturing industry demands substantial investments, making it challenging for new players to enter.

Bargaining Power of Suppliers: Suppliers can pressure the industry by raising the prices of essential materials, cutting into profits. If suppliers can readily venture into the buyer's industry on their own, they exert even greater influence.

Bargaining Power of Buyers: Customers have the power to drive prices lower or insist on higher quality, influencing the competitive landscape and company profits. In sectors such as fast fashion, where consumers are particularly sensitive to price, businesses must maintain competitive pricing to attract cost-conscious shoppers.

Threat of Substitute Products or Services: Substitute products or services that fulfill similar needs pose a risk to an industry's profitability. A notable example includes consumers opting for ride-sharing apps such as Uber instead of traditional taxis, or preferring streaming services like Netflix over cable TV.

Rivalry Among Existing Competitors: How fiercely companies within the same industry compete depends on factors like how fast the industry is growing, how different the products are, and how much it costs for customers to switch to a competitor. For instance, in a booming industry, the competition might be less intense since the market itself is rapidly expanding—think of the early days of automobiles or the internet boom. But in industries that aren't growing or are even shrinking, the battle for market share can get tough, as seen in coal mining or print media today.

Porter's Generic Competitive Strategies

Porter's Generic Competitive Strategies is a framework outlined by Michael E. Porter that categorizes three primary types of strategies businesses can use to achieve a competitive advantage in their industry. These strategies are meant to be "generic" because they can be applied to any business or industry. The three strategies are:

Cost Leadership: This approach is all about being the industry's most cost-efficient producer. Companies that adopt cost leadership work hard to cut their production and operating expenses to be lower than anyone else's. This lets them price their goods or services more affordably than their competitors, appealing to customers who are looking for the best deals. Examples of companies that excel in cost leadership include Walmart and IKEA.

Differentiation: This strategy focuses on making a company stand out in its industry by excelling in areas highly valued by customers. By developing products or services that are seen as unique in quality, design, brand reputation, technology, customer service, or other key aspects, a company can distinguish itself from competitors. This distinctiveness enables the company to command higher prices for its offerings. Apple serves as a prime example of a company that successfully employs differentiation, offering innovative products with a strong emphasis on design and user experience.

Focus: This strategy is all about picking a specific group of customers and making products just for them. There are two main ways to do this:

Cost Focus: This means being the cheapest option for a certain kind of customer.  For example, Aldi, a grocery store chain, adopts this approach by targeting shoppers looking for good deals. They offer a select range of products, mostly their own brands, at very low prices. Aldi manages to keep prices down by cutting overhead and operating costs, passing these savings on to their budget-conscious customers.

Differentiation Focus: This involves creating unique products or services for a specific segment of the market. Initially, Tesla aimed its electric vehicles (EVs) at a niche market of eco-conscious consumers willing to pay extra for luxury and performance. Tesla stood out with its cutting-edge technology and superior driving experience, features that were hard to find in other EVs at the time.

These strategies are not mutually exclusive; a company may employ elements of each to achieve competitive advantage. Porter argues that failure to adopt at least one strategy leads to a situation he describes as "stuck in the middle," where the company does not have a viable competitive advantage.