A large circle of entrepreneurs, mainly owners and managers of small enterprises, make decisions related to conducting business, focusing on their own premonitions. Often rely on intuition, and their choice is not in any way supported by solid numbers or analyzes. Many of them justify this situation by the lack of financial resources for marketing research, but using the appropriate methods and concepts, you can conduct the above analysis at home. One of the ways that do not require the involvement of companies specializing in this and large amounts of cash are competitive strategies for Porter - a method that should be part of any business plan.
What is it?
As the name suggests, the concept belongs to Michael E. Porter. He is a well-known economist, consultant, researcher, teacher, lecturer and author of a large number of books. Many concepts, strategies, and theories have been created regarding issues related to business, society, and the economy. Michael Porter's analysis of competitive strategies should be applied before trying to enter a new market, as the concept is intended to assess the attractiveness of the sector and is based on 5 different factors that are related to the environment of the enterprise:
- vendor bargaining power,
- Buyers' market power
- intra-sector competition
- the threat of new manufacturers
- the threat of substitutes.
Where to start the analysis?
A proper analysis of the basic strategies for M. Porter should begin by identifying the sector in which the enterprise should operate. It should be borne in mind that the sector is a narrower concept than the industry, and means a group of companies that produce substitute products in the same market. After determining the sector, it is necessary to determine its size, which is most often expressed as the sum of the annual turnover of all enterprises in the sector in this market.
Establishing accurate data in practice is extremely difficult, especially if the analysis is done on its own. A lot of information, however, can be found on the Internet or just think about it and determine the size of the sector as large or small.
Final stages
The penultimate step in miscalculating the competitive strategy for M. Porter is to determine the dynamics of the sector. How violently are manufacturers competing in the creation of ever newer technologies or products that they offer, how similar are they to each other? Dynamics can be determined, for example, in the range from 1 to 10.
The final stage of describing the external environment of the enterprise according to the leadership strategy for Porter should be thought in advance.
Key Features
The life cycle of the sector is taken into account, both the life cycle of both the product and the enterprise, and in addition, it resembles a model of human life. It consists of the following phases:
- introduction
- development,
- maturity,
- decline.
In individual phases, the sector is characterized by various features set forth below:
- introduction
- uncertainty and risk of activity,
- overcoming barriers to entry into the sector,
- the core value of technology and innovation,
- limited competition
- limited flow of information
- experience effect
- price change
- non-profit activity, negative liquidity,
- high capital requirements for financing activities.
In the second stage of development in the life cycle, the following phases are considered in the Porter strategy matrix:
- fast growing demand
- Entering new companies
- rapid growth in profitability,
- increased competition
- a sharp drop in prices,
- more and more intensive activity of the company (still negative liquidity),
- still great capital needs.
Maturity stage includes:
- great importance of marketing,
- stopping the growth of customer demand,
- intense competition (also international competition),
- price reduction,
- client intelligibility
- drop in income
- decrease in profitability of production and trade,
- release of capacity growth,
- the need to improve technology.
At the stage of decline are manifested:
- market stagnation
- price stabilization,
- sales at a level that guarantees survival,
- exit from the company sector,
- there are several companies serving the market,
- circumvention of competition,
- low incomes, low liquidity,
- sale of assets.
The correct definition of the stage of the life cycle of a sector is extremely important for all its participants, both current and future. This allows you to more accurately predict the current and future profitability and development potential of the enterprise.
Sector Competition
First, according to the Porter strategy, you need to start by identifying competition and assessing current competition in the industry. It is best to check what are the main players in the sector and analyze their market share. You can find information on this topic on the Internet, observing the company's results and sales dynamics.
Then it is worth determining the level of competition between the participants. Here, attention should also be paid to the marketing actions taken by individual companies, as well as to whether their actions have the nature of an open struggle in the field of pricing, promotion, or, rather, they focus on advertising their own strengths.
The threat of new competitors
The next important point in the strategies for Porter is the threat of the emergence of new competitors, that is, all companies that can enter this market. Here, those enterprises that are just being created should also be taken into account. It is easier for them, as new competitors, to enter this market, due to the fact that, as a rule, there are more of them, and they mainly compete with each other. Therefore, we do a study of potential competition based on an analysis of barriers. Assessing this risk, it is necessary to identify and evaluate barriers to entry into the market. The higher they are, the lower the risk of new items in the competition.
Principles
Porter strategies take into account economies of scale - if companies gain significant economies of scale in this market, the risk of new zones is low. New entities must for a long time operate in adverse conditions, until the moment of their final entry into the market, to achieve a level comparable to the companies already existing on the market.
The Porter Strategy is considering the possibility that sometimes a company can be created almost for free, and sometimes it requires huge capital expenditures. The higher the capital requirements in this business sector, the lower the threat from new entrants.
Know-how - some industries requiring special knowledge, in them, as a rule, companies have been present in the market for many years.
Obtaining such knowledge for new competitors can be difficult or very expensive, which greatly increases the barrier to entry into this market. In addition, some technologies may be protected by patents, thereby prohibiting competitors from using them for many years.
The cost of switching a provider is also taken into account in the Porter strategy - the easier it is for the client to change the provider, the more likely it is that new competitors will appear on the market in order to pick up customers from companies on the market.
Differentiation of products among competitors - if today's competitors offer consumers unique products under strong brands, entry barriers for new entrants will be higher than when everyone has in their assortment interchangeable products that are almost no different for the final recipient.
Government Barriers
Legal barriers - governments of different countries introduce various kinds of rules, in some sectors they cause a significant restriction of access to this market. In the case of many sectors, there are also rules that people must follow in order to be able to work in specific markets. The more any restrictions and requirements arising from the rules are in the business, the lower the risk of new competitors.