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CREATE A UNIQUE YET COMPETITIVE POSITION TO BE SUCCESSFUL
OCT 06, 1996 -
NEW STRAITS TIMES
DR MICHAEL E. Porter, dubbed the world's most competitive man,
was in Kuala Lumpur on Sept 11.
He addressed a gathering of more than 200 people, mostly CEOs,
general managers and senior Government officials.
Porter, a professor at Harvard Business School, is well known
throughout the management world for his two landmark books-
Competitive Strategy (1980) and Competitive Advantage (1985).
In his address to Malaysian public sector and corporate
leaders, he basically relied on the following framework to
present his views on "Global Competitive Advantage":
* The five diamonds model of "Forces Driving Industry
Competition";
* The three generic competitive strategies; and,
* The concept of the value chain and com advantage.
PORTER'S FIVE DIAMONDS MODEL
This model, which is used as a guide to analyse industries,
seeks to answer questions such as:
a) what forces drive industry competition?
b) what factors affect profitability in any given market7
c) which industry should firms pick to do business in?
d) how can organisations influence industry behavior so as to
increase their (firms') profitability?
Using this model, Porter argues that, in any given industry
(say the restaurant industry), the intensi ty of competition
which drives prices down depends on the way the five forces
interact against each other (see diagram).
The intensity of interplay of these forces will determine the
profitability in that given industry. It is important to note
that prior to this model, there was no such convenient tool
for analysing business markets. In fact, this model is
Porter's most outstanding contribution to the world of
strategic thinking. His two other outstanding contributions
are the three generic competitive strategies and the
value-chain concept.
Coming back to thfive diamonds model, the very important
role of the Gove ernment is to be individually assessed,
depending on how Government policies affect each of the above
mentioned five forces For instance, our Goverment's policy on
controlled items sets a price ceiling for those items. The
recent Government decision to al low the import of cement to
ease the temporary shortage stabilised the retail price of the
building material.
THREE GENERIC COMPETITIVE STRATEGIES
These generic or commonly practised strategies are ways which
organisations (in competitive environments) adopt to cope with
the five forces in their respective industries The three
strategies commonly used in all industries are:
a) Overall cost-leadership: companies achieve the "lowest
cost" of production through the use of operational:
effectiveness tools such as TQM (total quality management) BPR
(business process re-engineering), benchmarking (finding the
best practice and copying it), and so on.
b) Differentiation strategy: companies take deliberate
decisions to make their products or services unique. This
uniqueness, therefore, differentiates the company's products
from its competitors. For instance, the Rolex brand and
quality differentiates its watches from those manufactured by
others.
c) Focus strategy: this requires the company to deliberately
choose which customer group to do business with and which not
to.
For instance, if you are a restaurateur, you may choose to
serve the tourist market or offer halal food to serve Muslims
and non-Muslims. But you definitely should not try to serve
every market segment.
Let's look at some other examples. Take the case of Mercedes
cars. Their focus group is the well-to-do segment. They have
differentiated the Mercedes name and the star logo to carry a
strong message of status, prestige and success.
On the other hand, our national car, the Proton, is aimed at a
broad segment of buyers who need a car that is affordable,
reliable and economical. This incidentially is a combination
of cost leadership strategy and broad market focus as opposed
to Mercedes' differentiation strategy with much higher pricing
and a very narrow market focus.
Before we move on to the concept of value chain, let's touch
briefly on the advantages of overall cost leadership and
differentiation strategies which most companies adopt.
Companies with cost leadership strategies have operational
effectiveness such that they are extremely cost-effective or
are low cost manufacturers. (Toyota Motors Corporation is the
classic example of this approach). And cost effective
producers have, the following competitive advantages over
their rivals:
a) a better profit margin -result of a lower product cost;
b) greater flexibility to cope with raw material cost
fluctuations or economic downturns; and,
c) enables them to withstand a prolonged price war among rival
companies should it happen.
Organisations with well differentiated products enjoy the
advantage of this uniqueness in that they wilI have a group of
customers who are loyal to their products. For instance, brand
loyalty to Mercedes or Rolex. Brand loyalty shields you from
direct price competition, and it is also something your
competitors cannot easily copy or imitate.
THE VALUE CHAIN AND COMPETITIVE ADVANTAGE
What gives a company its competitive advantage?
Basically, competitive advantage arises out of a company's
ability to create value (something like value for money) for
its buyers. Everyone can appreciate a company which can offer
cheaper and equally reliable products or offer goods of much
better quality than its rivals', without charging extra.
Porter introduced the idea of "value chain" (which makes up a
firm's activities) as a tool to help in:
a) identifying the relevant and strategic activities it should
perform, and what activities it should not perform;
b) monitoring the costs and expenses of each of these separate
but important activities and see which costs can be further
minimised or which cost-incurring activity can be totally
discontinued, and,
c) singling out differentiation opportunities, cost leadership
advantages or help decide which market to focus or forgo, and
so on.
The ultimate purpose of this "value chain" or strategic
activities analysis is for the firm to arrive at a position
where it can perform all its discrete or separate activities
such that it can:
i) produce cheaper and better quality goods or services such
as Toyota cars or Southwest Airlines; and,
ii) serve its selected narrow market segment with goods or
services which command a premium price, for example, Mercedes
cars or Shangri-la Hotels.
So, to Porter, strategy is about creating these value
activities, whlch are many and varied but flow into each
other, and reinforces each other, ultimately creating a very
special company.
We can look at the idea of "value chain" from another angle.
And this is, the profitability of a company grows out of the
(value) activities it performs, or deliberately chooses not to
Perform so as to be unique from its other competitors.
Companies such as Mercedes or Shangri-la Hotels have
deliberately differentiated themselves from their rivals by
refusing to perform the many other activities their rivals do,
such as mass production and selling at low prices.
In the Malaysian furniture industry which is generally
perceived as producing "me too" products, and compete purely
on price, there is one producer with a different approach.
Artwright furniture, for instance, refuses to compete on
price. It would rather forgo customers purely negotiating on
price without looking at design difference or redesigning
flexibility.
So, in order to be successful, Porter advised Malaysian
corporate leaders to create a unique yet valuable and
sustainable competitive position for their goods or services.
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