Porter and Kotlers Theories - Essay Example

i Table of Content Page Part I Summary Part II Porter's and Kotler's Theories Perspective . 2 Main Aspects of Porter's Five Forces Analysis . 3 1.1 Force 1: The Degree of Rivalry . 3 1.2 Force 2: The Threat of Entry . 4 1.3 Force 3: The Threat of Substitutes 4 1.4 Force 4: Buyer Power . 5 1.5 Force 5: Supplier Power . 5 2. Market Positioning .. 6 2.1 Market Leader . 7 2.2 Market Challenger . 7 2.3 Market Follower . 8 2.4 Niche Marketer . 8 Part III -Generic Strategies and Value Chain Analysis Generic Strategies .. 8 Value Chain Analysis .. 9 Part IV - Case Study .. 10 Recommendations . 12 Conclusions . 13 Reference 1 Summary Company's success depends on its strategies and the adaptation of the said strategy. This paper includes the theories and perspectives of Porter and Kotler. These two writer has been helping the large number of industry in having a successful business. The Porter Five force which include the degree of rivalry, the threat of entry, threat of substitute, buyer power and supplier power. Each forces are discussed in this paper. The Kotler classification of market positioning includes market leader, market challenger, market follower and market niche, is also discussed in this paper. A case study is also presented in this study. The ABC learning center is a center for children from 0-12 years old. A large number of child center in Australia is now on the industry. ABC needs to survive and increase its profit and has come up and decide to merge with Child Care Center Australia (CCCA) and Peppercorn Management Group (PMG). Action done by its managing director are being analyze in this paper. Suggestion where given to help the company succeed on its aim to increase sale, profits and shares and survival in this stiff and increasing competition. 2 Part II Porter and Kotlers Theories/Perspectives What is an industry As defined in userweb.nni.com an "Industry" is way of classifying businesses that have something in common. Firms are included in or excluded from an industry classification based on the degree of similarity in the products they make or sell and types of customers they service, and the marketplace in which they compete. Industry analysis is a type of business research that focuses on the status of an industry or an industrial sector (a broad industry classification, like "manufacturing"). A complete industrial analysis usually includes a review of an industry's recent performance, its current status, and the outlook for the future. Many analyses include a combination of text and statistical data. Based on the article of Themanager.org, Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. 3 1. Main Aspects of Porter's Five Forces Analysis The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization's behaviour in a competitive market. These include the following: - The rivalry between existing sellers in the market. - The power exerted by the customers in the market. - The impact of the suppliers on the sellers. - The potential threat of new sellers entering the market. - The threat of substitute products becoming available in the market. Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998). 1.1 Force 1: The Degree of Rivalry The intensity of rivalry, which is the most obvious of the five forces in an industry; helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's "five forces" framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness. - This force is located at the centre of the diagram; - Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market. 4 1.2 Force 2: The Threat of Entry Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents' position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows: - Economies of scale: for example, benefits associated with bulk purchasing; - Cost of entry: for example, investment into technology; - Distribution channels: for example, ease of access for competitors; - Cost advantages not related to the size of the company: for example, contacts and expertise; - Government legislations: for example, introduction of new laws might weaken company's competitive position; - Differentiation: for example, certain brand that cannot be copied (The Champagne) 1.3 Force 3: The Threat of Substitutes The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs - that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves: - Product-for-product substitution (email for mail, fax); is based on the substitution of need; 5 - Generic substitution (Video suppliers compete with travel companies); - Substitution that relates to something that people can do without (cigarettes, alcohol). 1.4 Force 4: Buyer Power Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the "risk of failure" associated with a product's use. - This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores; - Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies; - Low cost of switching between suppliers, such as from one fleet supplier of trucks to another. 1.5 Force 5: Supplier Power Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations: 6 - Where the switching costs are high (switching from one Internet provider to another); - High power of brands (McDonalds, British Airways, Tesco, Hutchison); - Possibility of forward integration of suppliers (Brewers buying bars); - Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places). The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete - the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the "Structure-Conduct-Performance" (SCP) model: the structure of an industry determines organizations' competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly. 2. Market Positioning Philip Kotler (2000) defines competitive strategy as a marketing strategy that allows companies to effectively position themselves in a competitive environment. He uses the firm's position within a market to determine the firm's competitive strategy. The different roles that a 7 firm can play in a market are the market leader, the market challenger, the market follower and the niche marketer. For each role, there is a competitive strategy that is associated with it. 2.1 Market Leader 1. Expand the Total Market - Firms seek to grow the entire market. In this case, everyone in the market will grow. 2. Protect Current Market Share - As the market grows, the market leader must maintain its position. This is often done through continuous innovation. 3. Increase Market Share - Market leaders can continue to take market share from their competition. Share gaining companies add new products to their lines. 2.2 Market Challenger 1. Frontal Attack - The competitor matches the marketer leader in pricing , promotion 2. Flank attack - The leader can be attacked in either geographical or segmentation areas that are neglected by the market leader. 3. Encirclement - This is the combination of several methods, but uses quickness to defeat the competition before it can react. 4. Bypass - The competition can defeat the market leader by bypassing the current product and moving to the next technological innovation, diversifying into unrelated products or into unrelated areas. 5. Guerilla - The market leader can be overtaken through indirect methods that attempt to frustrate their strategy and weaken their brand image 8 2.3 Market Follower 1. Counterfeiter - Duplication of the market leaders products and selling them through disreputable dealers. 2. Cloner - Copying the market leaders products and selling them at a discount 3. Imitator - Copying selective things from the market leader but offering some sort of differentation. 4. Adaptor - Improving upon the market leader's products 2.4 Niche Marketer 1. Specialization - Specialization in niche markets. The competitive firm can maximize profit by focusing on neglected, niche markets. Part III -Generic Strategies and Value Chain Analysis Generic Strategies According to Porter's generic strategies if the primary determinant of the firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. Michael Porter has argued that a firm's strengths ultimately fall into one of the two headings: cost advantage and differentiation. By applying this strength in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. Business unit level is one of the level describe by Porter as a 9 strategic business unit maybe a division, product line, or other profit center that can be planned independently from other business units of the firm. The other levels of strategy are Corporate level - concerned with the selection of businesses in which the company should compete and with the development and coordination of that portfolio of businesses. And the Functional or Departmental Level - is the level of the operating divisions and department. Value Chain Analysis From the Book Competitive Strategy of Michael Porter introduced his acclaimed techniques for analyzing industries and competitors. Competitive Advantage introduces a powerful tool that the strategist needs in order to diagnose and enhance competitive advantage: the value chain. Value chain analysis allows the manager to separate the underlying activities a firm performs in designing, producing, marketing, and distributing its product or service. The following value chain analysis of Porter which shows: 1. How to understand the behavior of costs, and how to create and sustain a cost advantage. 2. How to identify what creates value for the buyer and hence differentiation, and how to carry out a successful differentiation strategy 3. How to choose a technological strategy that reflects the significance of the firm's technologies for competitive advantage as well as the benefits and costs of being a technological leader 4. How to improve a firm's competitive position by identifying "good" and "bad" competitors, and to decide what market share and mix of competitors optimizes long- term profitability 10 5. How to segment an industry, and formulate profitable and sustainable focus strategies based on that segmentation 6. How to analyze the substitution threat in an industry and encourage or defend against substitution 7. How to create competitive advantage through corporate strategy by harnessing interrelationships among related industries 8. How to manage a diversified firm so that the resistance to achieving strategic interrelationships among business units can be overcome 9. How to cope with strategic uncertainty, using industry scenarios to illuminate the range of possible future competitive environments 10.How to defend a firm's competitive position when challenged, and how and when to attack an industry leader. Part IV - Case Study The company of choice is the ABC Learning Center which has just merges with fellow listed child-care companies the Child Care Centers Australia (CCCA) and Peppercorn Management Group (PMG). The merging was done to increase the capital, rescue the falling profits and job losses. One of the biggest competitors of ABC Learning Center is the Kids Campus and Hutchison's Child Care Services. Knowing Hutchison you may be threatened by its background having a mandate in industry. Eddy Groves the managing director of the joining companies made the move by adopting the Porter's Five Forces. Groves identify the degree of rivalry. Hutchison is a big company having Craig Napier as the managing director of the company. Presently Hutchison has 72 centers and hope to have 82 by the end of this 11 year. Kid Campus has John Murphy as its managing director and has 34 to 103 centers over the next two and a half year. The rivalry is center of the Porter Five Force, from here we will be able to evaluate and analyze the move the company must do. The merging results from the increase capital of the company ABC will offer CCCA shareholders the equivalent of $1.40 a share in scrip and PMG shareholders $10.80 a share in cash. ABC will be able to raise $300 million additional capital and therefore can pursue its objective of managing from 327 centers to 778 centers, of which 550 will be owned and 228 managed on behalf of others. With the entry of the new ABC learning Child Center the competition will become very stiff and rigorous. The threat of this entry should be treated well. Grove must be able to check the economy on how it will be approached. Targeting a very big number of owning a center is a hard task, proper strategy and financial control must be done. Just to show how stable the other companies, they are not feel threatened of its new approached. They are much more concern in the exit of the managing director of Peppercorn, Michael Gordon. Napier and Murphy are watching intently if Groves will be able to pull off the merger. Groves will have to face some problems during the process of merging. First, Groves must bring Peppercorn's centers into ABC's business model (ABC owns its centers outright, but PMG only provides management services to child-care operators). Second, ABC must choose which PMG and CCCA centers its wants to rebrand and whether it needs to close any centers to avoid duplication. Third, Groves will need to carefully manage the development schedule to ensure new centers are in the right place to meet demand and avoid oversupply. 12 Groves must be able to switch costs - such as retooling, retraining and redesigning. The threat of substitution is important especially in the case of ABC since they are on its way of introducing a new center. According to Grove the profit forecasts which is from $38 million in 2004-2005 to $89 million in 2006-2007 is attainable if it is done in the right way. A lot of planning should be done to achieve those targets. A good choice of strategy is important. Recommendations Since Grove was able to identify its competitors, it is best if he will able to identify the strategy used by its competitors and try not to use it, since adaptation of the same strategy would mean copying their moves. Try to have a good strategy and adopt the Kotler and Porter theories to become successful. Be original and promote the new ABC well and try to reach out greater number of customer. Using the Kotler's Classification Grove should identify the leaders in the said industry. He should be able to find out how they become successful in such field. What are their moves why they able to have a good share in the market. Who among the group of people will be your follower, is it the middle class, the upper class or the poor. Grove must be able to take the challenge, identify the pros and cons of the said merging and evaluate the possible solution for every problem. In the value chain analysis, cost, competitiveness and strategy is important. Adopt the Porter's five forces and follow Kotlers management marketing classification, you might be able to achieve your goal in a shorter period of time. 13 Conclusion In every industry it is important to analyze the following important factors: Strategy, Competitors and Financial capabilities. Adopting proper strategy will surely make one company successful in achieving its goal. Consult books, articles, and other professionals such as Michael Porter's writings and Philip Kotler's for the success of the business. References 1. Kotler, Philip. Marketing Management. Prentice-Hall: New Jersey. 2000. 2. Haberberg, A. and Rieple, A. (2001) The Strategic Management of Organizations, Essex: Pearson Education Limited. 3. Kippenberger, T. (1998) Strategy according to Michael Porter, The Antidote, Vol. 3 Issue 6, pp. 24-25. 4. Luffman, G., Lea, E., Sanderson, S. and Kenny, B. (1996) Strategic Management, Oxford: Blackwell Publishers Inc. 5. Porter, M. (1980a) How Competition Forces Shape Strategy, Harvard Business Review, September-October, pp.137-145. 6. Porter, M. (1980b) Competitive Strategy, New York: Free Press. 7. Porter, M. (1998) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press. 8. Sanderson, S. (1998) New approaches to strategy: new ways of thinking for the millennium, Management Decision, Vol. 36 issue 1, pp.9-13. 9. Thurlby B (1998) "Competitive forces are also subject to change", Management Decision London 10. Wheelen, T. and Hunger, J. (1998) Strategic Management and Business Policy, 6th ed., Reading: Addison-Wesley. Read More