Porters 5 Forces

Benchmarking (Porters Value Chain)

Porters Generic Strategies
Prof. Arijit Bhattacharya
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Porters 5 Forces Model :

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Threat of New Entrants
Threat of entry depends on
Height of Entry barriers
Reaction entrants can expect from incumbents.
Entry Barriers
Advantages that incumbents have relative to new entrants.
1. Supply-side economies of scale
2. Demand-side benefits of scale
3. Customer switching costs
4. Capital requirements
5. Incumbency advantages independent of size
6. Unequal access to distribution channels
7. Restrictive government policy
8. Expected retaliation

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The Power of Suppliers
A supplier group is powerful if:
1. Supplier group is more concentrated than the
industry it sells to.
2. Supplier group does not depend heavily on the
industry for its revenues.
3. Industry players face switching costs in changing
suppliers.
4. Offer products that are differentiated.
5. No substitute for what the supplier groups
provides.
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The Power of Buyers
A customer group has negotiating leverage if:
1. There are few buyers or large volume buyers.
2. Industry products are standardized or
undifferentiated.
3. Buyers face few switching costs in changing
vendors.
4. Buyers can integrate backward and produce
industrys product themselves.


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Threat of Substitutes
The threat of a substitute is high if:
1. Substitute offers an attractive price-performance
trade-off to the industrys product.
2. Buyers cost of switching to the substitute is low.

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Rivalry Among Existing Competitors
Intensity of rivalry is high if:
Competitors are many or are roughly equal in size.
Industry growth is slow.
Exit barriers are high.
Rivals are highly committed to the business and have
aspirations for leadership.
Price competition is likely to occur if:
Products/services of rivals are nearly identical and few
switching costs for buyers.
Fixed costs are high and marginal costs are low.
Capacity must be expanded in large increments to be
efficient.
Product is perishable.



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What is Benchmarking?
Process of improving performance by
continuously identifying, understanding and
adapting outstanding practices found inside and
outside the organization.
Benchmark with:
Competitors (to know your deficits with respect to
competition)
A partner.
Another area of the same firm.
Best-practice companies
Unrelated industry or company



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Benchmarking Features
Continuous method of measuring and
comparing a firms business processes
against those of another firm.
Discover performance gaps between
ones own processes and those of
leading firms.
Incorporate leading firms processes into
ones own strategy to fill the gaps and
improve own performance.
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Benchmarks in the World
Toyota
Process

Intel
Design

Honda
Rapid product development
Motorola
Training

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A Benchmarking Process
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Benefits of Benchmarking
Product and Process Improvement
Cost Reduction
Competitive Strategy
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What to Benchmark?
Porters Value Chain
How it can enhance performance
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Primary Activities
Examine each activity with respect to competitors abilities and
rate as superior, equivalent or inferior.
Inbound Logistics
Receiving and warehousing of raw materials.
Distribution of raw materials to manufacturing and operations.
Operations
Process of transforming inputs into finished goods and services.
Outbound logistics
Warehousing of finished goods.
Distribution of those finished goods to customers or retail stores.
Marketing and Sales
Identification of customer needs.
Deploying product into marketplace.
Process of selling to customers.
Service
Supporting customers after they buy products and services.

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Support Activities
Procurement
Purchasing of raw materials and inputs needed to create
the product.
Technology Development
Technology developments that support value chain
activities.
Human Resource Management
Activities associated with recruiting, training, hiring and
compensation.
Firm Infrastructure
Legal team, accounting department, PR, quality
department etc.

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Why this matters
Profits depend on how well firms execute these
activities in the value chain.
Firms that excel in a value chain activity is said to
have a competitive advantage.
Competitive advantage is gained through cost
advantage.
Reducing cost of individual value chain activities
Reconfiguring the value chain
Structural changes to an activity in a value chain to reduce
costs.
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The Bigger Picture
Firms value chain is a bigger value chain
Competitive advantage also depends on the
management of connections with other firms
value chains.
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Types of Benchmarking
What is being compared with other
organizations?
Product, (functional) performance, process,
strategic
Who is being compared with our
organization?
Internal vs. External, Generic, International, Best in
Class, Best of the Best
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Benchmarked Performance Measures
Financial Ratios (ROA, ROI)
Productivity Ratios (use of resources)
Consumer related Results (C-Sat)
Operating Results (Cycle time, waste redn, lead time)
HR measures (E-Sat, absenteeism, turnover)
Quality measures (reject rate)
Market Share Data (shares in different markets)
Structural Measures (objectives, policies, procedures
followed by a firm)
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Benchmarked Business Processes
Employee recognition
Process improvement management
Procurement purchasing
Management operations policy leadership
Employee development and Training
Marketing
Asset management
Balanced Scorecard
Corporate Governance
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Balanced Scorecard
Pioneered by Robert Kaplan and David Norton
To effectively implement business strategy
Derives its name from the perceived need of
firms to balance financial measures that are
often used exclusively in strategy evaluation
and control with nonfinancial measures such
as product quality and customer service.
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Balanced Scorecard - Example
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Porters Generic Strategies
Marketing strategy challenge
To find a way of achieving a sustainable
competitive advantage over the other competing
products and firms in a market.
Competitive advantage
An advantage over competitors gained by offering
consumers greater value, either by means of
lower prices or by providing greater benefits and
services that justifies higher prices.

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Generic Strategies
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Porters Generic Strategies
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Cost Leadership Strategies
To employ a cost leadership strategy
successfully, a firm must ensure that its
total costs across its overall value chain
are lower than competitors total costs
Perform value chain activities more efficiently
than rivals and control the factors that drive
the costs of value chain activities
Revamp the firms overall value chain to
eliminate or bypass some cost-producing
activities

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Cost Leadership Guidelines
When price competition among rival
sellers is especially vigorous
When there are few ways to achieve
product differentiation that have value to
buyers
When most buyers use the product in the
same ways
When buyers incur low costs in switching
their purchases from one seller to another

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Differentiation Strategies
Should be pursued only after a careful study
of buyers needs and preferences to
determine the feasibility of incorporating one
or more differentiating features into a unique
product that features the desired attributes
When there are many ways to differentiate the
product
When buyer needs and uses are diverse
When few rival firms are following a similar
differentiation approach
When technological change is fast paced

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Focus Strategies
Successful focus strategy depends on an industry
segment that is of sufficient size, has good growth
potential, and is not crucial to the success of other
major competitors
Most effective when consumers have distinctive
preferences
When the target market niche is large, profitable, and
growing
When industry leaders do not consider the niche to be
crucial to their own success
When the industry has many different niches and
segments
When few, if any, other rivals are attempting to specialize
in the same target segment


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Risk
Cost Leadership
Competitors imitate
Technology changes
Differentiation
Bases for differentiation unattractive.
Focus
Target segment becomes structurally unattractive
Demand disappears
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Differentiation
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Stuck in the middle
To be successful in long-term, a firm must
select only one of these three generic
strategies.
With more than one generic strategy, the firm
will be stuck in the middle and will not
achieve competitive advantage.
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Generic Strategies vs. 5 Forces
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Examples of value-creating activities
with the Cost Leadership Strategy
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How to obtain a Differentiation
Advantage
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