1. Bibliography of Michael E Porter
Michael E. Porter is the Bishop William Lawrence University Professor, based at Harvard Business School. A University professorship is the highest professional recognition that can be given to a Harvard faculty member. Professor Porter is the fourth faculty member in Harvard Business School history to earn this distinction, and is one of about 15 current University Professors at Harvard.
Professor Porter is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions. He received a B.S.E. with high honors in aerospace and mechanical engineering from Princeton University in 1969, where he was elected to Phi Beta Kappa and Tau Beta Pi. He received an M.B.A. with high distinction in 1971 from the Harvard Business School, where he was a George F. Baker Scholar, and a Ph.D. in Business Economics from Harvard University in 1973.
Professor Porter has served as an advisor on competitive strategy to numerous leading U.S. and international companies, among them DuPont, Entel, Edward Jones, Navistar, Procter & Gamble, Royal Dutch Shell, Scotts Company, and Taiwan Semiconductor Manufacturing Company. He serves on the boards of directors of Parametric Technology Corporation, Thermo Electron Corporation, and Inforte Corporation as well as on several advisory boards of emerging companies. He has also served as a strategy advisor to community organizations including Brigham & Women’s Hospital, the Institute of Contemporary Art, WGBH public television, and others.
Case 10-3: Galvor Company Background Galvor Company was founded in 1946 by owner, and president M. Georges Latour. The company had acted as a fabricator, buying parts and assembling them into high quality, moderate-cost electric and electronic measuring and test equipment. Latour had always been personally involved in every detail of the firm's operations as in most family businesses. Fiscal ...
Professor Porter is also a counsellor to government. He plays an active role in U.S. economic policy with the Executive Branch, Congress, and international organizations. He is a member of the Executive Committee of the Council on Competitiveness; a private-sector organization made up of chief executive officers of major corporations, unions, and universities, and has provided intellectual leadership for much of the Council’s work.
Professor Porter has also served as an advisor to numerous foreign nations and groups of neighbouring countries. He has led major studies of the economy for the governments of such countries as India, New Zealand, Canada, and Portugal, and advised national leaders in Ecuador, Nicaragua, Peru, Singapore, Taiwan, and Thailand. His ideas have inspired national competitiveness initiatives and programs in more than a dozen other countries including Ireland, Finland, and Norway and sub national regions such as Catalonia, Scotland, and Northern Ireland. His thinking about economic development for groups of neighbouring countries has led to a long-term initiative with the heads of state of the Central American countries to develop and implement an economic strategy for that region, including the formation of the Latin American Centre for Competitiveness and Sustainable Development (CLACDS), a permanent institution based in Costa Rica.
1.1Michael E Porter – Five Competitive Forces
The five forces model developed by Michael E. Porter guides the analysis of organization’s environment and the attractiveness of the industry. The five forces include the risk of new competitors entering the industry, threat of potential substitutes, the bargaining power of buyers, the bargaining power of suppliers, and degree of rivalry between the existing competitors (Porter, 1985).
Environmental scan identifies external opportunities and threats, evaluates industry’s overall attractiveness, and identifies factors which makes an industry more or less attractive. Through the organization’s choice of strategy it can alter the impact of these forces to its advantage.
... developed the five forces model to describe and analyze these factors. Apart from Porters Book Competitive Strategy: Techniques for Analyzing Industries and Competitors“ in 1980 ... use this model to understand the industry context in which the firm operates. Software industry is a growing industry and there are many potential ...
This is a graphical interpretation of Porter’s five forces model: (Figure 1 )
2.The Structural Analysis of Industries
The essence of formulating a competitive strategy is relating a company to its environment. Social as well as economic forces are the key aspects of the environment in which a firm competes. Industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm. Forces outside the industry are significant primarily in a relative sense, since outside forces usually affect all firms in the industry. The differing abilities of firms to deal with outside forces strongly determine their company.
Competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors. The state of competition in an industry depends on five basic competitive forces, which are listed in Figure 1. The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital. Firms differ fundamentally in their ultimate profit potential as the collective strength of the forces differs.
The goal of a competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can even influence them in its favour.
The five competitive forces – entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors – reflect the fact that competition in an industry goes well beyond the established players. Customers, suppliers, substitutes, and potential entrants are all competitors to firms in an industry and may be more or less prominent depending on the particularly circumstances. Competition in this broader sense is also known as extended rivalry.
All five competitive forces jointly determine the intensity of industry competition and profitability. The strongest force or forcers are governing and become crucial for the strategic formulation.
In recent years, competition in the IT market economy has turned fierce. To survive competition, all organizations need to be fully aware of the prevailing business environment and industrial forces to ensure that their products conform to the customer’s expectations as the taste and choice of the customer changes rapidly over time. Lenovo has utilized unique competitive marketing strategy over ...
3. Threats of New Entrants in the Internet Banking Market
If barriers to entry are low, new competitors are likely to want to participate. New entrants bring new capacity into the industry, i.e. they
increase the volume and availability of the industry product. They also bring with them a desire to gain market share.
This means that the easier it is to enter an industry, the less profitable that industry is likely to be for the existing players. If, on the other hand, there are high barriers to entry or if any potential can expect retaliation from the existing competitors new players will be less likely to participate.
In the sense of Internet banking the threats of new entrants are very low as the cost to enter the market is not very high.
There are a number of significant barriers to entry. They include:
3.1Economics of Scale
Competitors who can produce their product in large volumes are able to produce them cheaper; therefore the unit cost of production will be lower. Thus, they enjoy what is referred to as economics of scale. Economics of scale discourage entry by forcing any new player to come in on a large scale or to accept cost disadvantage. Such economies may occur in financing, research and development, manufacturing, distribution, marketing, advertising and sales promotion, utilisation of the sales force, service, and in fact nearly every part of the business.
The building of strong brands usually creates product differentiation. Market Egg or Barclays are examples of this in Internet Banking
Strong brands create a barrier to entry because they force potential new entrants to spend heavily to overcome existing brand loyalty. Advertising, customer service, being first in the industry and product superiority, all contributes to brand loyalty.
As already mentioned before the top 2 online banks within Scotland are Barclays with 3.9m online customers and Egg: with 2,56m online customers . The difference between the numbers two and three of online banks are nearly 1m customers. Therefore I assume that it is very difficult for a new entry to compete with them.
The Topps Company, among other things discussed later, is in the business of manufacturing chewing gum and confections. According to the Business and Company Resource Center, the Topps is involved in ten different industry categories. They are listed here with their respective SIC/NAICS codes: Commercial Printing (2759), Chewing Gum (2067), Candy and Other Confectionary products (2064), ...
Large sums of money are often required to enter an industry on a sufficiently large scale to make profits and compete effectively. This creates another barrier to entry, particularly if capital is required for unrecoverable expenses such as upfront advertising research and development.
For online banks, this may be also true, but as they are normally linked to retail banks, they should therefore have sufficient money.
3.4Access to Distribution Barriers
Often, the existing players have secured reliable distribution channels that new entrants may find difficult to break into, especially if there are few available channels. Sometimes barriers to entry are so high that a new entrant will have to create its own distribution channels if it wishes to participate.
This does not really affect the online banking market, as they are all linked to retail banks. Their distribution channels should therefor be available to the new entrants However, it might be difficult for an online bank, which is solely an online bank to get access to distribution channels.
3.5Absolute Cost Disadvantage
The absolute cost disadvantages are independent of the size of the business and relate to the cost disadvantages of new entrants as opposed to established business. The latter will have market experience and therefore may have access to proprietary technology as well as a favourable location or benefit from government subsidies.
Government can limit the number of players in an industry or even prevent new entrants from participating at all.
4Bargaining Power –
4.1- Of Buyers
If the buyers of an industry’s products are powerful, i.e., when they have high bargaining power, the profits to be made by each competitor are severely diminished. They may lead to increased competition for market share. There are a number of conditions which increase the bargaining power of a customer group being high:
·There are only a few, large buyers.
·The products of the competitors in the industry are of commodity nature – or incapable of being differentiated.
The apparel and retail industry throughout the history of our nation has always been motivated to try and come up with ways to increase their profits by driving the costs of their products as low as possible. The solution to many of these corporations' problems has always seemed to be simple enough. The exploitation of people across the oceans in foreign lands for cheap labor is the common ...
·The buying groups earn low profits.
·The industry’s product is unimportant to the quality of the buyers’ products,
·The buyers pose a credible threat of integrating backward and making the competitor’s product themselves.
4.2- Of Suppliers
When the suppliers to an industry are powerful, they have high bargaining power of a suppliers group. That would include:
·The suppliers’ product is unique, or highly differentiated.
·The suppliers’ product does not have to contend with other products for sale to the industry.
·The suppliers pose a credible threat of integrating forward into the industry’s business.
·The competitors are not important customers of the supplier group.
4.2.1Availability of Substitutes
Substitutes are those products which are quite different in form but which offer a real alternative to the industry competitor’s products.
The availability of substitute products can limit the profit potential of competitors in an industry by placing a ceiling on the prices they can charge.
Unless the competitors can make their product significantly superior in the eyes of their customers, or differentiate it somehow, by marketing or distribution, the industry competitors will suffer in earnings and possibly in growth.
Buyers are more likely to turn to substitutes if:
·The substitute is close in price and performance to the industry product
·The switching costs are low.
·The buyers have been accustomed to making switches to alternative products in the past.
5.The Intensity of Rivalry
The rivalry between existing competitor, and / or the jockeying of position among them, can be either intense or placid. Intense rivalry is exhibited in an industry in tactics like price cutting, new product innovations and heavy bouts of ‘knock out’, comparative advertising.
There are a number of conditions that contribute to intense rivalry. They include:
·The competitors are numerous, or are roughly equal in size and power.
·The industry growth is slow.
·The industry’s product lacks differentiation or switching costs.
·The fixed costs are high.
·The product is perishable.
There are four distinct markets structures in the American economy. These four markets are, pure competition, pure monopoly, monopolistic competition, and oligopoly. These four market models differ as to the number of firms in the industry, whether those firms produce standardized products, or try to differentiate their products from those of other firms, and how easy or difficult it is for firms ...
·The exit barriers are high.
·The rivals are diverse in strategies, origins and personalities.
·Scottish Bankers, May Issue 2003