Business Strategy - Principle and Structural Elements of Porters Model - Assignment Example

?Business Strategy Table of Contents Introduction 3 2. Principle and Structural Elements of the Porter’s Model 4 2 Porter’s Five Forces Model 4 2.1.1. Structural Elements 4 2.1.2 Principle Elements 5 2.2. Porter’s Diamond Model 6 2.2.1 Structural Elements 6 2.1.2 Principle Elements 7 3. Business and Economic Contexts within Which Two Models Can Find Practical Application 9 4. Contemporary Examples Where the Models Help To Analyze the Business and Economic Context 11 4.1. Example Relating to Porter’s Five Forces Model 11 4.2 Example Relating to Porter’s Diamond Model 12 Conclusion 14 References 15 1. Introduction In a general sense, business strategy is regarded as the selection of effective and valuable business ideas, which aids in meeting organisational objectives. Formulation of business strategy is typically considered to be an imperative task for every organisation, whether small or large. It begins with the formulation of innovative business ideas by the concerned persons of various organisations. The responsibility of these concerned people does not end with the formulation of the ideas, but also they need to find out the best ways to implement those ideas and also have a frequent look whether those ideas are working well or not. All these significant aspects have been viewed to provide active support to the business managers of an organisation in making effective decisions towards the accomplishment of organisational targets (Kourdi, 2010). This assignment will analyze two of the decisive models that include ‘Porter’s Five Forces Model’ and ‘Porter’s Diamond Model’ as a new way of understanding competitive advantage. In this regard, Porter’s Diamond Model is used as the most appropriate basis of measuring the competitiveness at the company level and thus, it is also considered as the model which provides the learning of competitive advantage in accordance with different opinions. On the other hand, ‘Porter’s Diamond Model’ denotes that culture and other unique facets can support companies in determining their respective competitive position in the international market. Specially mentioning, Porter’s Five Forces Model states five of the forces that shape the industry in a competitive international market. Both of these models that proposed by Michael Porter are considered to be the effective tools for determining the position of the companies in the international competitive business markets (Porter, 1990). Hence, in this assignment, the study of various elements along with the principles of these models will be carried along with their practical implications within business and economic context. In the last section of the assignment, contemporary examples will be analysed wherein the aforesaid models help to analyse along with understand the relevant business and economic context. 2. Principle and Structural Elements of the Porter’s Model 2.1. Porter’s Five Forces Model 2.1.1. Structural Elements Porter’s Five Forces Model is a strategic insight, which avoids keeping the company’s competitive edge at risk and also ensuring the attainment of greater profit margin on a long term basis. The profit margin of the companies depends on a number of factors that can also be regarded as the structural elements of the aforesaid model. These elements have been mentioned below. Threat of New Entrants: It is the prime responsibility of the companies to prevent its competitors from entering into the business markets where they operates. This particular structural element depends on numerous factors such as market size, raw materials, cost of entry and also the cultural barriers (Lima, 2006). Competitive Rivalry: The competition between the companies determines the demand for the market. It is the analysis that performs by the companies to identify their competitors and determining their strengths along with weaknesses (Lima, 2006). Bargaining Power of Buyers: This structural element helps to control the profitability in the market. The companies must be conscious in selecting their clients as buyers’ bargaining power require to be inversely proportional to that of suppliers (Lima, 2006). Bargaining Power of Suppliers: It is regarded as an important aspect in the competitive market owing to the reason that the powerful suppliers can enforce their criteria on the basis of quantity, quality and price. Along with the concentration of the company, the suppliers will have more control over the prices charged by the companies (Lima, 2006). Threat of Substitute Products: Substitute products are those that serve similar functions and satisfy the similar needs of the people as the existing product does. The companies usually face this risk as the other companies undergo change or adopt modern technologies. In this context, the companies must be able to cope up with the problem of substitute products efficiently through adopting along with implementing effective strategies, as it might become one of the serious challenges for them (Lima, 2006). 2.1.2 Principle Elements Fundamentally, the principle elements of Porter’s Five Forces Model refer to basic assumptions based upon which the structural elements are determined. One of the principles of this model can be recognised as the external market scenario, which is causing the threat of competition for the companies. The external market imposes considerable impact upon the business performance of the companies, as it possess maximum risk of competition in relation to their products. On the other hand, institutional advantage is the other important principle of this model. It is the effectiveness of one particular company in performing its responsibilities comparatively with other company conducting the similar type of responsibility. It has also been observed that institutional advantage theory identifies the non-profit organizations especially, who do not have the risk of real competitors in the market (Cafferky, 2005). 2.2. Porter’s Diamond Model 2.2.1 Structural Elements According to the book “The competitive Advantage of Nations” written by Michael E. Porter, it can be viewed that the Diamond Model is helpful for determining the competitive position of a country in relation to international competition. Porter stated that the competitive advantage is a consequence of four major elements that have been discussed below. Factor Condition: The basic factors of production such as raw material, labour and land determines the flow of business in accordance with the simple theory of economics. The local availability of the factors of production compels the companies towards developing a constant innovation process. The adverse situation such as the shortage of labours and non-availability of raw materials drives the companies towards the development of new techniques. This development can be duly regarded as the innovation strategy, which contributes towards making the modern companies in attaining superior competitive position (Porter, 1990). Demand Condition: It can be affirmed that a particular product, which has a high demand in its national market will also possess greater demand in the foreign markets as well. The more demanding be the customers, the companies will be more involved in innovating their respective products or services. The products that possess higher demands in the local markets rather than in the foreign markets, eventually lead the companies towards the attainment of superior competitive position as the local companies begin to export the products (Porter, 1990). Related and Supporting Industries: The national competitive advantage in relation to this particular structural element motivates other service industries just as it does to the manufacturing industries. The internationally competitive industries provides triple benefit to the service industries such as creating demand for the products in foreign markets, making provisions of sophisticated customers in the local market and driving all these factors by linked services between local and foreign market (Porter, 1990). Firm Strategy, Structure and Rivalry: The strategy of the firms is highly affected by the local capital markets. The firms’ strategy is useful for the determination of the nature of the industry in which the country can attain greater competitive advantage. Structure varies from one company to other. Likewise, a country may be centred towards a particular style of structure. Thus, the countries can attain superior competitive advantage in accordance with the management structure that they have been adopting. The existence of global competition is not considered as the motivational factor as there pertain numerous differences between the companies and their business environment (Porter, 1990). 2.1.2 Principle Elements The Diamond Theory of Porter has been introduced on the basis of certain principle elements namely government, interrelationships and chance. The detailed study of the mentioned principles has been depicted hereunder. Government: The government has a special role to play in promoting competitive advantage to the local industries of a nation. It must provide the country with better environment for business and also promote for gaining greater competitive advantage through the implementation of various legislations along with policies (Nan & Lei, 2013). Interrelationships: It is regarded as the basic principle element, which creates a link between four structural elements of the Diamond Model. In this similar context, factor condition is the foundation for satisfying the demand condition and again, the demand condition can motivate the factor condition at large. The factor conditions provide related and supporting industries with the raw materials and in return, these industries provide with production. The raw materials that are provided by the factor conditions to the supporting industries help in building up strategies, structure and rivalry. Demand conditions provide the supporting industries with opportunities for growth and thus, with the growth, industries can satisfy the demand conditions. Demand helps in building of the strategy and the strategy will be useful in satisfying the demands. The presence of these interrelationships between the structural elements indirectly motivates a particular country in accomplishing its competitive position in global business markets (Nan & Lei, 2013). Chance: Porter states that chances are few of the external factors that can affect the industries. According to Porter, several chances such as increase in the market demand, change in the financial market and the policies of government among others are the best possible chances that aids in promoting superior competitive advantage of the countries (Nan & Lei, 2013). 3. Business and Economic Contexts within Which Two Models Can Find Practical Application Both Porter’s Five Forces Model and Porter’s Diamond Model contributes largely to the business of a company and also the national economy. Porter’s Five Forces Model is an effective tool to analyze the position of the companies in the global competitive market. It assists the companies in identifying few of its risk factors such as substitute products, competitors and the new entrants that can enter the existing market. The companies can adopt effective measures to mitigate these risks and ensure smooth running of the business (Jaradat & et. al., 2013). This model makes the companies competent enough to determine the business strategies within the industry. It not only provides significant benefits to the business organizations but also to the national economy in terms of generating superior competitive position for the countries as well. The local companies being benefited by the model will in return benefit the country’s economy. The companies which will boost its financial condition can develop the financial position of the nation and contribute to raise GDP rate at large (Porter, 1997). On the other hand, Porter gives much of the stress on the necessities of attaining greater competitive advantages of nations in respect to the production factors. Porter proposed the Diamond Model for providing positive impacts to the business and economies of various nations. In relation to this model, Porter states that the behaviour of firms is the vital determinant of the national competitive advantage. The principle element of Diamond Model i.e. government policies, enhance the national economy of the countries by facilitating them with gaining greater competitive advantage (Bosch & Prooijen, 1992). If the business organisations are to be considered in terms of the utility of Porter’s Diamond Model, the model is regarded as one of the effective tools as it provides the business organisations with the availability of raw materials and labour. The model provides with sufficient information, which is useful for the companies to decide what must be done with the available raw materials and labour. With the help of Diamond Model, y individual within the organisations can set their respective goals, which in turn will benefit the companies at large. This model also creates pressure on the companies for undergoing innovation and making arrangements for further investments (Bosch & Prooijen, 1992). From the above study of the utility of both the models in context of business and economics, it can be affirmed that the models contribute in developing the business of the companies along with the economies of the nations. But the difference lies in the concept of competition i.e. Five Forces Model concentrates on competition within the organisations, whereas Diamond Model stresses on the international level of competition. The Five Forces Model shapes an industry in order to resist in the competitive market and adopt all the strategies that could reduce the potential business risks. Porter’s Diamond Model focuses on the attainment of greater competitive advantage by the nations in the international market. One of the disadvantages relating to the Five Forces Model can be recognised as that, if all the elements create severe competitive pressure, the profitability index of the companies might reach at lower levels and hence, run in loss. However, it can be viewed that the Diamond Model delivers much attention on developing the national economy through the incorporation of various factors such as demand, organisational structure, and also rivalry among others (Hollensen, 2009). It can be affirmed from a broader outlook that both of the models have their own advantages and provide utility to the business environment along with the economy of the nation at large. Thus, based on the above discussion, the above discussed two models that proposed by Michael Porter are quite beneficial in terms of business and economic context. 4. Contemporary Examples Where the Models Help To Analyze the Business and Economic Context 4.1. Example Relating to Porter’s Five Forces Model In relation to this model, an example of one of the popular retail companies i.e. Wal-Mart can be taken into concern. It is regarded as a renowned company, which has been able to gain superior competitive position with the implementation of the Five Forces Model in its business. The explanation of the elements of the model linked with the business of Wal-Mart would help to understand the advantage that it gained in a better form. Threat of New Entrants: This element imposes moderate pressure upon the business of Wal-Mart. The company possesses an outstanding location and brand name that makes it risk free about the vital concern of the new entrants. The other benefit, which has been derived by the company from the use of this model, is better cost advantage (Chiang Mai University, 2011). Competitive Rivalry: This element also imposes moderate risk upon Wal-Mart. At present, the company has been able to identify its rivals and accordingly, adopted certain effective measures in order to reduce the risk of competition from other companies (Chiang Mai University, 2011). Bargaining Power of Buyers: Due to the brand name and the pricing strategy of Wal-Mart, its buyers can make the ultimate choice of buying products from its store itself (Chiang Mai University, 2011). Bargaining Power of Suppliers: Wal-Mart offers its wholesalers and manufacturers with lots of business facilities, as it holds maximum of the international market share. This empowers the company to have lesser suppliers’ bargaining power (Chiang Mai University, 2011). Threat of Substitute Products: As the focus has been made on the international retail market, it can be apparently observed that Wal-Mart is the sole company, which offers its customers with convenient shopping facility with reasonable price. By implementing the Five Forces Model, it has been able to shape its business in the form of enhancing its profitability along with overall productivity (Chiang Mai University, 2011). 4.2 Example Relating to Porter’s Diamond Model The most beneficial industry from the utilisation of Porter’s Diamond Model can be noted as the automobile industry of Mexico. The reasons have been explained in the following. Factor Conditions: The factors that can be derived from the automobile industry of Mexico include cheap labour along with raw materials and much skilled workers than the US. With the possession of these factors, Mexican automobile industry could attain success over the countries of Brazil, Korea and Taiwan (Barragan, 2005). Demand Conditions: It is the demand conditions of the US market that acted as the major source of competitiveness for the automobile sector of Mexico. This industry derived better competitive advantage from the foreign market of the US rather than the local market of Mexico. This facilitated the industry to gain higher competitive advantage in the global market (Barragan, 2005). Firm Strategy, Structure and Rivalry: The arrangement of the automobile industry in Mexico is often viewed to be one of the outstanding performers in the world, as it possesses the highest export growth and market share in the international market (Barragan, 2005). Thus, from the above contemporary examples, it has been clear that the aforesaid models of Michael Porter impose positive impact upon developing the business along with the economy at large. These can be measured in terms of increasing profitability and also boosting national economy. Conclusion From the above analysis, it can be affirmed that both Porter’s Five Forces Model and Diamond Model are regarded as effective tools that aids in determining the competitive position of an organisation. The contemporary examples of Wal-Mart and Mexican automobile industry have proved that the models not only focussed upon determining competitive advantage, but also upon enhancing the profitability of the organisations and boosting country’s economy. In the first section of this assignment, a study of the principle along with the structural elements of the aforementioned two business models has been made. Porter’s Five Forces Model has five main categories namely bargaining buyers’ along with suppliers’ bargaining power, threat relating to substitute products as well as new entrants and competitive rivalry. On the other hand, Diamond Model comprises factor along with demand conditions, related and supporting industries and firm strategy, structure as well as rivalry. One of the similarities that can be apparently observed in both the models is that these models offer benefits to the business organisations in the form of gaining superior competitive position. The above analysis represents that Porter’s Five Forces Model makes the companies competent enough to build up effective strategies for handling various problems or risks related to rivalry, competition and substitute products. The major benefit that a company can derive from the Five Forces Model is the awareness of the most significant forces that can shape the strategies of business in order to survive in the competitive market. Conversely, the Diamond Model develops a thought among the companies that long-term vision of the companies can lead them towards success. Above all, a conclusion which can be drawn from the above study is that with the implementation of these models, the companies can shape their respective strategies for surviving in the competitive market and also for accomplishing superior competitive position in the global market. References Barragan, S., 2005. Assessing the Power of Porter's Diamond Model in the Automobile Industry in Mexico after Ten Years of NAFTA. Abstract, pp. 1-102. Bosch, F. A. J. V. D., & Prooijen, A. A. V., 1992. The Competitive Advantage of European Nations: The Impact of National Culture - a Missing Element in Porter’s Analysis? European Management Journal, Vol. 10, No. 2, pp. 173-177. Chiang Mai University, 2011. Wal-Mart Stores, Inc. Introduction. [Online] Available at: http://km.camt.cmu.ac.th/mskm/952743/exchage/5Force_walmart%20case%20study.pdf [Accessed December 04, 2013]. Cafferky, M. E., 2005. The Porter Five-force Industry Analysis Framework for Religious Nonprofits: A Conceptual Analysis. Abstract. [Online] Available at: http://www.cbfa.org/Cafferky2.pdf [Accessed December 04, 2013]. Hollensen, 2009. Global Marketing, 4/E. Pearson Education India. Jaradat, S. & et. al., 2013. The Impact of Porter Model`s Five Competence Powers on Selecting Business Strategy. Interdisciplinary Journal of Contemporary Research in Business, Vol. 5, No. 3, pp. 457-470. Kourdi, J., 2010. Business Strategy: A Guide to Effective Decision-making. Profile Books. Lima, T., 2006. Michael Porter’s “Five Forces” Model. Summary and Interpretation, pp. 1-3. Nan, L. X. & Lei, C., 2013. The Rapid Development of Chinese Heavy Truck Industry: Adapted Porter’s Diamond Model Study. Uppsala University. [Online] Available at: http://uu.diva-portal.org/smash/get/diva2:618998/FULLTEXT01.pdf [Accessed December 04, 2013]. Porter, M. E., 1990. The Competitive Advantage of Nations. The Free Press. Porter, M. E., 1997. How Competitive Forces Shape Strategy. Harvard Business Review, pp. 1-10. Read More