Michael Porter proposed that a firm’s profitability is dependent on five important forces i.e. supplier power, buyer power, threats from new entrants, threat from substitutes and intensity of rivalry within an industry. The goal of a competitive strategy for a firm should be to find a position in the industry from which it can best defend itself against these competitive forces or can influence them to its advantage. The analysis of the above five forces should shape the formulation of business strategy. For example a firm can earn above average returns in industries characterized by high barriers to entry and by weak competitors’ weak substitutes, weak buyers and weak suppliers. Of course few industries have all of these features but the important issue in strategy formulation is to focus on the particular opportunities and constraints in the industry. Three strategies to gain competitive advantage can be suggested.
Overall Cost Leadership: Here the firm works hard to achieve the lowest costs of production and distribution so that it can price lower than its competitors and win a large market share. (Examples include Moser Baer in data storage products, Jubilant organosys in fine chemicals, Hindustan Inks and Resins Ltd in printing Inks etc).
Differentiation: Here the firm tries to offer something different or unique to its customers – that is distinct from that of its rivals. The key assumption behind such a strategy is that, customers are wiling to pay higher price for a product that is distinct (or at least perceived as such) in some important way.
Focus: Here the firm focuses its effort on serving a few market segments well rather than going after the whole market.
Resource based View: During the 1990s there has been a surge of issues (Barney, Pandian, Peterlaf, Collins) in the role of a firm’s resources and capabilities as an important basis for strategy and the primary determinants of a firm’s profitability. In a world where customer preferences are volatile and the identity of customers and the technologies from serving them are fast changing, a market focused strategy may not enable a firm to find an advantageous position for its own survival and growth. Therefore the focus must shift to its own internal strengths and defend it strategy in terns of what it is capable of doing better than its rivals. The key to profitability is not doing the same as other firms — locating in the most attractive industries and pursuing the appropriate generic strategy but exploiting the differences among firms.
Resource based View (RBV):
The RBV model argues that the firm’s resources and capabilities rather than environmental conditions, should be the basis for organizational decisions. It assumes that firm will identify and locate key valuable resources and, over time acquire them. Hence, under this model resources may not be highly mobile across organizations as once they are acquired by a particular firm that firm will attempt to retain those resources that are of value. However, as mentioned earlier, resources are only of value to a firm when they are costly to imitate and non-substitutable.
Each firm is a unique collection of highly differentiated resources and capabilities. Establishing competitive advantage is concerned with formulating and implementing a strategy that recognizes and exploits the unique features of each firm. The resources based approach has three important elements:
1) Select a strategy that exploits a firm’s unique resources and capabilities.
2) Ensure that the firm’s resources are fully employed and their profit potential is exploited to the limit.
3) Fill the resource gaps and build the firm’s base of resource and capabilities for the future.