Relationship. Almost all countries of the world participate in them to one degree or another. At the same time, some states receive large profits from foreign economic activity and constantly expand production, while others can barely maintain their existing capacities. This situation is determined by the level of competitiveness of the economy.
Relevance of the problem
The concept of competitiveness is the subject of numerous discussions among people making corporate and government management decisions. The increasing interest in the problem is due to various reasons. One of the key ones is the desire of countries to take into account the economic requirements changing within the framework of globalization. Michael Porter made a great contribution to the development of the concept of state competitiveness. Let's take a closer look at his ideas.
General concept
The standard of living in a particular state is measured by national income per person. It increases with the improvement of the economic system in the country. Michael Porter's analysis showed that state stability in the foreign market should not be considered as a macroeconomic category that is achieved through the methods of fiscal and monetary policy. It must be defined as productivity, the efficient use of capital and labor. is formed at the enterprise level. In this regard, the welfare of the state’s economy must be considered in relation to each company separately.
Michael Porter's theory (briefly)
To operate successfully, businesses must have low costs or provide differentiated quality to higher-priced products. To maintain their position in the market, companies need to constantly improve products and services, reduce production costs, thus increasing productivity. Foreign investment and international competition act as a special catalyst. They provide strong motivation for businesses. Together with the international level, it can have not only a beneficial effect on the activities of companies, but also make certain industries completely unprofitable. However, this situation cannot be considered completely negative. Michael Porter points out that the government can specialize in those segments in which its enterprises are most productive. Accordingly, it is necessary to import those products in the production of which companies show worse results than foreign companies. As a result, the overall level of productivity will increase. One of the key components in it will be imports. Productivity can be increased by establishing affiliated enterprises abroad. Part of production is transferred to them - less efficient, but more adapted to new conditions. Profits generated from production are funneled back into the state, thus increasing national income.
Export
No state can be competitive in all production areas. Exporting to one industry increases labor and material costs. This, accordingly, negatively affects less competitive segments. Constantly increasing exports cause an increase in the exchange rate of the national currency. Michael Porter's strategy assumes that the normal expansion of exports will be facilitated by the transfer of production abroad. In some industries, positions will undoubtedly be lost, but in others they will become stronger. Michael Porter believes that they will limit the state’s capabilities in foreign markets and slow down the increase in the standard of living of citizens in the long term.
The problem of attracting resources
And foreign investment can certainly significantly increase national productivity. However, they can also have a negative impact on it. This is due to the fact that in each industry there is a level of both absolute and relative productivity. For example, a segment may attract resources, but exports from it are not possible. The industry is not able to withstand import competition if the level of competitiveness is not absolute.
Michael Porter's Five Forces of Competition
If a country's industries that are losing ground to foreign enterprises are among the more productive in the country, then its overall ability to generate productivity increases is reduced. The same is true for firms that move more profitable activities abroad, since costs and earnings are lower there. Michael Porter's theory, in short, connects several indicators that determine a country's stability in the foreign market. Each state has several methods for increasing competitiveness. Collaborating with scientists from ten countries, Michael Porter formed a system of the following indicators:
Factor conditions
Michael Porter's model suggests that this category includes:
Explanations
Michael Porter points out that key factor conditions are not inherited, but created by the country itself. In this case, what matters is not their presence, but the pace of their formation and the mechanism for improvement. Another important point is the classification of factors into developed and basic, specialized and general. It follows from this that the stability of the state in the foreign market, based on the above conditions, is quite strong, although fragile and short-lived. There is ample evidence in practice to support Michael Porter's model. Example - Sweden. It profitably exploited its largest deposits of low sulfur iron until the metallurgical process changed in the main Western European market. As a result, the quality of the ore no longer covered the high costs of its extraction. In a number of knowledge-intensive industries, certain basic conditions (for example, cheap labor resources and the abundance of natural resources) may not provide any advantages at all. To improve productivity, they must be tailored to specific industries. These may be specialized personnel at manufacturing industrial enterprises, which are problematic to form elsewhere.
Compensation
Michael Porter's model admits that the lack of certain basic conditions can also act as a strength, motivating companies to improve and develop. Thus, in Japan there is a land shortage. The absence of this important factor began to act as the basis for the development and implementation of compact technological operations and processes, which, in turn, became very popular on the world market. The lack of certain conditions must be compensated by the advantages of others. Thus, innovation requires appropriate qualified personnel.
State in the system
Michael Porter's theory does not classify it as a basic factor. However, when describing the factors that influence the degree of stability of the country in foreign markets, the state is assigned a special role. Michael Porter believes that it should act as a kind of catalyst. Through its policies, the state can influence all elements of the system. At the same time, the influence can be both beneficial and negative. In this regard, it is important to clearly formulate the priorities of government policy. General recommendations include encouraging development, stimulating innovation, and increasing competition in domestic markets.
Spheres of influence of the state
The indicators of production factors are influenced by subsidies, policies in the field of education, financial markets, etc. The government determines internal standards and norms for the production of certain products, approves instructions that influence consumer behavior. The state often acts as a major buyer of various products (goods for transport, army, education, communications, healthcare, and so on). The government can create conditions for the development of industries by establishing control over advertising media and regulating the operation of infrastructure facilities. State policy is able to influence the structure, strategy, and characteristics of competition between enterprises through tax mechanisms and legislative provisions. The government's influence on the level of competitiveness of the country is quite large, but in any case it is only partial.
Conclusion
Analysis of the system of elements that ensure the stability of any state allows us to determine the level of its development and the structure of the economy. A classification of individual countries was carried out in a specific time period. As a result, 4 stages of development were identified in accordance with four key forces: production factors, wealth, innovation, investment. Each stage is characterized by its own set of industries and its own areas of enterprise activity. Identification of stages allows us to illustrate the process of economic development and identify problems encountered by companies.
Professor of Business Administration at Harvard Business School, a recognized expert in the study of economic competition, including competition in international markets, competition between countries and regions. Developed a theory of competitive advantages of countries.
Michael Porter was born in 1947 in Michigan into the family of an army officer. He graduated from Princeton University and then received an MBA and PhD from Harvard University, graduating with honors in each phase of his studies. Since 1973 he has been working at Harvard Business School (he was the youngest professor in the history of this college). Conducted extensive research work on studying over 100 industries in different countries.
Professional awards, prizes:
He has received the McKinsey award three times for his articles.
George R. Terry Book Award (Academy of Management) for "competitive advantage as an outstanding contribution to management development."
Adam Smith Award (National Association of Industrial Economists).
Seven honorary doctorates.
Consulting for companies and government agencies
Michael Porter is one of the leading experts in the study of the nature of competition. During his career, Porter acted as a business consultant to world-famous companies, including, for example, AT&T, DuPont, Royal Dutch / Shell and Procter & Gamble, and provided services to the boards of directors of Alpha-Beta Technologies, Parametric Technology Corp., R & B Falcon Corp and ThermoQuest Corp.
Porter also worked as a government consultant. He was appointed to the President's Commission on Industrial Competitiveness by President Reagan and was also tapped by Massachusetts Governor William Weld to chair the Governor's Council on Economic Growth and Technology. M. Porter has advised the governments of countries such as India, New Zealand, Canada and Portugal, and is currently a leading specialist in the development of regional strategy for the presidents of Central America. In the 1990s, he advised the South Korean government.
In 2006, the Russian Government ordered M. Porter to conduct a study to analyze the country's competitiveness. According to the economist, the main problem in Russia is the one-sided focus on raw materials and the presence of a mass of vertically integrated companies. “To become competitive, key corporations must not be built on the concept of national security. The concept of national leaders died along with General Motors - no one believes in it. The heart of the economy is small mobile companies.”
Professor Porter has been an innovator in revitalizing the economy of America's old inner cities. M. Porter is the founder and chairman of the Initiative for a Competitive Inner City (USA), a non-profit organization that seeks ways to accelerate business-based development and growth of the old inner city and proposes a new approach to its economic development.
Scientific views
Porter, as the popularizer of the concept of an economic cluster, showed that the competitiveness of a company is largely determined by the competitiveness of its economic environment, which, in turn, depends on the basic conditions (common resource) and competition within the cluster.
Porter developed a well-known methodology for analyzing competitiveness, and also described the stages of growth of the competitiveness of a national economy (from the stage of “primary factors”, such as cheap labor, to the stage of competition based on innovation, and the last stage - competition based on wealth).
According to Michael Porter, the stronger the competition in the domestic market of a country and the higher the demands of customers, the greater the likelihood of success of companies from this country in international markets (and vice versa, weakening competition in the national market usually leads to a loss of competitive advantages).
Porter's fundamental book, The Competitive Advantage of Nations, was published in Russian under the title “International Competition.”
Since the time of Adam Smith, the theory of market relations has changed significantly. Both the theoretical base and applied sectors are developing. In the field of competition studies, Michael Porter’s five forces analysis model is currently popular. With its help, it is possible to make a detailed analysis of the environment and develop a counteraction strategy. It should be noted that this is not a panacea and not even the only theory in the field of studying competitiveness.
The history of the emergence of M. Porter's model of five competitive forces
Understanding any theory is integral to understanding the way of thinking of its author. Michael Eugene Porter was born in 1947 in Michigan, United States of America. Eternal excellent student. Winner of many awards. He has seven honorary doctorates. Currently a faculty member at Harvard Business School in Boston.
He is a thin, gray-haired man in all photographs, always wearing a tie. He travels a lot around the world giving lectures and seminars. An excellent speaker. Skillfully manages the attention of listeners and senses the mood of the audience well. During the lecture he can relax and take off his tie. He speaks with enthusiasm. His theory about the five forces of competition is already about forty years old and M. Porter continues to work on improving it and adapting it to modern conditions of a market economy.
Dr. Porter's theory was used in their work by such large companies as DuPont, Royal Dutch Shell, Procter & Gamble, Nevskaya Cosmetics and many others.
Summary of Michael Porter's Five Factor Model
The essence of Porter's theory is the differentiation of competitive forces and the analysis of individual indicators. The theory is successful, judging by the fact that M. Porter collaborated with many, and at the same time the company always achieved success in the competition.
M. Porter sees the weakness of the company in the fact that managers look at the problem of competition narrowly, seeing evil for themselves only in firms that occupy the same cell with them in the economy. While competition is a set of main forces that influence the economic viability of a company. Among the competitive forces in Porter's model are:
- Intensity of competition in the industry.
- The emergence of product substitutes.
- Problems with suppliers.
- Problems with consumers.
- Threat of new competitors.
During lectures, Porter simply draws a diagram with chalk on a blackboard. This depiction of the theory of the five forces of competition is often found in textbooks.
Each influencing factor can be considered separately.
Intensity of competition in the industry
The model involves analyzing the industry and what factors are behind competition problems. M. Porter talks about the “threshold of entry”. As an example, he cites air transportation. Starting a business in this area, from his point of view, is quite easy: You just need to have one plane. The first regular flight can be launched. However, there are many airlines that provide the same services. The passenger can choose, and if the ticket is cheaper, fly in an hour on another flight. Or he will use another type of transport, etc. With such a threshold for entering the business and regulated competition, profitability is quite low. The intensity of competition is also determined by:
- A large number of similar companies carrying out the same type of activity or providing the same types of services.
- Typical similarity of manufactured goods.
- The level of costs for the production of goods and services (consistently high costs).
- High barrier to entry (market maturity and saturation).
Profitability also depends on the internal structure of the industry. And exposure to “storm impacts from external forces.”
The emergence of product substitutes
There is always the possibility of new types of goods of the same purpose appearing on the market. The task of management is to anticipate the possibility of commodity substitution and respond to such facts in a timely manner. A new product on the market may be cheaper in cost or meet other, increased requirements. The threat of a new product can be prevented if the company’s pricing and marketing policies are properly organized:
- Price competition can shift buyer attention to low prices instead of focusing on quality.
- Advertising attacks draw attention to the product and distract from the possibility of its replacement.
- The production of new attractive products within the company reduces the possibility of product substitution.
- Improving the quality of service in the sale and distribution of a product will reduce the competitiveness of the substitute.
Problems with suppliers
Suppliers have the same competitive environment, determined by the same criteria. Their strength is determined by:
- Availability of large supplying companies. Possibility of monopoly.
- The uniqueness of the goods supplied.
- An option when the industry to which the goods are supplied is not the main one for the supplier.
- Constancy. Lack of supplies will lead to the liquidation of the company itself.
- The ability to acquire the acquiring company through vertical integration.
Suppliers can:
- Raise the price of your goods.
- Reduce the number of products and services provided.
Consumer factor
Buyers influence competitiveness as much as other factors. Their strength depends on the following factors:
- Consumer cohesion. Often - their organization around a society.
- The degree of importance of the product for the consumer.
- Wide range of product use areas.
- Level of awareness about product substitutes and areas of application of the product.
A strong consumer can:
- Put pressure on prices to reduce them.
- Demand high quality.
- Demand better service.
- Pit producers against each other.
Threat of new competitors
The risk of new players appearing in an existing niche is determined by the economic attractiveness and threshold of entry into the business. The following factors influence:
- Price attractiveness of entering the market.
- Low cost of organizing production (services).
- Ease of entry into business (threshold of entry).
How the model is used: situation analysis and strategy development
M. Porter explains that the principle of his method of the five forces of competition is a systematic and integrated approach to building a strategy for relationships with all market participants.
For successful and competitive work you need:
- Industry analysis, identifying the factors behind competition.
- Determination of industry structure. Her attractiveness and barrier to entry.
- Understanding industry dynamics. How quickly changes occur, the direction of movement.
The circle of interested parties is expanding as much as possible. The main strategic task in all industries is to find a unique need that the company will satisfy with its activities. For this purpose, the following procedure is defined:
- Determining the company's priorities, such as making a profit, achieving a monopoly, expansion, etc.
- Identification of the circle of the most powerful factors from the five forces.
- Concretization of the problem facing the company from the point of view of a specific force.
- Selecting factors that can be mitigated.
- Drawing up an action plan to bring the idea to life.
Example of mathematical factor analysis
The forces can be assessed mathematically, for example, in the form of a table. Let us give an example of a calculation for the construction industry, specifically for installers of plastic windows.
Evaluation criteria are based on a ten-point system. The final rating is calculated using the formula:
The calculation can be carried out independently using several sources, different authors and several industries, after which a priority area is determined.
Table: assessment of competitive forces in the construction industry
According to the table, we see that the industry is attractive. Quite high competitiveness - 8 and the possibility of new competitors emerging - 6. Consumer power is low “1” due to the high demand for plastic windows. The possibility of the emergence of substitute products is below average. In the market of suppliers, and these are manufacturers of plastic windows, the monopoly, suppliers have a strong influence. They can dictate their terms. Conclusions follow from these data, and we can recommend:
- Our influence over existing competitors is small. We can fight with quality, but at the moment it is not profitable. Rating "8". Let's analyze the possibility of reducing the price.
- The possibility of the emergence of substitutes is small. There is a market for plastic and wooden windows. Consumers have been identified. We recommend advertising the advantages of our plastic, monitoring prices and services of related companies.
- The power of suppliers is high due to monopoly. This has a very strong impact on the market. The threat needs to be reduced. Let's assume that there are funds. It is necessary to repurchase a share in existing production in order to influence supplies or organize new production of finished products.
- The consumer is not organized. Demand exceeds supply. The influence of this factor can be neglected at this stage.
- The possibility of new competitors emerging is high. Take measures to reduce the attractiveness of the market for new enterprises - adjusting the quality and pricing policy.
Video: a detailed description of choosing a competitive strategy according to Porter
Modified Porter model for countries and regions, “national diamond”
Dr. Michael Porter works not only in the field of meso-environment (M. Porter's terminology) - relationships at the company level. He developed a similar approach for the macroeconomics of countries and individual nations.. To analyze the situation and prospects for the development of states, he proposed using a “competitive diamond”.
The analysis of the economy of states is based on the concepts of the initial state of the economy, demand conditions, the state of individual industries and the strategy of the state. The key issue is the effective use of natural and national characteristics with the involvement of foreign technologies and investments.
In Russia, Dr. Porter became widely known after 2005, when, at the invitation of the government, he studied the country's competitiveness. Dr. Michael Porter's report was published in 2006, but is known in full only to specialists. From Porter’s point of view, the main drawback is the raw material orientation of the Russian economy. And targeting large vertically integrated companies. This thesis was then repeatedly played out in the media of different countries. Porter criticizes the idea of national leaders, from his point of view, it died with General Motors. The backbone of the economy is mobile companies.
Key aspects of Michael Porter's theory of five competitive forces
From Michael Porter's latest lectures, we can conclude that from his point of view the main thing is:
- An integrated approach to addressing the importance and impact of various competitive forces.
- Orientation of the entire management team towards the ultimate goal and ways to achieve it.
- Openness of the company. Strategy shouldn't be a secret. Dr. M. Porter's personal experience shows that it does not matter whether competitors know about the adopted strategy. But openness on this issue contributes to a general adjustment of management actions in a given direction.
- Intuitive approach. Porter himself believes that actions to counter the forces of competition should be intuitive and largely spontaneous.
- Changes over time. Impact factors are variable and subject to temporary adjustment.
At all levels of competition, M. Porter uses the concepts of positive and negative competition. An example of a positive one is those actions of the company, as a result of which the quality of goods or services improves.
In order to make a company a leader in any field, the approach is general. This is a differentiated difference between the company and other enterprises, the concentration of management on the main goal and the application of a successful strategy in the field of competitiveness.
Country
| Michael Porter | |
|---|---|
| Michael Porter | |
| Date of Birth | May, 23rd(1947-05-23 ) (71 years old) |
| Place of Birth | Michigan |
| A country | |
| Scientific field | economy |
| Place of work |
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| Alma mater |
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| Scientific director | Richard Earl Robinson[d] And Richard E. Caves[d] |
| Known as | specialist in the field of economic competition studies |
| Awards and prizes | |
| Michael Porter at Wikimedia Commons | |
Biography
Professor Porter has been an innovator in revitalizing the economy of America's old inner cities. M. Porter is the founder and chairman of the nonprofit organization Competitive Inner City Initiative. Initiative for a Competitive Inner City) (USA), which is looking for ways to accelerate the development and growth of the old inner city, based on business, and proposes a new approach to its economic development.
Scientific views
Porter, as the popularizer of the concept of an economic cluster, showed that the competitiveness of a company is largely determined by the competitiveness of its economic environment, which, in turn, depends on the basic conditions (common resource) and competition within the cluster.
Porter proposed the first known typology of competitive strategies (basic competitive strategies).
Porter developed a well-known methodology for analyzing competitiveness to determine a company's strategy based on a study of the actions of competitors and the market as a whole, and also described the stages of growth of the competitiveness of the national economy (from the stage of “primary factors”, such as cheap labor, to the stage of competition based on innovation and the last stage - competition based on wealth).
According to Michael Porter, the stronger the competition in the domestic market of a country and the higher the demands of customers, the greater the likelihood of success of companies from this country in international markets (and vice versa, weakening competition in the national market usually leads to a loss of competitive advantages).
Michael Porter defines sustainable competitive advantage as a combination of activities that are difficult to imitate.
He developed a model of 5 market forces, which include existing competitors, new competitors over time, competitors who sell substitute goods or offer substitute services, suppliers and consumers.
Porter's fundamental book The Competitive Advantage of Nations was published in Russian under the title “International Competition”.
Bibliography
Monographs
- Interbrand Choice, Strategy, and Bilateral Market Power (Harvard Economic Studies). - Cambridge, Mass.: Harvard University Press, 1976. - 254 p. - ISBN 0-674-45820-6.
- Competitive Strategy: Techniques for Analyzing Industries and Competitors. - New York: The Free Press, 1980 (2nd ed. - New York: Free Press, 1998. - 397 p. - ISBN 978-0-684-84148-9);
Including competition in international markets, competition between countries and regions. Developed a theory of countries' competitive advantages.
Encyclopedic YouTube
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✪ "Competitive advantage". Michael Porter
✪ Lecture 8: Blue Ocean Strategy
Subtitles
Biography
Professor Porter has been an innovator in revitalizing the economy of America's old inner cities. M. Porter is the founder and chairman of the nonprofit organization Competitive Inner City Initiative. Initiative for a Competitive Inner City) (USA), which is looking for ways to accelerate the development and growth of the old inner city, based on business, and proposes a new approach to its economic development.
Scientific views
Porter, as a popularizer of the concept of an economic cluster, showed that the competitiveness of a company is largely determined by the competitiveness of its economic environment, which, in turn, depends on the basic conditions (common resource) and competition within the cluster.
Porter developed a well-known methodology for analyzing competitiveness, and also described the stages of growth of the competitiveness of a national economy (from the stage of “primary factors”, such as cheap labor, to the stage of competition based on innovation and the last stage - competition based on wealth).
According to Michael Porter, the stronger the competition in the domestic market of a country and the higher the demands of customers, the greater the likelihood of success of companies from this country in international markets (and vice versa, weakening competition in the national market usually leads to a loss of competitive advantages).
Porter's fundamental book The Competitive Advantage of Nations was published in Russian under the title “International Competition”.
Bibliography
Monographs
- Interbrand Choice, Strategy, and Bilateral Market Power (Harvard Economic Studies). - Cambridge, Mass.: Harvard University Press, 1976. - 254 p. - ISBN 0-674-45820-6.
- Competitive Strategy: Techniques for Analyzing Industries and Competitors. - New York: The Free Press, 1980 (2nd ed. - New York: Free Press, 1998. - 397 p. - ISBN 978-0-684-84148-9);
- Competitive Advantage: Creating and Sustaining Superior Performance. - New York: The Free Press, 1985 (2nd ed. - New York: Free Press, 1998. - 592 p. - ISBN 978-0-684-84146-5);
- Competitive Advantage of Nations. - New York: Free Press, 1990 (2nd. ed. - New York: Free Press, 1998. - 896 p. - Japanese economic model. Can Japan compete? - M.: Alpina Publisher, 2005. - 262 p. - ISBN 5-9614-0130-8.
- Porter M. E., Elizabeth Olmsted Teisberg E. O. Redefining Health Care: Creating Value-Based Competition on Results. - Boston: Harvard Business School Press, 2006. - 506 p. - ISBN 1-59139-778-2.
Collections
- Porter, M. E.(ed.) Competition in Global Industries. Boston: Harvard Business School Press, 1986.
Featured Articles
- Porter M. E. How Competitive Forces Shape Strategy // Harvard Business Review, March/April 1979.
- Porter M. E. From Competitive Advantage to Corporate Strategy // Harvard Business Review, May/June 1987, pp. 43-59.
- Porter M. E. Towards a Dynamic Theory of Strategy // Strategic Management Journal, 1991, 12 (Winter Special Issue), pp. 95-117.
- Porter M. E. What is Strategy // Harvard Business Review, Nov/Dec 1996.
- McGahan A. M., Porter M. E. How Much Does Industry Matter, Really? // Strategic Management Journal, 1997, 18 (Summer Special Issue), pp. 15-30.
- Porter M. E. Strategy and the Internet // Harvard Business Review, March 2001, pp. 62-78.
- Porter M. E., Kramer M. R. Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility // Harvard Business Review, December 2006, pp. 78-92.
