For a company there is no higher goal to attain maximum profitability. A priori, any manager would say the way is maximizing resources, removing inefficiencies, improving productivity and implementing modern ways of management, such as total quality and reengineering, which for several years have been applied successfully in all over the world.
But Porter thinks this is not enough. During an exhibition in Brazil whose main concepts are transcribed below, this renowned specialist argued that these tools-that anyone can implement-not enough to get that unique competitive advantage that makes us truly different in the industry and allows us to ensure, therefore, the highest profitability.
The profitability of a company, he says, depends on the type of industry structure to which it belongs as the positioning against the competition. To do this, who have in their hands the responsibility for planning the goals of the company should be familiar with what the industry that touches them compete and what place your company in the marketplace.
Through various studies, Porter found that there are only two ways to get a competitive advantage through lower costs and differentiation. These two concepts are the basis of all competitive strategy, together with the land where they are applied mass-market or market segments.
The performance of a company is related to two factors: the structure of the industry and the company's own position within that industry, considering that one third of that performance is influenced by the first and the remaining two thirds by the second.
The case of the pharmaceutical industry is very illustrative in this regard. The average net return on investment of the last 11 years was 24 percent, a figure a quite good and that is an objective fact about the behavior of the industry. If we analyze what happens within it you will see that there is a substantial difference between those companies that exceed the overall average and that are below it. A distance that, in extreme cases, can reach almost 15 percent.
Why this difference occurs? The studies that have been done show that is due to the structure of this industry.
The industries are profitable according to certain basic competitive forces that affect them, namely:
1. Rivalry with existing competitors. The degree to which competition is creating new products, lowering prices and increasing advertising has a significant impact on the profitability of the industry. If the rivalry within it is very intense, the potential profitability is low.
Two. The threat of substitute products or services. A fax machine manufacturer, for example, could be threatened by platelets that allow functionally equivalent to personal computers. This is a challenge that is not from a known competitor, but a company that produces another product that has the same function.
Three. The threat of new competitors. If new firms can easily enter to compete in an industry, profitability also be impaired.
April. The power of customers. A customer who has great buying power can bring prices down and eliminate the profitability of a business.
May. The bargaining power of suppliers. In the same way, an influential provider can raise prices and take away the profit potential of an activity.
In order to develop a competitive strategy is essential to know several factors: the average profitability of the industry and each of the competitors within it, the structure of the industry in the long term, ie why profitability has averaged high, if you have one, or why not, what are the barriers to entering the business, how sensitive to pressure prices for consumers.
To develop an above-average performance of the industry a company must have a substantial competitive advantage, which should be improved constantly. It should be clarified that talk about competitive advantage is not to refer to core competencies or strengths and weaknesses of a company. It should be much more rigorous.
The modern competition becomes much more difficult to maintain an advantage because companies imitate each other with increasing speed. Consequently, a company only has two ways to get an advantage in an industry:
1. Differentiate their products in order to establish a higher price. It involves being able to offer a unique value to its customers, from features and superior technologies. This may mean higher costs, but it is important to the extent that the final price is greater than the extra cost of providing a unique value.
Two. Having lower costs. The Company may decide to spend some of the cost reductions on prices, but lower costs mean higher margins.
Companies develop their action primarily through activities: sales force is an activity, processing purchase orders is another and so on. Organizations are groups of activities, and the value chain represents traditional activities within a company. Competitive advantage can only be understood by observing the activities. Companies must be able to identify where the advantages and disadvantages of the company. Therefore, it is necessary to study what specific activities provide a competitive advantage in terms of cost or differentiation.
Both in order to have lower costs and to differentiate, companies must make another choice in terms of "competitive scope". And here comes the concept of focus. Every industry has a variety of customer segments with different needs. The scope refers to how many of these segments the firm chooses to serve. Some choose a wide field of action, offering a complete product line that serves many different customer groups. Others prefer narrow its scope, focusing on a particular segment or group of segments.
It is very important to find a unique position within the industry in relation to these two possibilities. The worst that can happen in an industry is that all companies compete based on the same variables as competition becomes a self-destructive battle. All will become more and more money in the construction of the same capabilities. There will be no victor and industry profitability will dissipate.
Even so, companies often continue to affirm that must respond to any changes in the market and try to imitate all the new features of competitive products launches. However, successful companies maintain a clear and consistent position, continuously improving to differentiate themselves from the competition and not imitate.
The Total Quality literature argues that quality is free because one can improve quality and reduce costs at the same time. This is true in a company operationally inefficient when resources are wasted, but in a context of efficiency is necessary to choose. If a company wants to improve the quality, and is operationally efficient, you should invest in better technology, better materials, ie increasing costs.
The essential concept of positioning is to choose. Companies should first decide what they want to have unique position in the market and only then design a change program that will help them achieve it. Otherwise, companies will find themselves in a vicious self-destructive as they spend more resources just to be in the same situation as competition.