Porter's Five Forces Model

The Porter’s 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too.

Porter’s Diamond Model & Clusters

A. The Diamond as a System

• The points on the diamond constitute a system and are self-reinforcing.
• Domestic rivalry for final goods stimulates the emergence of an industry that provides specialized intermediate goods. Keen domestic competition leads to more sophisticated consumers who come to expect upgrading and innovation. The diamond promotes clustering.
• Porter provides a somewhat detailed example to illustrate the system. The example is the ceramic tile industry in Italy.
• Porter emphasizes the role of chance in the model. Random events can either benefit or harm a firm’s competitive position. These can be anything like major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates.

1. When there is a large industry presence in an area, it will increase the supply of specific factors (ie: workers with industry-specific training) since they will tend to get higher returns and less risk of losing employment.
2. At the same time, upstream firms (ie: those who supply intermediate inputs) will invest in the area. They will also wish to save on transport costs, tariffs, inter-firm communication costs, inventories, etc.
3. At the same time, downstream firms (ie: those use our industry’s product as an input) will also invest in the area. This causes additional savings of the type listed before.
4. Finally, attracted by the good set of specific factors, upstream and downstream firms, producers in related industries (ie: those who use similar inputs or whose goods are purchased by the same set of customers) will also invest. This will trigger subsequent rounds of investment.

B. The Diamond - Four Determinants of National Competitive Advantage

1. Factor Conditions

• Factor conditions refers to inputs used as factors of production - such as labour, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure.
• "Non-key" factors or general use factors, such as unskilled labour and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.
• Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources. How true is this?

1. Switzerland was the first country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches.
2. Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it, they innovated traditional inventory techniques).
3. Sweden has a short building season and high construction costs. These two things combined created a need for pre-fabricated houses.

b. Demand Conditions

• Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers
  
• If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market.
• One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.
  

c. Related and Supporting Industries

• Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This includes suppliers and related industries. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit (for the auto industry) and Italy (leather-shoes-other leather goods industry).
• The phenomenon of competitors (and upstream and/or downstream industries) locating in the same area is known as clustering or agglomeration. What are the advantages and disadvantages of locating within a cluster? Some advantages to locating close to your rivals may be

1. potential technology knowledge spillovers,
2. an association of a region on the part of consumers with a product and high quality and therefore some market power, or
3. an association of a region on the part of applicable labour force.

• Some disadvantages to locating close to your rivals are

1. potential poaching of your employees by rival companies and
2. obvious increase in competition possibly decreasing mark-ups.

d. Firm Strategy, Structure and Rivalry

1. Strategy

(a) Capital Markets

• Domestic capital markets affect the strategy of firms. Some countries’ capital markets have a long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry).

(b) Individuals’ Career Choices

• Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.

2. Structure

• Porter argues that the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited.
• For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms.

3. Rivalry

• Porter argues that intense competition spurs innovation. Competition is particularly fierce in Japan, where many companies compete vigorously in most industries.
• International competition is not as intense and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.

C. Implications for Governments

• The government plays an important role in Porter’s diamond model. Like everybody else, Porter argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"
• Governments can influence all four of Porter’s determinants through a variety of actions such as

1. Subsidies to firms, either directly (money) or indirectly (through infrastructure).
2. Tax codes applicable to corporation, business or property ownership.
3. Educational policies that affect the skill level of workers.
4. They should focus on specialized factor creation. (How can they do this?)
5. They should enforce tough standards. (This prescription may seem counterintuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.)

• The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?

D. Criticisms

Although Porter theory is renowned, it has a number of critics.

1. Porter developed this paper based on case studies and these tend to only apply to developed economies.
2. Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market-share erosion and decline. However, there seems to be little empirical evidence to support that claim.
3. The Porter model does not adequately address the role of MNCs. There seems to be ample evidence that the diamond is influenced by factors outside the home country.

Reference Groups

A group with which the customer identifies in some way, and whose opinions and experiences influence the customer's behaviour. For example, a sports fan might buy a brand of equipment used by a favourite team.

Reference groups come in several different forms. The aspirational reference group refers to those others against whom one would like to compare oneself. For example, many firms use athletes as spokespeople, and these represent what many people would ideally like to be.

Associative reference groups include people who more realistically represent the individuals’ current equals or near-equals—e.g., coworkers, neighbors, or members of churches, clubs, and organizations.

Finally, the dissociative reference group includes people that the individual would not like to be like. For example, the store literally named The Gap came about because many younger people wanted to actively dissociate from parents and other older and "uncool" people.

Reference groups come with various degrees of influence. Primary reference groups come with a great deal of influence—e.g., members of a fraternity/sorority. Secondary reference groups tend to have somewhat less influence—e.g., members of a boating club that one encounters only during week-ends are likely to have their influence limited to consumption during that time period.

Another typology divides reference groups into the informational kind (influence is based almost entirely on members’ knowledge), normative (members influence what is perceived to be "right," "proper," "responsible," or "cool"), or identification. The difference between the latter two categories involves the individual’s motivation for compliance. In case of the normative reference group, the individual tends to comply largely for utilitarian reasons—dressing according to company standards is likely to help your career, but there is no real motivation to dress that way outside the job. In contrast, people comply with identification groups’ standards for the sake of belonging—for example, a member of a religious group may wear a symbol even outside the house of worship because the religion is a part of the person’s identity.

KB’s Fair Price Shop

Pantaloon Retail India Ltd is moving into the smaller retail store format through their launch of the KB’s fair price shop. It is going to be a no-frills, fair price shops chain; with a tag line of “Saare Jahan se Sasta” the new retail chain would alter a few rules of the game in India. Subhiksha is "Bachat Mera Adhikar", while KB's (Kharido Becho) fair price shop wants to be "Saare Jahan Se Sasta" retailer in India. KBFP’s target should be to provide essential items cheaper than the market price and to look at a 20% to 30% market share of the neighbourhood retail market.

With each shop measuring an average of 2,000 square feet retail space, it will be based on neighbourhood, convenience, stores concept. Stocking only a limited variety of items required to meet daily needs of its customers, the chain proposes to offer merchandise at 10% lower prices than market for national brands and up to 20% lower than market prices for local brands. ¨

KB’s fair price shop needs to differentiate itself from Competition and then maintain a sustainable competitive advantage by offering consistency in service efficiency and product quality. ¨

These are the two areas in which Subhiksha will be lagging behind and hence it is essential to make it an immediate Point-of-Difference. ¨ Subhiksha is positioned as “Lower Priced” store as seen from the results of the primary research in the following sections. ¨

The Indian consumer however wants “Value for Money” and not “cheap” products/brands. Hence this is how KBFP should position itself against the Kiranas and organized players like Subhiksha

Fiama Di Wills: ITC Shampoos

Ad-Analysis:
ITC has prided itself on breaking the clutter with its different approaches towards advertising in Sunfeast and then Bingo. But it has gone for a safe bet on Fiama Di Wills.
The advertisement looks more like a Pantene TV ad rather than a new entrant.

Description:

Cigarette and FMCG major, ITC has launched its first mass personal care offering, a high-end shampoo. After a year of speculation, ITC has launched its first mass market personal care product. ITC 's shampoo brand, Fiama di Wills is in the premium segment, that’s growing faster at 44%, compared to 21% for the overall market.

Interestingly, ITC didn’t introduce a new brand name for its shampoo. Instead it has opted for a brand extension of its two year old, super premium range of personal care products, Essenza di Wills. But unlike Essenza that was available at ITC hotels and Wills Lifestyle stores, Fiama di Wills shampoos will be stocked at retail stores across India. The product will be available at Rs 99 for a 200 ml bottle.

On the pricing front, ITC is taking established players like HUL and P&G head on.

Expanding its range of personal care products, and following the successful launch of Fiama Di Wills Shampoos, ITC presented yet another world class range of products for the Indian consumer through its new range of Fiama Di Wills Shower Gels.

Fiama Di Wills’ new premium range offers three transparent shower gels with suspended beads. Each variant provides a specific benefit to the consumer:

Shampoo Variants: Silky Strong,Everyday Mild, Aqua Balance, and Volume Boost.

Continuing with its tradition of offering a superior product and brand experience to the modern Indian consumer, ITC also launched today the Superia range of soaps and shampoos in select markets .

Superia offers a range of four soap variants and two shampoo variants with a range benefit of Glowing skin and Shiny hair. Each of the variants have been designed to deliver specific benefits to the various consumer needs.

SOAPS: For Glowing Skin
1. Fragrant Flower with the fragrance of Rose & Lavender Oil
2. Soft Sandal with the fragrance of Sandal & Almond Oil
3. Natural Glow with Neem & Coconut Oils
4. Healthy Glow with Orange Oil

SHAMPOOS: For Shiny Hair
1. Shiny Black with Triple Conditioners and the natural goodness of Hibiscus & Brahmi extracts
2. Vibrant Green with Triple Conditioners and the natural goodness of Amla &
Arnica extracts

Superia soaps will be available in sizes ranging from 50g to 125g, and the shampoos in 125 ml and 55 ml.

Co-branding

Co-branding is a marketing arrangement that associates a single product or service with more than one brand name, or otherwise associates a product with someone other than the principal producer. The typical co-branding agreement involves two or more companies acting in cooperation to associate any of various logos, color schemes, or brand identifiers to a specific product that is contractually designated for this purpose. The object for this is to combine the strength of two brands.

The marketing of Gillette M3 Power shaving equipment with Duracell batteries (both brands owned by Procter & Gamble).

Many online companies think they are pursuing co-branding when in fact they are pursuing strategic partnerships. Partnerships, which have different goals than co-brands, are a way of leveraging a corporation’s own strengths and softening its weaknesses via a joint effort with another firm.

Umbrella Branding

As with all effective brand strategy, umbrella brands require a single message, an expression of a commonsense benefit grounded in human emotion that opens the way to own the conversation within a business category.

Umbrella brands abound in business; examples include Virgin, Kellogg’s, Sony, and location brands such as Japan, Manitoba, and St. Louis.

With an umbrella brand, the number of interactions the consumer has with the brand increase significantly, thereby reinforcing the brand values, and it helps transfer the goodwill to new products and categories. But the umbrella brand needs to be focused: It must stand for the same values across the category or range of products, and have the same emotional link.

Generally, consumer durables and services brands have used umbrella branding, while FMCGs have not, but even they have resorted to brand extensions rather than new launches.

Independent brands only make sense when the product clearly has a different proposition from the company brand; like Lexus from Toyota and Swatch from Omega.

In the case of Asian Paints, there were so many sub-brands, there was a reduction of media weights for advertising each entity. Then, the company shifted to a brand-centric portfolio, which involved a change of logo, product names, packaging and advertising. But the response from the trade and consumers has been positive, overall brand synergy and shop presence have increased, and the advertising is more effective, he added.

So unless the product is clearly different in the mind of the consumer, umbrella branding is the way to go. NIVEA is a great international example of an Umbrella Brand