Introduction In1979, Harvard Business Review published “How Competitive Forces Shape Strategy”by a young economist and associate professor, Michael E. Porter. To Porter, theclassic means of developing a strategy formula for competition, goals, andpolicies to achieve those goals are antiquated and in need of revision.Porterstated that the essence of the elaboration of the competitional strategy relieson relating the firm to the environment in which it conducts its business. Thecompany’s environment is very complex, comprising both social and economicalforces. For a company, the central element of this environment is representedby the sector(s) in which it competes. The structure of a certain sector yieldsa powerful influence over the establishment of the competitional rules.
Thecompetition intensity in a certain sector is neither due to chance, nor to badluck. (Porter, 1980). Porter identifies five forces that shape anindustry: (1) rivalry among existing competitors (2) threat of new entrants (3) bargaining power of suppliers (4) bargaining power of buyers (5) the threat of substitute products 1.
TheIntensity of rivalry between the existing competitors Theintensity of rivalry, which is the most obvious of the five forces in anindustry, helps determine the extent to which the value created by an industrywill be dissipated through head-to-head competition. The most valuablecontribution of Porter’s ”five forces” framework in this issue may be itssuggestion that rivalry, while important, is only one of several forces thatdetermine industry attractiveness. The trend is the following: the number oftitles grows, the market diversifies, the editions decrease, the prices godown, which places us in an even situation, which encourages competition. Theexiting costs that need to be analyzed are relatively reduced; generally, thepublishing houses are not engaged in considerable costs for fixed funds (loans,leasing, etc.), which represents a vector for the reduction of thecompetitional tension.
2. TheThreat of the New Entrants Bothpotential and existing competitors influence average industry profitability.The key concept in analysing the threat of new entrants are the entry barriers.They can take diverse forms and are used to prevent an influx of firms into anindustry whenever profits, adjusted for the cost of capital, rise above zero.In contrast, entry barriers exist whenever it is difficult or not economicallyfeasible for an outsider to replicate the incumbents’ position.
The most commonforms of entry barriers, except intrinsic physical or legal obstacles, areusually the scale and the investment required to enter an industry as anefficient competitor. For this force the problems that must be taken intoconsideration are the following: The Economy of Scale – how strong thenewcomers are, what is their ability to outsell the current players and benefitfrom the big numbers. Because the newcomer must be a massive presence,otherwise he would be ignored by the distribution channels; hence he is forcedto come up with a considerable portfolio of books in a relatively short periodof time, with an excessively big duration for the investment return. 3. The Customers’ Negotiating PowerBuyerpower is one of the two horizontal forces that influence the appropriation ofthe value created by an industry. The most important determinants of buyerpower are the size and the concentration of customers. Other factors are theextent to which the buyers are informed and the concentration ordifferentiation of the competitors. It is often useful to distinguish potentialbuyer power from the buyer’s willingness or incentive to use that power,willingness that derives mainly from the ”risk of failure” associated with aproduct’s use.
Obviously, the customers will be trying to pay less, their powerbeing decisive both on the final price and the publisher’s profit. For thisforce, the problems that must be taken into consideration are the following:How powerful are the biggest buyers; if there are few buyers, there are fewleverages that can be used to increase the price and there will be greatpressure on the price at big volume sales. The publisher’s main customer is thebook wholesaler. In the entire chain, from the raw materials to the point wherethe book reaches the consumer, the weakest link, the most unprofessional one isthe distribution. Distributors in turn, know the loss of a player cannot becompensated by a growth in the turnover with other players because it is thenumber of titles that gets to decide the turnover. 4. TheSuppliers’ Power of Negotiation Supplier power is the mirror image of buyerpower. As a result, the analysis of supplier power typically focuses first onthe relative size and concentration of suppliers relative to industryparticipants and second on the degree of differentiation in the inputssupplied.
The ability to charge customers different prices in line withdifferences in the value created for each of those buyers usually indicatesthat the market is characterized by high supplier power and at the same time bylow buyer power. Regarded from the point of view of this force, the publishers’position seems to be the most stable and the dominating one, although there arecontradictory elements. The more fragmented the market is, the more powerfulthe suppliers are. As far as the fragmenting effect affecting the publishingproducer, the publishers are fragmented: there have been and there still aretendencies of coagulating which have manifested in the founding of severalassociations of the members of this community, but they form weak links. At thesame time the suppliers the printing houses are equally, if not even morefragmented, and in this case the possibility of easily replacing one’s suppliercompensates the loss of field due to the fragmentation in the publishingdomain. Is there competition with the suppliers, is there any danger ofvertical integration? The possibility of vertical integration becomes a realdanger if the publishers excessively increase the pressure over the profitmargin and the payment conditions in their relationship with the supplier: ifthe supplier has a minimal financial force and a complete technological line,they can easily find the human resources necessary for carrying out theeditorial production by themselves, which would make them less exposed to thepublisher’s whims and it could turn the supplier into a threat to the publishersince the supplier has the advantage of lower prices, but at the same time thedisadvantage of not having a brand name.
Such things happen, but they do notrepresent a phenomenon of significant size. 5. Pressurefrom the Substitute Products Thethreat that substitute products pose to an industry’s profitability depends onthe relative price-to-performance ratios of the different types of products orservices to which customers can turn to satisfy the same basic need. The threatof substitution is also affected by switching costs – that is, the costs inareas such as retraining, retooling and redesigning that are incurred when acustomer switches to a different type of product or service. The substitutionprocess follows an S-shape curve. It starts slowly as a few trendsetter’s riskexperimenting with the substitute, picks up steam if other customers followsuit, and finally levels off when nearly all the economical substitutionpossibilities have been exhausted. Although technology is changing this doesnot change the way people evaluate the economic value created by companies orthe traditional rules of competition.
Porter’s Competitive Strategies1. Cost Leadership Incost administration, a firm embarks to wind up plainly the minimal effort makerin its industry. The wellsprings of cost advantage are shifted and rely uponthe structure of the business. They may incorporate the quest for economies ofscale, restrictive innovation, special access to crude materials and differentcomponents. An ease maker must discover and adventure all wellsprings of costadvantage.
If a firm can accomplish and maintain general cost initiative, atthat point it will be a better than expected entertainer in its industry, if itcan summon costs at or close to the business normal. 2. DifferentiationIna differentiation procedure a firm tries to be one of a kind in its industryalong a few measurements that are generally esteemed by purchasers. It choosesat least one characteristics that numerous purchasers in an industry see ascritical, and exceptionally positions itself to address those issues. It iscompensated for its uniqueness with a top-notch cost. 3. Core interest Thenonexclusive technique of concentrate lays on the decision of a restrictedaggressive degree inside an industry.
The focuser chooses a section orgathering of portions in the business and tailors its system to serving them tothe prohibition of others. Theconcentration methodology has two variations. 1.In cost center a firm looks for a cost advantage in its objective portion,while in 2.
separation center a firm looks for separation in its objective fragment. Thetwo variations of the attention technique lay on contrasts between a focus’sobjective fragment and different sections in the business. The objectiveportions should either have purchasers with uncommon needs or else the creationand conveyance framework that best serves the objective fragment must vary fromthat of other industry sections. Cost center adventures contrasts in costconduct in a few portions, while separation center endeavors the uncommon needsof purchasers in specific sections.