Understanding Michael Porter: The Essential Guide to Competition and Strategy
Being the best, possible or even worth it?
In business, we have been indoctrinated with the concept if you are not first you are last. What defines being first or the best in business anyway? Is being the biggest the best? There has been plenty of times where the mighty have fallen and the “little guy” just keeps trudging along. What is the definition of success? Too often managers are too busy attempting to be the biggest that they don’t look at what is making them successful and developing systems to continue that trend.
In many markets, it is wiser to not take on the giant and be the biggest. The smart play is to look at what offerings that set your product or service apart from the rest. Once you find this difference, focus on this difference and to keep your footing in the market. In the plainest terms, being different can be just as profitable as the biggest.
What happens when the market doesn’t allow for being different or unique?
When a market is cutthroat a wise manager will examine the Five Forces and see if there is a way that the business can leverage a force to their advantage. The Five Forces are Buyers, Suppliers, Substitutes, Incumbents, and New entrants (Magretta, 2012). If you take the automotive industry and an example you can see how two different automakers handle the Five Forces. Our first example could be a mass production maker such as Hyundai in South Korea. The other example couple is a smaller higher-end maker such as Bayerische Motoren Werke Aktiengesellschaft, or more commonly called BMW, in Germany.
Hyundai and BMW both make automobiles, and while Hyundai has been working on their image, the two bands are viewed differently. In the first force Buyers, the bargaining power of the customers is high for both makers, but BMW is slightly lower due to brand recognition, quality, and technological engineering. The second force is suppliers, the bargaining power of both maker’s suppliers is low. Both maker’s suppliers, bargaining power is low, but for different reasons. Hyundai’s suppliers are smaller and fragmented, and Hyundai is such a large brand that they have options to find or build new suppliers. BMW’s suppliers are invested in making sure that the automaker is satisfied because their products are being used by a “prestigious” company, BMW also invests in the suppliers by free training and education. The force of substitutions is very similar for both makers as they compete with other automakers, public or private transportation, or doing without. BMW has a slight advantage from brand loyalty over Hyundai. The force of incumbents or rivalry in the automotive industry is very high, however, the advantage is taken by Hyundai due to their diverse offerings in selling a full range of cars from entry economy to luxury vehicles. In the automotive industry, the threat of new entrants is something to pay attention to but not worry too much about. The entry cost to break into this industry is high enough that a new automaker does not show up overnight.
When looking at both companies, the competitive positions of these two automakers are strong (Pratap, 2020). The question is why? Why do both companies have strong positions if one big and the other is smaller? The reason is simple, Hyundai is the traditional be as big as possible while BMW focuses on the “German Engineering”. Hyundai leveraged forces when they bought out their closest rival KIA, securing production research and development, suppliers, and retail locations. BMW leverages forces by maintaining its brand image of being exclusive. These two companies show that there is more than one way to be successful.
Pratap, A. (2020). Hyundai Five Forces Analysis. notesmatic. Retrieved from https://notesmatic.com/hyundai-five-forces-analysis/.
Pratap, A. (2020). Porter’s Five Forces Analysis of BMW Automobiles. Notesmatic.com. Retrieved from https://notesmatic.com/2019/10/porters-five-forces-analysis-of-bmw-motors/
Magretta, J. (2012). Understanding Michael Porter. Harvard Business Review Press.