This document discusses Michael Porter's theories on competitive forces and competitive advantage. It covers Porter's five forces model of competition, including rivalry among existing firms, threat of substitutes, buyer power, supplier power, and threat of new entrants. It also discusses how firms can achieve competitive advantage through developing resources and capabilities to achieve either a cost advantage or differentiation advantage. The document provides examples and details on each of Porter's theories to analyze industry competition and strategy.

1. Michael Porter
Competitive forces and competitive advantage
Tourish and environment
Pedro Francisco Medina Marín
Dni: 15425741D Id:b121300810
24/02/2012

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SUMMARY
1. Competitive forces………………………………………………………………………Pag. 2
1.1.Rivalry
1.2.Threat of Substitutes
1.3.Buyer Power
1.4.Supplier Power
1.5.Threat of New Entrants and Entry Barriers
2. Competitive advantage………………………………………………………….……Pag. 6
2.1.Resources and Capabilities
2.2.Cost Advantage and Differentiation Advantage
2.3.Value Creation
3. Porters Five Forces Context: Environment……………………………Pag. 8
4. Competitive advantages relationship with environment…….Pag. 10
4.1.Improved productivity due to a possible cost savings
4.2.Product differentiation
5. Activities to be more competitive……………………………….…………Pag. 12
6. References……………………………………………………………………………………..Pag. 13

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1.Competitive forces
(Diagram of Porter´s 5 forces)
1.1. Rivalry.
In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries.
The CR indicates the percent of market share held. A high concentration ratio indicates that a high concentration of market share is held by the largest firms the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive.
A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive.

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When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being intense, moderate, or weak, based on the firms aggressiveness in attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several competitive moves:
 Changing prices
 Improving product differentiation
 Creatively using channels of distribution
 Exploiting relationships with suppliers
The intensity of rivalry is influenced by the following industry characteristics:
1. A larger number of firms increases rivalry.
2. Slow market growth causes firms to fight for market share.
3. High fixed costs result in an economy of scale effect that increases rivalry.
4. High storage costs or highly perishable products.
5. Low switching costs increases rivalry.
6. Low levels of product differentiation.
7. Strategic stakes are high.
8. High exit barriers.
9. A diversity of rivals.
10. Industry Shakeout.
1.2. Threat of Substitutes.
In Porter´s model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product´s demand is affected by the price change of a substitute product.
Product´s price elasticity is affected by substitute products as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.
The competition engendered by a Threat of Substitute comes from products outside the industry.
While the threat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes.

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1.3. Buyer Power.
The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony, a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsony exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.
1.4. Supplier Power.
A producing industry requires raw materials labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products.
Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry´s profits. The following tables outline some factors that determine supplier power.

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1.5. Threat of New Entrants and Entry Barriers.
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits in increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring a market equilibrium.
Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But it firms individually keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry- deterring pricing establishes a barrier.
Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm´s competitive advantage. Barriers to entry arise from

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several sources:
1) Government creates barriers.
2) Patents and proprietary knowledge serve to restrict entry into an industry.
3) Asset specificity inhibits entry into an industry.
4) Organizational (Internal) Economies of Scale.
Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry unable to leave the industry, a firm must compete. Some of an industry´s entry and exit barriers can be summarized as follows:
2. Competitive advantage
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:
• cost advantage
• differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.
The following diagram combines the resource-based and positioning views to illustrate

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the concept of competitive advantage:
2.1. Resources and Capabilities
According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:
• Patents and trademarks
• Proprietary know-how
• Installed customer base
• Reputation of the firm
• Brand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.
The firm's resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.

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2.2. Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.
2.3. Value Creation
The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).
3. Porters Five Forces Context: Environment
Generally, strategic planning commences with an analysis phase, where you seek to refresh your understanding of your businesses 3 key strategic environments, these three strategic environments that you analyses during your strategic analysis are your
 Macro Environment,
 Industry Environment, (or Porter's Five Forces), and
 Internal Environment
Porter´s five forces is a competitive analysis model, it helps you to understand at the nature of competition within your industry, hence it is used when completing your industry analysis.
The traditional view among economists and managers concerning environmental protection is that it comes at an additional cost imposed on firms, which may erode their global competitiveness. Environmental regulations (ER) such as technological

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standards, environmental taxes or tradable emission permits force firms to allocate some inputs (labor, capital) to pollution reduction, which is unproductive from a business perspective. Technological standards restrict the choice of technologies or inputs in the production process. Taxes and tradable permits charge firms for their emission pollution, a by-product of the production process which was free before. These fees necessarily divert capital away from productive investments.
This traditional paradigm was challenged by a number of analysts, notably Professor Michael Porter and his co-author Claas van der Linde. Based on cases studies, the authors suggest that pollution is often a waste of resources and that a reduction in pollution may lead to an improvement in the productivity with which resources are used. More stringent but properly designed environmental regulations can trigger innovation that may partially or more than fully offset the costs of complying with them in some instances.
Porter and van der Linde first described the main casual links involved in the PH, if properly designed, environmental regulations can lead to innovation offsets that will not only improve environmental performance, but will partially and sometimes more than fully offset the additional cost of regulation.
Porter and van der Linde go on to explain that there are at least five reasons that properly crafted regulations may lead to these outcomes:
• First, regulation signals companies about likely resource inefficiencies and potential technological improvements.
• Second, regulation focused on information gathering can achieve major benefits by rising corporate awareness.
• Third, regulation reduces the uncertainty that investments to address the environment will be valuable.
• Fourth, regulation creates pressure that motivates innovation and progress.
• Fifth, regulation levels the transitional playing field.
Finally, they note “…we readily admit that innovation cannot always completely offset the cost of compliance, especially in the short term before learning can reduce the cost of innovation-based solutions”.

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4. Competitive advantages relationship with environment
The company competes in a global competitive environment characterized by uncertainty, dynamism and complexity. The strategic direction that will be responsible for developing the company adapt to the changes that take place, trying to transform an environment into an environment dominated dominating. The business strategy will be in charge of trying to transform risks into opportunities to adapt as quickly as possible to the environment. Thus, the environmental factor adversely affect companies react or do not react late, but positively affect companies that fit better. This new environment is the emergence of new competitive advantages that can be exploited by companies that understand the importance of this opportunity.
In other words, as a positive pursuit of profit for the environment does not necessarily harm the company. The overlap of the ecological and economic objectives is greater than one might think at first. It is possible to achieve a common benefit. Improved environmental performance can lead the company improved its competitiveness. These are called situations win-win-win. While the company can maximize their financial goals and the customer gets their needs through the product of the company, the environment is benefited by a minimization of the impact.
This improvement can come from both the supply side (through improved productivity), and from the demand orientation (via product differentiation).
4.1. Improved productivity due to a possible cost savings.
Analogously to quality management, investment and increases costs to adapt our process and our product more environmentally stringent criteria (prevention costs) can be amortized over the following cost savings:

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a) Costs of waste: caused by the misuse of resources.
b) Legal costs: both of complying with current legislation and the costs of non- compliance (sanctions, indennizaciones, etc.)
c) Costs of loss of image: a negative image of the behavior of the company towards the environment can lead to a rejection of its products by customers. According to the Environment Foundation study, 78% of the Spanish would not be willing to buy a product if the manufacturer knew that undertaking practices that harm the environment, compared with 10% that would be.
Therefore, one can say that investing in prevention environmental impact (environmental quality costs) can offset the existence of environmental quality costs no (fines and penalties, taxes, costs of damage restoration or cleaning, insurance coverage environmental risks, ...).
4.2. Product differentiation
Just as the quality, branding, packaging, added services, etc.. are means of differentiation, ecological attributes of the product or the packaging or the image of company concerned with the environment may also constitute elements of differentiation for the consumer segment, the green, which gradually becomes larger. These consumers are willing to prefer, for the same price and quality, a brand with ecological attributes compared to competing brands or even to pay a premium for it. Therefore, the environment can be beneficial to the company by creating a corporate image / green product created through the implementation of a marketing strategy to disseminate credible market efforts in the industry regarding environmental protection.
The creation of this company respects the natural environment is valuable not only towards our potential consumers but also to other stakeholders face (1) of the firm as:
a) Current and potential employees, who begin to question their responsibility for the pollution generated by your business.
b) Public bodies, they begin to incorporate the environmental variable in public procurement processes and procurement of work.
c) Potential investors, since more and more people looking to invest their money consistent with their ethical values.
d) Financial institutions, which are beginning to include environmental considerations in the lending process.

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5. Activities to be more competitive
The environment offers opportunities for improvement to companies that incorporate management of environmental quality. In this regard, in addition to respect environmental legislation increasingly stringent and punitive to those who commit crimes against the environment, environmental quality management improves business efficiency, reduces the risk of accidents and related penalties, and can achieve an ecological image, used in public relations for the company, helping to improve their competitiveness.
The environmental management system is understood within the total quality management of the company, laying down the procedures, measures and actions to meet environmental requirements and thus, get a quality product that meets consumer economically.
The environmental quality management involves the establishment of an environmental policy and an organization to fully achieve the objectives. Once launched, the company is audited to measure efficiency. In short, involves the creation of a department - that is dependent on the size of the organization - that works like any other organization.
Now, as any department, requires control systems that allow their permanence in time. In any case, the quality system registration is not mandatory, but it is a voluntary process used to improve the company.

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6. References:
http://www.quickmba.com/strategy/porter.shtml
http://www.quickmba.com/strategy/competitive-advantage/
http://www.whatmakesagoodleader.com/Porters-five-forces.html
http://www.cirano.qc.ca/pdf/publication/2010s-29.pdf
http://www.ciberconta.unizar.es/leccion/gestmed/200.HTM