The Five Competitive Forces That Shape Strategy

Since 1922, The Harvard Business Review has been published as a monthly digest of research-based articles written specifically for high ranking business practitioners.

It is an esteemed publication and is revered by the icons of global business management and is highly regarded as being quite authoritative in scope by the leaders in the fields of academic research as well as upper level managers, executives, and management consultants of a wide array of major industries.

Its worldwide English-language circulation is 240,000, and there are 11 licensed editions of the magazine, including two Chinese-language editions, a German edition, a Brazilian (Portuguese-language) edition, and an English-language South Asia edition.

In it's January 2008 Special Edition issue, which I had the pleasure of reading on a long flight recently, there is an article that speaks of how a business, any business, can increase profitability if they understand the role of competition in its strategic approach. The article, The Five Competitive Forces That Shape Strategy,is written by renowned Harvard business expert, Professor Michael E. Porter. Dr. Porter's credentials are unsurpassed and is widely recognized as a leading authority on competitive strategy and the competitiveness and economic development .

Real Estate, being a business industry, most assuredly can benefit from the understanding and implementation of the precepts Porter details in the article.

Porter's basis for the article is that a business that is aware of the "five forces" will be much better suited to understand the structure of its industry and can create a position for itself that is more profitable and less vulnerable to attack.

In looking at the Five Competitive Forces That Shape Strategy we can see how appropriate these strategies are from the perspective of a real estate professional.

In understanding his theory, it can be concluded that the National Association of Realtors may not be working in the best interest of the real estate industry. As the NAR is NOT the real estate industry, it is quite odd that a trade association or lobbying unit of an industry is defining the national policy and procedural strategy of the real estate business. In its ongoing attempt to fulfill its stated core purpose of helping its "members become more profitable and successful", NAR seems to believe that the best course of action for establishing its mission is to stifle or eliminate competition for its rank and file members.

This may prove to not be the best plan. The job of the business strategist is to understand and cope with competition, not seek to eliminate it.

Eliminating rivals is a risky strategy. A profit windfall from removing today's competitors often attracts new competitors and backlash from customers and suppliers. The competition in the real estate industry that is sparked by new arrivals like Zillow, Redfin, Trulia and the like can actually help profitability for all involved.

The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious

Let's take a look at how the Five Competitive Forces That Shape Strategy can impact the real estate industry as we know it today.

Threat of Entry

Porter makes an excellent point relative to how competition can increase the success and profitability of an industry. If you have to become better at what you do to stave off being overtaken by competition, the consumer truly benefits. The diversification and implementation of technologies forces you to up your game. New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. Particularly when new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition, as Pepsi did when it entered the bottled water industry, Microsoft did when it began to offer internet browsers, and Apple did when it entered the music distribution business.

The Power of Suppliers

Renamed in our business to read the Power of Sellers, details how the entity that is in control of the "product" is not reliant on the industry to drive its revenue. This is very important when you realize in an up or down market, it is the Seller who has the sole power to set market prices and to set the level of inventory of a product.

The Power of Buyers

As can be expected, the Buyer is the antithesis of the Seller. There is no such thing as a low ball offer. No reason for anyone to think that. The Buyer is exerting their power in the transaction just as the Seller exerts theirs by setting the price. It's business people!! Buyers can capture more value by forcing down prices, demanding better quality or more service (thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions.

The Threat of Substitutes

When the threat of substitutes is high, industry profitability suffers. Substitute products or services limit an industry's profit potential by placing a ceiling on prices. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profitability, and often growth potential. It's not competition that hurts business but rather the perceived threat. If you find Redfin or any of a number of newcomers to the industry to be a threat then you are looking at things the wrong way. What you must realize is that the obsolescence and perceived antiquity of the current real estate industry business model has made the industry ripe for the invasion of substitution and of course...advancement. A substitute performs the same or a similar function as an industry's product by a different or better means.

Rivalry Among Existing Competitors

Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. If it were just a matter of offering a cheaper service or product then perhaps the Redfin's of the world would indeed be a problem for the existing real estate industry business model. However in reviewing what Redfin, Zillow and many new entrants to the business offer the consumer, there are many features, and amenities afforded a consumer that are valuable far in excess of just price.

Competition on dimensions other than price, on product features, support services, delivery time, or brand image, for instance, is less likely to erode profitability because it improves customer value. Rivalry can be positive sum, or actually increase the average profitability of an industry, when each competitor aims to serve the needs of different customer segments, with different mixes of price, products, services, features, or brand identities. Such competition can not only support higher average profitability but also expand the industry, as the needs of more customer groups are better met. Since the entry of new competitors or substitutes is not solely based upon price, then their entry should be applauded and heralded, not met with disquietude.

You are licensed by the state, you are an independent contractor under a broker, or you may be a broker. Why is the NAR running your business and telling you how to conduct your affairs? They are a lobbying organization whose interests may not necessarily mirror your own.

If the NAR does not have your business plan, should you be managing your affairs according to what they say?

I often get responses wherein agents across the Country want to debate substantiated fact with rhetoric opinion. This time, the facts may be hard to debate. They definitely can not be refuted.

The subject of this post, Dr. Porter's article the Five Competitive Forces That Shape Strategy, deserves much more study and attention than I can write here. I urge you to read his article in its entirety and try your best to comprehend and implement the precepts he describes to meet the challenge of today's real estate business model.

It may very well be the catalyst that allows you to turn from conventional wisdom and embrace the future of real estate.

About the Author Barry Cunningham is one half of the B&B Crew who are the hosts of Real Estate Radio USA. Real Estate Radio USA. is an opinionated, provocative, informative and entertaining talk radio show about all that is real estate and how to promulgate wealth through real estate investing.

Real Estate Radio USA is broadcast daily live worldwide at 4PM-6PM at http://www.realestateradiousa.com. We invite you to listen in and participate in lively and spirited discussion. Tune into Real Estate Radio USA .

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Blue Ocean Strategy

The business universe consists two distinct kinds of space, which are blue and red oceans. Red oceans represent all the industry in existence today. The market space was known, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. On the contrary, blue ocean strategy denote all the industries not in existence today. Blue ocean strategy is about doing business where there is no competitor, focus on creating new land, not dividing up existing land. In designing blue ocean strategy, these concept must be considered:

1. Blue oceans are not about technology innovation. It is the product of strategy and managerial action.

2. Incumbents often create blue oceans and usually within their core business. Most blue oceans are created from within, not beyond, red oceans of existing industries.

3. Company and industry are the wrong units of analysis. The most appropriate unit of analysis for explaining the creation of blue oceans is the strategic move.

4. Creating blue oceans can build brand equity.

The creators of blue oceans never use he competition as a benchmark. They make it irrelevant by creating a leap in value for both buyers and the company itself. Blue oceans rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost. When companies create blue ocean, they can pursue differentiation and low cost simultaneously. Blue ocean strategy also creates considerable economics and cognitive barriers to imitation.

Maximizing Regional Opportunities

Going global is now popular strategies among companies. For many national companies’ executives, they should include global strategies among their strategic choice. But it is not easy to set up global strategies especially for our national companies. Companies need smart strategy which has considered deep understanding of their own product categories and the geographic arenas they operate in.

Indonesian manufacturers were already facing the prospect of a more difficult environment due to globalization of manufacturing production and liberalization. In addition, low competitiveness applies to Indonesian condition since the slow-down of the manufacturing sector in 1993-1997. This challenge creates difficulties for national manufacturers to compete in the global arena.

How successful a company is depends crucially on how intelligent it is at observing and interpreting the dynamic world in which it operates (Gupta and Govindarajan, 2002). It makes companies need to take rigorous look at where they stand relative in the industry. It has several purposes, first, take a different view of companies in the industry and rigorous understanding about interdependencies with other sector. Second, it would provide potential opportunities and weaknesses which could be the evident later. Companies can used their understanding to creates strategic choice for the companies.

Economic experts have predicted that the 21^st century will be the Asia-Pacific century: forecasts say that in 2020, the year the total free trade begins, almost 70 percent of the world’s GNP will be circulating in the Asia-Pacific region (Ciptono, 2005). For local champion, it is the time to expand their market, creating early competitive advantage in regional first. In other word, global strategy may start at a regional level.

But the definition of "region" often changes in response to market conditions and, indeed, to a company's own strategic decisions (Ghemawat, 2003). Thus, companies need to consider what they mean by region. According to Indonesia, common understanding of region is based on geographic view, that is ASEAN-south east continent and Asia Pacific region in which Indonesia take an important roles inside.

Maximizing regional opportunities has several benefits for Indonesian companies. First, it has many similarities with national condition in cultural, economic, political, and administrative. Thus, expanding into regional market become achievable and easier than going global directly. Companies would not confuse to decide whether standardize or localize product because regional market is much more similar. Regional expansion creates business model easier—how much to standardize from country to country versus how much to localize to respond to local differences.

Second, starting regional market as the early step for global strategy is supported with the free trade arrangement. As we know, by the time AFTA is implemented, South East Asian market will be integrated. The opportunities create here if the companies start to expand the markets now.

In many if not most cases, companies see globalization as a matter of taking a superior (by assumption) business model and extending it geographically, with necessary modifications, to maximize the firm's economies of scale (Ghemawat, 2003). There are several national companies that create success in expanding into regional market. They are even have new motto in facing globalization challenge, that is “go regional, act local”. This success story is expected to inspire other local champion to start enter the global market through regional strategy.

Global market is a very big opportunities. Maximizing its potential need smart approach in choosing what’s the first move. Regional strategy is one of the right choices for national companies which possess some benefits.

Gupta and Govindarajan, 2002. Converting Global Presence into Global Competitive Advantage. Academy of Management Executive. Vol. 15 No. 2

Ciptono, 2005. Towards A New Indonesia: Total Quality of Indonesian Management-The Red and White Management. Paper on International Seminar, 50 Anniversary Faculty of Economics, Gadjah Mada University.

Ghemawat, Pankaj. 2003. "The Forgotten Strategy," Harvard Business Review, Vol. 81, No. 11, November

Ghemawat, Pankaj. 2005. "Regional Strategies for Global Leadership," Harvard Business Review, Vol. 83, No. 12, December 2005

National Cultural Strategy

Globalization brings Indonesia the need to set up national strategy which leads us toward competitive advantage rather than comparative advantage. The strategy includes cultural aspect. Culture becomes important attention in national strategy because it is the glue of Indonesia effort toward competitiveness. It can link many dimensions of Indonesian’s lives. In addition, Cultural strategy is important because it is about how Indonesia is perceived abroad. Cultural development contributes to the image of Indonesia, thus supports the overall development program. It both reflects and shapes our society. Cultural strategy is also needed because we should build capability to our culture to adopt, adapt, and innovate the international influences.

Competitive strategy is about being different (Porter, 1996). Developing cultural strategy needs framework of action, which will underpin the expected cultural life in the future. Thus, to strategize our culture, we need to explore our unique value and heritage to set up national cultural strategy which fosters national innovation and creativity. The blue print of national cultural strategy should embrace all people, inclusive, and belongs to everyone.

There are several elements to be considered as core objectives in arranging Indonesian cultural strategy. First, we should consider innovation and creativity. We could develop the conditions in which creativity and innovation can flourish in all sectors of our life, including business, schools, and daily lives.

Innovation is the creativity in action. Creativity could become our national resource, vital to the individual's quality of life and to society's well being. Fostering creativity among people would give potential growth into creative industry. Creative industry is industrial sector which contains creativity as the concept.

Second, we should maximize the role of educational institution as the key for cultural enhancement. Schools are the center of creativity. Having educated people, we would realize culture’s potential contribution to Indonesian economy. Reflecting Indonesia’s present condition, education doesn’t become priority of government budget. Government even neglects the law which regulates 20% minimum allocation of the budget.

Culture is still needed to be included in the educational curriculum. Arts and other cultural expressions could enrich everybody’s lives, thus should be embedded in the daily teaching process.

The next attention is partnership among parties in national lives to strategizing cultural aspect. The parties are government, culture practitioner, and public. Blue print for national cultural strategy should declare clearly what is the role of each party.

The essence of government’s role is creating conducive environment to support and encourage the development of desired culture. National cultural treasures and traditions must be conserved and promoted both locally and globally. Government commitment

Local authorities held important roles here. Indonesia has 33 provinces that possess its own culture. Local authorities, means “Gubernur” and “Bupati/Wali Kota” must be engaged in the national cultural development. They are also hold strategic roles in initiating any cooperation with private sector.

Cultural practitioners must also view culture as one of national potential to be enhanced in the global era. They must also realize that international influences could become big threats to the existence of national culture.

Finally, public engagement is the edge for cultural strategy. Indonesian efforts to conserve, enhance, and promote national culture is depend also in the public hand. Lack of participation from public would not makes the objectives couldn’t be reached. The expected role of public is also controlling the implementation of the blue print for national cultural strategy.

Read also: Porter, Michael E.1996. What is Strategy?. Harvard Business Review

Global Strategy: Conceptual Framework

Global strategy is the way a business competes in the global market. The strategy plays vital role in determining the performance of a business in the global market. There are numerous prescriptions for business facing global competition. These prescription describe what is global strategy, why, and how the global strategy be implemented.

The general framework for global strategy concepts are: first, a global strategy is required whenever there are important interdependencies among a business’s competitive position in different countries. Second, the sources of these interdependencies can be identified.

Third, the critical issues that a global strategy must address include the configuration and coordination of the business’s world activities. Fourth, the organization structure should be aligned with and derived from the global strategy.

There are two theoretical approaches to global strategy. Industrial organization-based theory describe that competitive advantage is viewed as a position of superior performance that a business attains through offering undifferentiated products at low prices or differentiated products for customers are willing to pay a price premium.

Second is resource-based theory, which said that competitive advantage is residing in the inherent heterogeneity of the immobile strategic resources which business control. The two theoretical perspectives must be linked together to provide a solid theoretical foundation to study global strategy and performance.

Global strategy is not a simple choice of product standardization, standardized marketing or concentrated manufacturing. Rather, it is multifaceted course of action involving six major dimensions; include global market participation, product standardization, uniform marketing, integrated competitive moves, co-ordination of value adding activities, and concentration of value adding activities.

To implement global strategy, as managerial implications, managers must formulate the multidimensional and coherent set of actions. Specifically, managers must develop an organization-wide market orientation, be committed to global markets, nurture a kind of organization culture that is conducive to global strategy conception and implementation, create organizational capabilities, and accumulate international experience.

full paper

Converting Global Presence into Global Competitive Advantage

Global presence doesn’t ensure companies into global competitive advantage. Thus, companies need to transform global presence into global competitive advantage. It requires systematic analysis, purposeful thinking, and careful orchestration, and is never ending process. Companies must exploit five value creation opportunities, which are:

1. Adapting to local market differences. By responding to country-level heterogeneity, companies can reap benefits in three fundamental areas: Increased market share, improved price realization, and neutralizing local competitors.

2. Exploiting economies of global scale. The potential benefits of economies of scale can appear in various ways: spreading fixed costs, pooling purchasing power, and creating critical mass.

3. Exploiting economies of global scope. Global scope refers to the multiplicity of regions and countries in which company markets its products or services. In fulfilling the needs of multilocation global customers, companies have two potential avenues through which to turn global scope into global competitive advantage: providing coordinated services and leveraging their market power.

Tapping he optimal locations for activities and resources. By optimizing the location for every activity in the value chain, companies can yield one or more of three strategic benefits: performance enhancement, cost reduction, and risk reduction.

Maximizing knowledge transfer across locations. Locally created knowledge can yield strategic benefits to the global enterprise, ranging from faster product and process innovation, lower cost of innovation, and reduced risk of competitive preemption.

Creating global competitive advantage requires several actions as implication. They must evaluate the optimality of the global network for each activity in the value chain along three dimensions: activity architecture, world-class competencies for each facility, and frictionless coordination between similar activities; between complimentary activities. Based on this evaluation, firms should then design and execute actions to eliminate or at least reduce the suboptimalities.

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