Michael Porter's Competitive Advantage

It's important to analyze these five forces and their affect on companies we want to invest in. The Porter Five Forces Analysis will give you a good explanation for the profitability of an industry, and the firms within it. If you want to know why a company is able, or unable, to make a decent profit, this is the first analysis you should do.

Michael Porter's Competitive Advantage

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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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Toyota Way 2001

Toyota is one of company that implement excellence Human Resource Model with comprehensive pattern in Toyota Way 2001. Every company may benchmark to Toyota to succeed its road to the competition and go out with success.

The insight of how Toyota manage its Human Resources presented below from Toyota website. Basically, Toyota put its Employee as valuable asset to make Toyota Way Happen. Toyota presented that:

"In order to carry out the Guiding Principles at Toyota Motor Corporation, in April 2001 Toyota adopted the Toyota Way 2001, an expression of the values and conduct guidelines that all employees should embrace. In order to promote the development of Global Toyota and the transfer of authority to local entities, Toyota's management philosophies, values and business methods, that previously had been implicit in Toyota's tradition, were codified. Based on the dual pillars of "Respect for People" and "Continuous Improvement," the following five key principles sum up the Toyota employee conduct guidelines: Challenge, Kaizen (improvement), Genchi Genbutsu (go and see), Respect, and Teamwork. In 2002, these policies were advanced further with the adoption of the Toyota Way for individual functions, including overseas sales, domestic sales, human resources, accounting, procurement, etc." (toyota.co.jp)

You can download supporting article here by click Toyota Human Resource Development

Building Competitive Advantage

Checkout the presentation and see the article. To Download the presentation visit building competitive advantage and download the presentation

Competitive Advantage

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Where does your business success begin? If you want to secure a competitive advantage, what are the 3 key areas that you must address?

Your employees or internal customers are your competitive advantage if you want to create a high performance work culture where at least 35% of the employees are engaged in thinking intensive jobs. A reasonable question is the how does one build a foundation from which to develop and then maximize that advantage?

The foundation begins with three 3 and distinct areas or pillars: your systems, your strategies and your people. Each pillar needs to be assessed and then aligned to developing internal customer satisfaction.

When looking at your systems, you will need to look at team building, process improvement, customer loyalty and continuous improvement. Quality leadership will ensure that these systems are both efficient and effective.

Strategy is embedded in your strategic planning process that includes your Vision, Values and current measurable Mission Statement along with all the critical success factors. To develop internal customer satisfaction mandates that your strategy is well communicated within your entire organization.

One simple way to assess the effectiveness of your strategic plan is ask every employee to name the top 3 goals for the current year. And if you get more than 3 answers, you know this is an area that needs immediate attention. Using an organizational assessment tool that incorporates known and proven criteria such as Baldrige helps to determine where your directional gaps are.

The pillar of people include: self leadership skills (interpersonal skills), leadership skills, attitudes and behaviors and business plans for each department. Management development oversees this essential pillar.

When all three areas of systems, strategy and people are aligned to developing achieving the goal of internal customer satisfaction, something almost magical happens. Your employees experience moments of truth that lead to loyal external customers.

TAKE ACTION to think about your strategic plan and how will it is executed in your business. What would happen if every employee could name the top 3 goals of the business for the current year? Would your overall productivity increase? Would you find yourself with greater sales, greater profitability and less costs? Just imagine the possibilities.

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The Balanced Scorecards : Video Lesson

This is visual lesson about balanced Scorecards. The video describe briefly whats the concept of balanced scorecards with integration with other management system. Watch it.






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Collaborative Advantage

Alliance between companies is a fact of business today. Even it becomes a key corporate asset and gives potential benefit called collaborative advantage. A well developed ability to create and sustain fruitful collaborations gives companies a significant competitive leg up.

There are five phases into alliances for general. First, courtship-two companies meet, are attracted, and discover their compatibility. The second, engagement-hey draw up plans and close the deal. Phase three, the newly partnered companies discover they different ideas about how business should operate. Phase four, the partners devise mechanisms for bridging those differences and develop techniques for getting along. And finally phase five, each company discovers that it has changed internally as a result of its accommodation to the ongoing collaboration.

Building a successful alliance depends on maintaining a careful balance between personal and the institutional. Like a family, alliance gives way to each partner to live together in day-to-day operation include its uncertainty and unanticipated condition. Thus, each partner should adjust its cultural and operational differences, learn about the differences early and take them into account as events unfold. Active collaborations need for bridging organizational and interpersonal differences and achieving real value from the partnership. Management must be sensitive to political, cultural, organizational and human issues.

Several criteria to meet best relationships are: 1. Strong and something value of each partners. 2. Fit major strategic objectives of the partners. 3. Complementary of assets and skills. 4. Invest each other, means tangible signs of long term commitment. 5. Share information each other. 6. Linkages and shared ways of operating so they can work together smoothly. 7. Formal status, clear responsibilities and decision process. 8. The partners behave toward each other in honorable ways that justify and enhance mutual trust.

Environmental Management: A New Industrial Revolution

The need to protect environment and conserve natural resources has driven industrial to create environmental sustainability. Environmental effects is now become primary concern of many business of how to manage them effectively and efficiently. Companies are now shifting rapidly from a strategy of regulatory compliance to one of proactive environmental management. This kind of thinking has gone through three stages: 1. the widespread business practice in the 1960s and 1970s of coping with environmental crises as they occurred and of attempting to control the resulting damage. 2. The reactive mode of government environmental regulations and minimizing the cost of compliance. 3. The proactive environment strategy through which corporations began to anticipate the environmental effects of their operations.

Proactive environmental management includes combination of five major approaches:

1. Waste minimization and prevention. It requires the prevention of pollution rather than the control of wastes at the end of the pipeline, through new approaches of production or technology.
2. Demand side management. It is an approach to pollution prevention that originated in the utility industry.
3. Design for environment. The objective is reducing reprocessing costs and returns products to market more quickly and economically.
4. Product stewardship. It is a practice that reduces environmental risks or problems resulting from design, manufacturing, distribution, use, or disposal of products.
5. Full-cost (environmental) accounting. This method identifies and quantifies environmental performance costs for the product, process, or project.

Corporations that do not adopt proactive approaches to environmental management will simply not be competitive in the global economy of 21^st century. Thus, pollution prevention must be adopted for all-small, medium, large corporations, to satisfy customers’ needs, saves money, and profitable business opportunities. Governments, universities, environmental partnerships, and industry association must also work together to seek solutions for the environment problems.

Beyond Greening: Strategies for a sustainable World

The ways companies do their business create great impact on environment. This problems challenge every player on business to develop a sustainable global economy: an economy that the planet is capable of supporting indefinitely. Strict government regulations are issued, and more and more companies are “going green” as they realize that they can reduce pollution and increase profits simultaneously.

There are three stages of environmental strategy that guide companies into sustainability:

a. Pollution prevention. This first step is to make the shift from pollution control to pollution prevention. Pollution control means cleaning up waste after it has been created. Pollution prevention focuses on minimizing or eliminating waste before it is created.

b. Product stewardship. Product stewardship focuses on minimizing not only pollution from manufacturing but also all environmental impacts associated with the full life cycle of a product. In this stage, companies need to examine all the effect that a product could have on the environment, includes full assessment of all inputs to the product and how customers use and dispose of it.

c. Clean technology. The next stage is plan for and invests technology that is environmentally sustainable.

Overall strategies for sustainable environment needs clear framework to give direction to those activities. Thus, companies need to create a vision of a sustainability showing the way products and services must evolve and what new competencies will be needed to get there. Moreover, companies’ clear and fully integrated environmental strategies should also shape the companies’ relationship to customers, suppliers, other companies, policymakers, and all its stakeholders.

Companies must educate customers to prefer products and services that are consistent with sustainability, not just to market its product. The reason is the responsibility for ensuring a sustainable world falls largely on the shoulders of world’s enterprise, public policy, and individual consumption patterns by consumer. Corporations then can and should lead the way to helping to shape public policy maker and driving changes in consumers’ behavior.

Value Innovation: The Strategic Logic of High Growth

The difference about growth and less successful companies lies in their way approached about strategy. The less successful companies took a conventional approach, dominated by the idea of staying ahead of the competition. The high-growth companies, in contrast, paid a little attention to matching or beating their rivals. They sought to make their competitors irrelevant, through value innovation.

Conventional logic and the logic of value innovation differ in five basic dimensions of strategy:

1. Industry assumption. Conventional logic assumed that conditions are given. But value innovators don’t. They assumed that industry conditions can be shaped.

2. Strategic focus. Conventional logic thought that company should build competitive advantage and beat the competition. Value innovators viewed competition isn’t the benchmark, and company should pursue a quantum leap in value.

3. Customers. Conventional approach view that the customer should be retained, expanded through further segmentation and customization. It focuses on the differences in what customers value. Value innovator targets the mass of buyers and willingly lets some existing customers go. It focuses on the key commonalities.

4. Assets and capabilities. Conventional logic view the business opportunities by leverage its existing assets and capabilities. Value innovators not be constrained by what companies already have.

5. Product and service offerings. An industry’s traditional boundaries determine the products and services a company offers. A value innovators often cross the boundaries.

In creating a value innovation, managers should focus on three platforms: product, service, and delivery. Product platform is the physical products; service platform is support such as maintenance and customer service; and delivery platform includes logistics and the channel used to deliver the product to customers.

Value innovation is the simultaneous pursuit of radically superior value of buyers and lower costs for companies. To become a value innovators, companies should become pioneers, the business that offer unprecedented value. Thus, managers must stop and think about the industry assumptions, the company’s strategic focus, and the approaches-to customers, assets and capabilities, and product and service offerings-that are taken as given.

Strategy, Value Innovation, and the Knowledge Economy

Competition has occupied the center of strategic thinking for the past twenty years. This approach results an unintended effects, that are: imitative approach to the market, the companies act reactively, and understanding of emerging mass markets and changing customer demands becomes bazy. But high growth and successful companies view this approach was irrelevant. They pursue value innovation which is not about striving to out perform the competition. These companies offer fundamentally new and superior buyer value in existing markets and by enabling quantum leap in buyer value to create new markets. They went beyond competing in existing markets to expanding the demand side of the economy.

Value innovation links innovation to what the mass of buyers value. High growth companies offer customers with radically superior value at accessible price level to the mass buyers.

Successful value innovators using two different approaches. First, strategic pricing for demand creation, leads to high volume and rapidly establishes a powerful brand reputation. Second, target costing for profit creation, leads to attractive profit margins and a cost structure that is hard for potential followers to match.

To make value innovation happen, top management must clearly communicate the company’s commitment to value innovation as the key strategic component by articulating its underlying logic. Then, when putting value innovation strategies into action, companies must cultivate a corporate culture conducive to willing collaboration. Companies must pursue its individuals to share their best ideas and knowledge, because these are the primary inputs for value innovation. Fairness in the process of making and executing decisions must also be engaged, because fair process and value innovation create a positively reinforcing cycle.

Value innovation is the essence of strategy in the knowledge economy. By implementing value innovation, strategies of cost leadership and differentiation are likely to succeed. But, it is also important to note that value innovators must shifting their strategy focus, from conventional to value innovation focus.