Michael Porter and his theory of competitive advantage. Michael Porter's Five Forces Model of Competition

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

Today, international economic relations are developing quite actively. Almost all countries of the world participate in them to one degree or another. At the same time, some states receive large profits from foreign economic activity, constantly expanding production, while others can hardly maintain the existing capacities. This situation is determined by the level of competitiveness of the economy.

Relevance of the problem

The concept of competitiveness is the subject of numerous discussions among people who make corporate and government management decisions. The growing interest in the problem is due to various reasons. One of the key ones is the desire of countries to take into account the economic requirements that are changing within the framework of globalization. Michael Porter made a great contribution to the development of the concept of state competitiveness. Let's take a closer look at his ideas.

Overall concept

Levellife in a particular state is measured in terms of national income per person. It increases with the improvement of the economic system in the country. Michael Porter's analysis showed that the stability of the state in the foreign market should not be viewed as a macroeconomic category, which is achieved by methods of fiscal and monetary policy. It must be defined as productivity, the efficient use of capital and labor. The national income is formed at the level of enterprises. In this regard, the welfare of the state economy must be considered for each company separately.

Michael Porter's Theory of Competitive Advantage (briefly)

To be successful, businesses must have low costs or provide differentiated quality to higher value products. To maintain a position in the market, companies need to constantly improve products and services, reduce production costs, thus increasing productivity. Foreign investment and international competition act as a particular catalyst. They form a strong motivation for businesses. At the same time, competition at the international level can not only have a beneficial effect on the activities of companies, but also make certain industries completely unprofitable. This situation, however, cannot be considered absolutely negative. Michael Porter points out that the state can specialize in those segments in which its enterprises are mostproductive. Accordingly, it is necessary to import those products in the release of which companies show worse results than foreign firms. As a result, the overall level of productivity will increase. One of the key components in it will be imports. Productivity can be increased through the establishment of affiliated enterprises abroad. Part of the production is transferred to them - less efficient, but more adapted to new conditions. Profits from production are sent back to the state, thus raising the national income.

Export

No state can be competitive in all areas of production. When exporting in one industry, labor and material costs increase. This, accordingly, negatively affects less competitive segments. The ever-increasing exports cause the appreciation of the national currency. Michael Porter's strategy assumes that the normal expansion of exports will be facilitated by the transfer of production abroad. In some industries, positions will undoubtedly be lost, but in others they will become stronger. Michael Porter believes that protectionist measures will limit the ability of the state in foreign markets, slow down the improvement in the standard of living of citizens in the long term.

The problem of attracting resources

International trade and foreign investment can certainly greatly increase national productivity. However, they can also have a negative impact on her. This isis due to the fact that in each industry there is a level of both absolute and relative productivity. For example, a segment can attract resources, but it is not possible to export from it. The industry is not able to withstand import competition if the level of competitiveness is not absolute.

The Five Forces of Competition by Michael Porter

If the industries of a country that are losing ground to foreign enterprises are among the more productive in the state, then its overall ability to increase productivity is reduced. The same is true for firms that move more profitable activities abroad, because there costs and earnings are lower. The theory of Michael Porter, in short, connects several indicators that determine the stability of the country in the foreign market. In each state, there are several methods to increase competitiveness. Collaborating with scientists from ten countries, Michael Porter formed a system of the following indicators:

1. Factor conditions.
2. Service and related industries.
3. Factors of domestic demand.
4. Strategy and structure of companies, competition within industries.
5. The role of public policy and chance.

Factor conditions

Michael Porter's model suggests that this category includes:

1. Human resources. They are characterized by skills, cost, workforce, shift length and work ethic. Humanresources are divided into various categories, since each industry has its own needs for certain employees.
2. Scientific and information potential. It is a set of data that affects services and goods. This potential is concentrated in research centers, literature, information bases, universities, etc.
3. Natural and physical resources. They are determined by the quality, cost, availability, quantity of land, water sources, minerals, forests, and so on. This category also includes climatic and geographical conditions.
4. Capital is money that can be invested. This category also includes the level of savings, the structure of national financial markets.
5. Infrastructure. It includes the transport network, the communications and he althcare system, postal services, payment transfers between banking organizations, etc.

Explanations

Michael Porter points out that key factor conditions are not inherited but created by the country itself. In this case, it is not their presence that matters, but the pace of their formation and the mechanism for improvement. Another important point is the classification of factors into developed and basic, specialized and general. It follows from this that the stability of the state in the foreign market, based on the above conditions, is quite strong, although fragile and short-lived. In practice, there are manyevidence supporting Michael Porter's model. An example is Sweden. It profited from its largest low-sulphur iron deposits until the metallurgical process changed in the main Western European market. As a result, the quality of the ore no longer covered the high costs of its extraction. In a number of knowledge-intensive industries, certain basic conditions (for example, cheap labor resources and rich natural resources) may not provide any advantages at all. To increase productivity, they must be tailored to specific industries. These may be specialized personnel in manufacturing industries, which are problematic to form elsewhere.

Compensation

Michael Porter's model assumes that the lack of certain basic conditions can also be a strength, motivating companies to improve and develop. So, in Japan there is a shortage of land. The absence of this important factor began to act as a basis for the development and implementation of compact technological operations and processes, which, in turn, became very popular in the world market. The lack of certain conditions must be compensated by the advantages of others. So, for innovations, appropriately qualified personnel are needed.

State in the system

Michael Porter's theory does not include it among the basic factors. However, when describing the factors influencing the degree of stability of the country in foreign markets, the state is given a special role. Michael Porter believes that it should act as a kind of catalyst. Through its policy, the state can influence all elements of the system. The influence can be both beneficial and negative. In this regard, it is important to clearly formulate the priorities of the state policy. The general recommendations are to encourage development, stimulate innovation, increase competition in domestic markets.

Spheres of state influence

Indicators of production factors are influenced by subsidies, policies in the field of education, financial markets, etc. The government determines internal standards and norms for the production of certain products, approves instructions that affect consumer behavior. The state often acts as a major buyer of various products (goods for transport, the army, education, communications, he althcare, and so on). The government can create conditions for the development of industries by establishing control over advertising media, regulating the operation of infrastructure facilities. State policy is able to influence the structure, strategy, characteristics of the rivalry of enterprises through tax mechanisms, legislative provisions. The impact of the government on the level of competitiveness of the country is quite large, but in any case it is only partial.

Conclusion

Analysis of the system of elements that ensure the stability of any state allowsdetermine the level of its development, the structure of the economy. A classification of individual countries in a specific time period was carried out. As a result, 4 stages of development were identified in accordance with the four key forces: production factors, we alth, innovation, investment. Each stage is characterized by its own set of industries and its own areas of activity of enterprises. The allocation of stages allows us to illustrate the process of economic development, to identify problems that companies face.