A Poter Glossary: Key Concepts

Question 1

Activities?

Answer 1

Discrete economic processes, such as operating a sales, force, developing products, or physical delivery to the customer. And activity usually involves people, technology, fixed assets, sometimes working, capital, and various types of information. The activities companies perform are the basic units of competitive advantage, because they are the ultimate source of both relative cost and the level of differentiation a company can offer its customers.

Question 2

Barriers to entry?

Answer 2

The hurtles, a new entrance would have to surmount in order to enter an industry. Low entry barriers, industries that are easy to enter, lower the industries, average profitability. The threat of new entrance is one of the five forces.

Question 3

Barriers to imitation?

Answer 3

The hurdles facing a rival within an industry, who tries to move from one positioning to another, in order to copy another company strategy. Barriers to imitation, slow the process of competitive convergence.

Question 4

Clusters?

Answer 4

Geographic concentrations of companies, suppliers, related industries, and specialized institutions, such as academic programs, think Hollywood entertainment, for example, Silicon Valley, technology, or Seward, India, diamond cutting. Clusters play an important role in competition because a company’s productivity is influenced by the presence of light firms, institutions, and infrastructure around it. With affective local suppliers of time sensitive services, for example, a company will be more efficient. Clusters draw on local assets and institutions, such as public education, physical infrastructure, clean water, fair, competition laws, quality standards, and transparency. Clusters are prominent features of all successful and growing economies, and a crucial driver of competitiveness, entrepreneurship, and new business growth. For more on this topic, see clusters and competition in porters on competition in 2008.

Question 5

Competition?

Answer 5

The term is commonly used to refer to rivals in rivalry, but for Porter, this definition is too narrow. Competition is the tug-of-war over profits that occurs not just between rivals, but also between a company and its customers, it’s suppliers, makers of substitutes, and potential new entrance.

Question 6

Competitive advantage?

Answer 6

The term is commonly used to mean here’s what we think we’re good at, as in our competitive advantage is technology. Or, it is used even more loosely, as in our competitive advantage, lies in our people. Porters definition is tightly linked to the economics of competition, you have competitive advantage, if your profitability is sustainably higher than that of your rivals. Then you can dig further to understand whether that advantage comes from higher prices, lower cost, or some combination of both. These differences in relative prize or relative cost arise because of differences in the activities being performed.

Question 7

Competitive convergence?

Answer 7

What happens when companies imitate and match each other’s moves, when they compete to be the best. Overtime all companies begin to look alike as one difference after another erodes. When rivals converge around a standard offering, customers must choose on price alone. Main stream economics has always highlighted the way in which this kind of perfect competition benefits customers by lowering prices. The Porter sees it differently. Convergence can actually hurt customers because it limits their choice.

Question 8

Competitiveness (of a nation, a location)?

Answer 8

The term is commonly used to describe a region or country with low cost labor or some other conventional comparative advantage, such as access to a valuable natural resource. Importers view, the focus on low cost inputs, on comparative advantage, is far less relevant and it once was. Porter defines the competitiveness of a location in terms of how productively it uses Human and natural resources as well as its capital. Competitiveness arises, in other words, from how well a location uses inputs to produce valuable goods and services, not from the inputs it has. It arises from choices, not endowment. Moreover, Porter argues that the productivity and prosperity possible in a given location, depend not on what industries, its firms compete in, but on how they compete. Policy makers and executives, through their choices, create a business environment that affects our companies compete, and thus their competitiveness. For more on this topic, see the competitive advantage of nations in our competition 2008.

Question 9

Competitor analysis?

Answer 9

Intelligence gathering and analysis aimed at helping a company deal with competitive dynamics by assessing the intentions and capabilities of rivals. For more on this topic, see Porter seminal work in chapter 3 of competitive strategy, 1980.

Question 10

Continuity?

Answer 10

Porter uses the term to refer to stability in the core value proposition. It is his fifth test a good strategy. A strategy is a path, not a destination. A company can stay on the path without standing still, a distinction that is misunderstood by those who think that strategy is somehow static, or that it does not allow for change. All of the other elements of strategy, tailoring a value chain to the value proposition, extending trade-offs, achieving fit, across activities, take time to develop. Without continuity of direction, a company would be unable to develop and dependence, competitive advantage.

Question 11

Corporate strategy?

Answer 11

The overall strategy for a corporation that consist of diversified, businesses and multiple industries, it is not the same thing as competitive strategy. Because competitive advantage is one or loss at the level of an individual business, the goal of corporate strategy should be to enhance the competitive advantage of its multiple business units. But because the corporation sits on top of the business units and is the seat of power and control, this distinction is often lost in practice. The card often leads the horse, giving corporate synergy a bad name. For more information on this topic see from competitive advantage to corporate strategy importers on competition 2008.

Question 12

Cost driver?

Answer 12

The factors that influence cost. And analyzing a companies cost position, look at each distinct activity to see which factors influence the cost of that activity. Competitive advantage 1985 has a 50 page chapter on this important subject.

Question 13

Diamond theory?

Answer 13

A major porter framework not covered in this book that explains why some nations and regions achieve greater economic success in a given industry than others. Comparative advantage attributes a region success to low cost labor or access to a valuable natural resource. In contrast, Porter highlights the role of competitive advantage, achieved through higher productivity, and innovation. These arise, according to diamond theory, where the local environment is the most forward, thinking, dynamic, and challenging. See the competitive advantage of nations, 1990.

Question 14

Differentiation?

Answer 14

The term is most commonly used to simply tint mean different. In marketing, it is used to describe how one offering is positioned in relation to others, it might offer more quality or features, or it might sell at a lower price. Porter uses this term more narrowly to refer to a companies ability to commend a higher relative price than rivals because its offering has increased customers willingness to pay. Porter prefers this narrower and more precise definition because he believes it is essential not to confuse the two components of competitive advantage, price, and cost.

Question 15

Diversification?

Answer 15

The expansion of a company into different businesses. Porters thinking about diversification is directly linked to the value chain and its activities. Too often, Porter, observes, core competences that are vaguely defined, provide a rationale for diversification that turns out to be in businesses that are actually unrelated. The challenge in diversification is to identify activities or activity systems that can be shared with new businesses, or to find businesses where your proprietary skills in managing specific day activities can be transferred. This is how valuable resources or competences can be leveraged. For more on this topic, see from competitive advantage to corporate.

Question 16

Execution?

Answer 16

See operational effectiveness (OE)

Question 17

Fit?

Answer 17

When the value or cost of one activity is affected, by the way, other activities are perform. One of the five basic test of a good strategy, fit can amplify the value of a competitive advantage by lowering cost, or by producing unique value that raises a customers willingness to pay. It also amplifies the sustainability of a strategy, making it harder for rivals to understand and copy the strategies complex system of activities.

Question 18

Five forces?

Answer 18

Corders seminal framework for assessing competition in any industry by analyzing the industry structure. The framework explains the large and sustained differences in profitability from one industry to another. Five forces analysis is the first step in thinking about the strategy, about how to shift the forces in your favor, and where are you might be able to establish a unique positioning. For the framework and an extensive application of it, see the five competitive forces, that shape strategy and strategy and Internet importers on competition 2008.

Question 19

Frameworks?

Answer 19

The term porter uses to distinguish his approach from formal economic models. Formal models can capture only those aspects of competition that can be represented and solve mathematically, and this requires sharply limiting the number of variables that can be considered. Porters frameworks, except that competition is too complex to lend itself to formal modeling, they are more like expert systems help you to consider the relevant dimensions of competition..

Question 20

Generic strategies?

Answer 20

Broad characterizations of the key themes of strategic positioning. A focused strategy chooses to limit the scope of customers and needs that the company serves. A differentiation strategy allows a company to commend a premium price, while cost leader ship, allows it to compete by offering a low relative price. The idea of generic strategies was a seminal concept first described by Porter in competitive strategy in 1980 and has been widely embraced by managers ever since. Effective strategies typically integrate multiple themes in a unique way. You can be differentiated in some ways to be low-cost, for example, as long as the particular kind of differentiated values is not inconsistent with low cost. See stuck in the middle.

Question 21

Geographic scope?

Answer 21

For strategy, it is critical to draw the geographic boundaries of your industry correctly. Is your business, global, national, regional, or local? Significant differences in the five forces suggest that you may be dealing with separate industries. There has been a tendency, porter notes, to defined businesses as being global, when in fact, there are significant differences in industry structure from one country or region to the next would do men different strategies. See competing across locations, enhancing competitive advantage through a global strategy in on competition 2008.

Question 22

Global strategy, globalization?

Answer 22

See geographic scope

Question 23

Industry structure?

Answer 23

The basic, underlying economic, and technological characteristics of an industry that shape a competitive arena in which strategy must be set. Analyzing industry structure is the place to start in order to understand the competitive environment, as well as the profit potential of the industry. See five forces

Question 24

Operational effectiveness (OE)?

Answer 24

Commonly called best practice or execution by managers, 0E is porters umbrella term for a companies ability to perform the same or similar activities better than rivals. OE includes a multitude of practices that allow a company to get more out of the resources it uses. Every functional area has its current best practices, the best way to load a factory, the best way to train, a salesforce, and so on. Differences in OE are pervasive and can explain some differences in relative profitability. 0E is about achieving excellence in execution. OE is important to performance, but it is different from strategy. For more on OE see what is strategy? In porters on competition 2008

Question 25

Outsourcing?

Answer 25

The decision to buy from a third-party an activity that your organization wants performed internally. The received wisdom has been to retain those activities that are core and to outsource the rest. Porter offers a different way to frame the decision, linking it directly to the economics of competitive advantage, retainers functions that are, or could be tailored to your strategy, and outsource those that are truly generic, for which little tailoring as possible or relevant to the strategy..

Question 26

Porter hypothesis?

Answer 26

The name given by the environmental community to porters argument that corporate pollution is often a sign of economic waste, of resources, used in efficiently, energy, wasted, or valuable raw materials, discarded. Improving environmental performance, then, will often increase productivity, and, in some cases, even offset the cost of making improvements. Corporations, therefore should see environmental improvement, not as a regulatory nuisance, but as an essential part of improving productivity and competitiveness. Smart, environmental regulation, Porter argues, encourages product and process innovation. C Porter’s article with class, Vanderlinde, green and competitive, ending the Stamate, in on competition 2008.

Question 27

Positioning?

Answer 27

The choice of a value proposition made against a specific and relevant set of industry rivals. Discovering a good strategy means finding a unique positioning, the place you want to be in your industry.

Question 28

Relative buyer value?

Answer 28

How much the customer is willing to pay for a good or service versus other offerings.

Question 29

Relative cost?

Answer 29

Your cost per unit relative to that of your rivals. A relative cost advantage can come from two possible sources, performing the same activities, better, competing to be the best, or OE, or choosing to perform different activities, competing to be unique.

Question 30

Relative price?

Answer 30

Your price per unit relative to that of your rivals. A relative price advantage comes from differentiation that produces buyer value, or in planer English, from producing something distinctive, for which customers are willing to pay more.

Question 31

Return on investment capital (ROIC)?

Answer 31

A financial measure that ways the profits, a business generates versus the capital invested in it. For Porter, this is the best financial measure of success, because it captures how effectively a company uses its resources to generate economic value.

Question 32

Strategic competition?

Answer 32

Porter uses this term to refer to positive some competition, in which companies win, and achieve superior profitability, by creating unique value for their customers. This is a win-win form of competition because your customers benefit and so to you.

Question 33

Strategy?

Answer 33

The word is commonly used to refer to any important goal or initiative, as in our strategy is to be number one in our industry, or our strategy is to grow through acquisitions. Porters definition the set of integrated choices that define how you will achieve superior performance in the face of competition. It’s not the goal, to be number one, nor is it a specific action, like making acquisitions. It’s the positioning, you choose that will result in achieving the goal, the actions are the path you take to realize the positioning moreover, one Porter defines strategy, he is really talking about what constitutes a good strategy, one that will result in higher ROIC then the industry average

Question 34

Stuck in the middle?

Answer 34

A porter phrase that quickly became part of the strategy Lexion to describe a strategic trap companies fall into when they refuse to make trade-offs, when they try to be all things to all customers. The problem is that when you try to offer types of value that are inconsistent, you will inevitably fail to be as efficient or effective as the more focus competitor has been willing to Taylor, it’s activities to deliver that unique value.

Question 35

Substitute?

Answer 35

A product from another category that a customer might choose to meet the same need your product serves. To the dismay of traditional watch makers, cell phones are becoming a substitute for wrist watches, especially for the younger generation. Threat of substitute is one of the five forces.

Question 36

SWOT analysis?

Answer 36

A simple and widely used tool developed in the 1960s to organize discussions and strategic planning meetings. Managers are asked to list the companies, strengths, weaknesses, opportunities, and threats. SWOT attempts to relate a company to its environment, but it is typically short on analysis and objectivity. SWOT predates the insights that derive from porters work.

Question 37

Tailored value chain?

Answer 37

Porter use the word tailored to refer to activities that are designed specifically to deliver a certain value proposition. A tailored activity is the opposite of a generic one. Having a tailored value chain is Porter second test to a good strategy.

Question 38

Trade-offs?

Answer 38

Trade-offs occur when companies have to make choices between strategic positioning‘s that are inconsistent. Those kinds of choices give rise to differences among rivals in cost and value, and thus trade-offs are the economic linchpin of strategy. One of the five test, good strategy, trade-offs contribute to the cost and price differences that constitute competitive advantage. Trade-offs also make it difficult for rivals have made different choices to copy what you do without damaging their own strategies. Thus trade-offs make competitive advantage, sustainable by deterring imitation from existing rivals.

Question 39

Value chain?

Answer 39

The set of all the discreet activities, a firm performs in creating, producing, marketing, and delivering it’s good or service. This is the basic tool for understanding, competitive advantage, since all cost arise from the value change activities, and all differentiation is created by them

Question 40

Value creation?

Answer 40

The process by which organizations transform inputs into goods and services that are worth more than the sum of those inputs. This is the ultimate source of superior performance for businesses that exist to create economic value, and for nonprofits that exist to me a specific social objective with the greatest efficiency. Strategy is about how any organization will create unique value for its chosen customers.

Question 41

Value proposition?

Answer 41

The core element of strategy that defines the kind of value a company will create for its customers. A value proposition answers three questions. Which customers are you going to serve? Which needs are you going to meet? What relative price will you charge? A unique value proposition is the first test of a good strategy.

Question 42

Value system?

Answer 42

The full set of end, end activities involved in creating value for the end-user. A company’s value chain is typically just a part of a larger value system that includes companies, either upstream, such as suppliers or downstream, such as distribution channels, or both. This perspective about how value is created forces you to consider every activity in the process, regardless of the who performs that activity. It also forces you to see each activity not just as a cost, but as a step, it Hass to add some increment of value to the finished product or service. And thinking about your own value chain, it’s important to see how your activities have points of connection with those of your suppliers, channels, and customers.

Question 43

Zero some competition?

Answer 43

A form of rivalry in which you win only if someone else loses, even if the someone else is your customer or your supplier. For example, porters description of US healthcare competition, cost are reduced by shifting them to others. Physicians are pressured to improve productivity by skipping on time, spent with patients. Physicians win by cutting better deals with their hospitals, hospitals win by merging into groups to gain more bargaining cloud on rates, health plans, win by restricting services, and Muslim physicians to accept lower pay. In ways such as these, each player in the system, gains not by increase in value for the patient, but by taking value away from someone else. Supporter in Howell physicians can change the future of healthcare in JAMA, page 297 in 2007.