Porter's diamond and product life cycle

Porter's diamond and the product life cycle: eclecticism for a joint vision

Summary

The need to develop a strategy, as well as the evaluation of an investment project, leads organizations to develop permanent valuation systems for their environment. These systems are based: on the analyzes of the competition, the structure of the sector, the interrelations with the social environment that have a strong influence when determining the rules of the game, but also on the strategic possibilities of the competition. These systems not only help companies to position themselves within their market niche, but also help them set the course and their way of competition.

The objective of this document is to propose an eclectic and easy-to-adopt system for the MiPyMEs, (Micro, Small and Medium-sized Companies), based on the use of two techniques that help them to know their position in the market and, therefore, to establish strategies or policies that lead them to increase their competitiveness. Both techniques are well known by specialists, but are not widely disseminated at the micro and small business level in Mexico, these are: Porter's diamond and the Product Life Cycle.

In this sense, the use of these techniques together and their theoretical analysis in this document reflect an aid for business improvement in MSMEs.

Porter's diamond

To begin, it is necessary to be clear about what is offered to the market, that is, to perfectly outline each and every one of the features of our service or product: this can be done through a description of our product in aspects such as price, place of sale or form of distribution, delivery time, quality of raw material (supplies), quality of customer service, quality of after-sales service (after sale) and how these aspects can be improved. (See value chain on author Michael Porter's competitive advantage) or carrying out a SWOT analysis (Strengths, Opportunities, Weaknesses, Threats) can help us in the same way.

Once this is done, the industrial sector (market) is analyzed, beginning with the identification of the different types of data sources such as:

The publications that refer to the sector. (Writings of economists, industrial sector books, associations, chambers, annual reports, etc.) Those gathered in interviews with participants in the industrial sector and with observers.

On the Internet there is a wide variety of information from studies of all kinds.

The data required for this analysis should be limited to the categories:

Products.Buyers and their behavior.Products different from ours but that can be used instead.Machinery or tool to produce or distribute the product.Sales and distribution form. Innovations of other producers. Competitors strategy, objectives, strengths and weaknesses, assumptions. Social, political, legal environment. Macroeconomic environment.

These categories are specified because every company that competes in an industrial sector has a strategy and by observing this, the organization has the possibility of taking a strategic position and approach that allows it to develop broadly and effectively.

These data are analyzed by Porter synthesizing them in a tool that tries to determine the scenario of the set of competitors in the industrial sector and to examine the strategic skills that each company has to create strategies that allow sustainable competitive advantages in the long term.

"The situation of competition in an industrial sector depends on five basic competitive forces that are shown in the figure…, the joint action of these forces determines the potential profitability in the industrial sector" Porter, 2001; pp. 2. 3.

FIG. 1.- FORCES THAT MOVE THE COMPETITION IN INDUSTRIAL SECTORS

The diagram shows that:

a) Potential competitors: when new competitors enter an industrial sector and try to obtain market share, there may be a reduction in consumer prices, or existing companies may incur increased costs to differentiate their product, which causes a reduction in profitability in the sector, for this reason "… the probability that a new competitor enters the market will depend on the barriers to entry to the sector…" (Porter 2001 pp. 27).

According to Porter, different entry barriers can be established to block the possible entry of new competitors, the higher these are, the more difficult it will be to appropriate a part of the market, but it is attractive if the entry barriers are easy for new competitors to overcome. they can arrive with new resources and capacities to gain from a part of the market.

Among the most important we have:

Economies of scale: refers to the reduction in unit cost of the product experienced by established companies, as long as the absolute volume produced increases for a period. This forces companies that enter to produce on a large scale without the guarantee of reaching their equilibrium point. Product differentiation: brand identification and customer loyalty can generate additional advertising costs to convince and motivate the market to Adopt the new brand and given that brand loyalty can be deeply rooted, these advertising investments would last for long periods of time, even generating start-up losses. Investing large amounts of money:This barrier is more common in markets that require machinery or technology to produce or offer the product, and due to its high cost, potential competitors are reduced to individuals or companies with large capital in order to make such investments, which are generally recovered in the long term.Access to distribution channels: when distribution channels are occupied by established companies, an income barrier is generated because the incoming company must find a new way to distribute their product, or try to persuade the channel with a reduction in prices with the risk of not bearing the costs. Disadvantage in cost independent of economies of scale:It is possible that the sector will develop cost advantages that are difficult to equalize by the companies that enter and that are not related to economies of scale, such as; patented technology to produce the product, the learning curve derived from the extensive experience of employees manufacturing the product (they improve their methods and become more efficient) “If costs decline with experience in a sector and if established companies can patent the experience, so the effect is an entry barrier. ”(Porter 2001 pp.32) Government policies: the government can limit or prevent the entry to industries through licenses, permits or restrictions derived from controls for environmental contamination or foreign investment.patented technology to produce the product, the learning curve derived from the extensive experience of employees manufacturing the product (they improve their methods and become more efficient) “If costs decline with experience in a sector and if established companies can patent the experience, so the effect is an entry barrier. ”(Porter 2001 pp.32) Government policies: the government can limit or prevent the entry to industries through licenses, permits or restrictions derived from controls for environmental contamination or foreign investment.patented technology to produce the product, the learning curve derived from the extensive experience of employees manufacturing the product (they improve their methods and become more efficient) “If costs decline with experience in a sector and if established companies can patent the experience, so the effect is an entry barrier. ”(Porter 2001 pp.32) Government policies: the government can limit or prevent the entry to industries through licenses, permits or restrictions derived from controls for environmental contamination or foreign investment.they can patent the experience, so the effect is an entry barrier. ”(Porter 2001 pp.32) Government policies: the government can limit or prevent the entry to industries through licenses, permits or restrictions derived from controls for contamination of the environment or foreign investment.they can patent the experience, so the effect is an entry barrier. ”(Porter 2001 pp.32) Government policies: the government can limit or prevent the entry to industries through licenses, permits or restrictions derived from controls for contamination of the environment or foreign investment.

b) Intensity in rivalry between competitors: When companies participating in the sector try to manipulate their positions with price tactics, strong and aggressive advertising or marketing campaigns, promotions and new product launches, it is because one or more competitors feel the pressure or see within the structure of the sector the possibility of improving their position, these possibilities are the product of structural factors that interact with each other, such as:

Large number of members: when there is a considerable number of competitors, their efforts may be mostly aggressive and continuous, but if the sector is concentrated or there are market leaders, discipline and intensity can be imposed. Slow growth of the industrial sector: when this happens, the competition focuses on a fight for greater market share, especially with companies seeking expansion, the sector becomes more volatile. High fixed costs: when you have a product that moves slowly or whose storage cost is Very high, companies may feel pressured to bring their capacity to equilibrium, which may lead to an escalation of low prices to ensure their sales. Lack of differentiation:If the consumer finds no difference between one or the other product, the purchase criteria is based on the price or service, both forms of competition are much more unstable.

c) Pressure of substitute products: substitute products are characterized by limiting the

Potential returns in the sector, placing a cap on companies, since these are products that replace ours by performing the same function, this fact may be determined by the price or the improvement in profit and performance against the product of the industrial sector.

In such a way that the competition and the benefits of the sector are subject to the

practices in the substitute product sector, such as; technological development, price policies, advertising investment, or any other that prevails in that market.

d) Bargaining power of suppliers: suppliers exercise their bargaining power over companies threatening to raise the price or reduce the quality of products or services and this power will be determined by:

Concentration of your sector : if the number of suppliers is less than the number of competitors to which you supply, you will have the power to exert your strength in prices, quality and conditions of purchase-sale. Zero or little competition with substitute products: if the product you provide, it does not compete with products that substitute its function, its influence will be greater Importance of the company for the supplier: if a sector does not represent an important fraction of the supplier's sales, it may be greater. Importance of the input: if the product it provides is important for the success of the buyer's manufacturing process or the quality of the product, then greater power will be exercised. Forward integration: if the supplier has the possibility of integrating forward it will exercise power over the company that supplies.

e) Bargaining power of the buyers: The buyers influence the sector by forcing the drop in prices and negotiating for a superior quality in the products or services and the same relationship of forces to negotiate will be in favor of the clients if:

The concentration of the sector they buy from is high (they have the possibility of acquiring the product with another competitor). The volume of purchases is minimal. (less dependency is generated from the buyer to the supplier).The products they buy are undifferentiated (the quality and price are the same with any buyer). They have a high capacity to integrate backwards, (they can produce the input with little investment).

All this information can be searched in the sources mentioned above, however, the information published varies greatly by industrial sector; the larger it is, and the rate of technological change is slower, the better the published information available will tend to be.

The product life-cycle management

To complement an industrial analysis, it is necessary to generate a forecast or forecast where the industrial sector will move and what type of returns we will obtain in the medium and long term, so a characterization of the product life cycle can be included in the analysis..

This technique is key in the diversification of the product line, being used to show the behavior of the product in the market, based on the following definition: "… a product is a complex of tangible and intangible attributes and even packaging, color, price prestige of the manufacturer and the seller, which the buyer can accept as something that satisfies their wishes or needs. ”(Stanton 2003, pp 118), it can be concluded that the demand for said product follows a well-behaved with a more or less regularly ascending curve, determined by the volume of sales (demand) and the time in which they occur, this behavior is called the product life cycle as explained below:

Figure 2 shows that the “Y” axis shows the sales and profits of the product and the “X” axis represents the different stages of product development over time (years), therefore the resulting graph that follows the course of sales and profits of the product / service is an increasing curve "… the model suggests that… products go through a series of stages, which start with low demand during market development, continuing with growth, maturity with a high volume of saturation and finally its decline. ” (Everett 1991, pp 129)

FIG. 2 PRODUCT LIFE CYCLE

Source: Own elaboration with data from Stanton, 1998 pp 247

At each stage of evolution the qualities of the sector vary so that the organization must adapt its strategy to remain competitive, these peculiarities of the sector vary in each

In this case, taking as an example the typical life cycle shown in the previous figure, the table is shown.

TABLE 1. IMPORTANT CHARACTERISTICS OF THE PRODUCT LIFE CYCLE

characteristics	Introduction	Increase	Maturity	Decline
Variety of products	Great variety	Increasing standardization	Appearance of a dominant design	High standardization, basic product
Volume / Product Model	Low volume	Increasing volume	High volume	High with a tendency to decrease
Structure of the Industrial sector	Small competitors	Increase in the number of companies and a high rate of their disappearance	Fall and consolidation of competitors Few large companies	Survivors
Competition form	Based on design	Product quality and availability	Price and dependency	Price
customers	Innovators	Mass market	Mass market	Loyal
Sales	Low levels	Crescent	Slow and non-annual growth	Decrease
Utilities	Null	Important and then they reach the maximum level	Decrease annually	Few or null

Source: Own elaboration with data from Everet 1991 pp 132 and Stanton 2001 pp 248

We have that at the beginning in the introduction stage you can compete based on differentiation or design since the market is new and what you want is to create buyer loyalty, there are also few competitors because only a few have the knowledge to produce the good, while sales are low and in some cases profits are nil, because there is not enough information about the product or its uses by the market.

The growth stage can be identified by seeing an increase in sales and profits reaching a maximum level at the end of it, due to the fact that the consumer market has acquired more information about the product and its uses, that is, its usefulness has spread This also broadens the offer and the number of competitors, but with a high death rate of the same as it extends the quality and availability of the product to compete, two aspects that very few companies manage to achieve distribution channels and a wide learning curve, at the end of this period in some cases it will be possible to observe that the product begins to standardize, and it is at this precise moment that the fate of the company and the sector will be decided.Technological learning will afloat companies from the rest of the competitors and the innovation capacity of companies as a whole will save the sector from its disappearance. It is at this stage where innovations must be adopted to rejuvenate the sector and the market in general, although they can be adopted at any stage, but this is the ideal one, since the right conditions exist to make investment in this sector even attractive.

In the maturity stage, competition in the sectors is sharpened because the product and its process are completely standardized, which implies a reduction in production costs (Kotler, 1998.), due to the advantage given by the curve From learning to companies in the sector, customers become expert consumers and most of them are loyal to a brand, which is why a few companies consolidate and those that did not adapt to the standardization of the product or process end up disappearing, Sales at this stage maintain slow growth as do profits that begin to decrease.

Finally, we find the stage of decline in which we can observe as a more distinctive feature the decrease in sales and the few or no profits, this no longer makes the sector profitable so only a few companies manage to survive; the product has become basic and has been completely standardized.

It is good to mention that the product life cycle and the stages that the industrial sectors go through are interrelated, so it would be important that for more characteristics of the sector in each of the stages, the book by Michael Porter Competitive Strategy be consulted: techniques for the analysis of the industrial and competitive sectors, since much of this work is based on ideas that the author exposes there.

It is also necessary to mention that this qualitative analysis can be reinforced with a more in-depth quantitative study, considering the stage in which it is, taking into account historical sales and profits, and the stage to which it should theoretically go, for this They can use statistical forecasting techniques such as linear or multiple regression analysis, time series, among others. This can give us a scenario of the type of competition that will operate in the industrial sector and the way in which the company must compete.

A study of this nature for the organization is of vital importance since it can be used as a frame of reference to quickly identify which are the crucial structural characteristics that determine the origin of competition in any sector, and from there carry out:

The formulation of a strategy capable of achieving a competitive advantage in an already established organization. The decision in favor of carrying out an investment project that begins.

Bibliography.

Everett, E. Adam Jr & Ebert, J. Ronald (1991). Production and operations management: concepts, models and fundamentals. Prentice Hall, 4th edition Kotler , Philip & Armstrong, (1998). Marketing fundamentals. Prentice Hall. Mexico. Porter , Michael (2001). Competitive strategy: techniques for the analysis of the industrial and competitive sectors. Compañía Editorial Continental SA México DF Stanton , William J. Etzel, Michael J. & Walker, Bruce J. (2001). Fundamentals of Marketing. Mc Graw Hill. Mexico DF