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5.3.1.1. Phase 1 Tools: Context

Porter’s Diamond of National Advantage

Michael Porter’s Diamond of Competitive Advantage is an excellent way to gain a quick strategic view on the status of an industry. The four components of the diamond can be used to analyze the current domestic industry and identify areas of relative strength and weakness relative to similar industries in other countries. Each section of the diamond works as a system and reinforces the inputs from the other attributes. When researching each topic, both positive and negative interactions between the different components should be noted. These may serve as the foundation from which to begin building up a competitive industry. This type of analysis can be done in a few days, but provides excellent insight and a comprehensive view of the strengths and weaknesses of any value chain.[1]

Porter’s 5 Forces Analysis

Porter’s 5 Forces framework is a useful framework for assessing the structural attractiveness and therefore profitability of a value chain. Every industry is different and each force plays a unique, varying role in determining the overall profitability of the industry and the firm. The major criteria are broken down and accompanied by sources where to locate this information. [2]

This chart identifies Porter's 5 Forces for assessing the profitability of a value chain: threat of substitutes, threat of new entrants, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors.

Value Chain Waterfall Chart

An excellent tool for taking a snapshot of how value is shared and distributed among value chain actors is with a value chain waterfall chart. The basis of this analysis can be either retained revenue, net profit or both at each stage of the value chain. The prices at each level are recorded and then graphed to gain a visual representation of the cost mark-ups. The analysis should be careful to account for the impact of tariffs on the cost bars.

This waterfall chart describes how value is shared and distributed among actors in a value chain. The x-axis of the graph represents dollar values. The y-axis represents value chain actors. The graph displays the dollar value of each actor as a share of the total value of the value chain.

Once completed, the value chain should be analyzed for discrepancies. Remember that each process should add value and in turn should earn a “fair” rate for their work. Two areas to examine are steps that earn significantly more than the work they do or steps that might be able to be skipped over to lower the final price to the consumer. Ways to efficiently gather this information are:

  • Supplier/Grower: This is one of the more difficult areas to gather information through secondary research methods. Often, primary research such as informal interviews or product requests is required to gather the most accurate information from the average supplier.
  • Middlemen/Exporter (often broken up into 2-3 different steps/companies): This segment usually works on a cost plus or percentage basis. The purchase price is known from the selling price of the supplier and the average export price can be determined using trade statistics. These are often found on Trademap or EuroStat.
  • Tariffs: Tariffs are often placed on goods, particularly agriculture products, and need to be calculated within the value-chain step chart to better understand the pricing in the market. Most tariff rates can be found online at the USITC website or export.gov.
  • Wholesaler/Importer: The average purchase price can be found using Trademap or other industry specific databases. To find the selling price to the retailer and the segments’ margin, a more detailed analysis that looks at specific wholesaler prices is needed. These can often be found by requesting a wholesale price sheet, making simple phone calls to the wholesaler, or surveying local wholesale prices in the market.
  • Retailer: A survey of local prices is the best way to discover the average retail price in each market. Depending on the sophistication of the product and market, this might include a quick internet search or a trip to several retail outlets that carry the product.

Footnotes

  1. http://www.quickmba.com/strategy/global/diamond/
  2. http://www.quickmba.com/strategy/porter.shtml