PORTERS DIAMOND MODEL- GERMANY

Porter's diamond model suggests that there are inherent reasons why some nations, and industries within nations, are more competitive than others on a global scale. The argument is that the national home base of an organization provides organizations with specific factors, which will potentially create competitive advantages on a global scale. Porter's model includes 4 determinants of national advantage, which are shortly described below: Factor Conditions Factor conditions include those factors that can be exploited by companies in a given nation. Factor conditions can be seen as advantageous factors found within a country that are subsequently build upon by companies to more advanced factors of competition. Factors not normally seen as advantageous, such as workforce shortage, can also be seen as a factor potentially strengthening competitiveness, because this factor may heighten companies' focus on automation and zero defects. Some examples of factor conditions:

Highly skilled workforce Linguistic abilities of workforce Rich amount of raw materials Workforce shortage

Demand conditions If the local market for a product is larger and more demanding at home than in foreign markets, local firms potentially put more emphasis on improvements than foreign companies. This will potentially increase the global competitiveness of local exporting companies. A more demanding home market can thus be seen as a driver of growth, innovation and quality improvements. For instance, Japanese consumers have historically been more demanding of electrical and electronic equipment than western consumers. This has partly founded the success of Japanese manufacturers within this sector. Related and Supporting Industries When local supporting industries and suppliers are competitive, home country companies will potentially get more cost efficient and receive more innovative parts and products. This will potentially lead to greater competitiveness for national firms. For instance, the Italian shoe industry benefits from a highly competent pool of related businesses and industries, which has strengthened the competitiveness of the Italian shoe industry world-wide. Firm Strategy, Structure, and Rivalry The structure and management systems of firms in different countries can potentially affect

competitiveness. German firms are oftentimes very hierarchical, which has resulted in advantages within industries such as engineering. In comparison, Danish firms are oftentimes more flat and organic, which leads to advantages within industries such as biochemistry and design. Likewise, if rivalry in the domestic market is very fierce, companies may build up capabilities that can act as competitive advantages on a global scale. Home markets with less rivalry may therefore be counterproductive, and act as a barrier in the generating of global competitive advantages such as innovation and development. By using Porter's diamond, business leaders may analyze which competitive factors may reside in their company's home country, and which of these factors may be exploited to gain global competitive advantages. Business leaders can also use the Porter's diamond model during a phase of internationalization, in which leaders may use the model to analyze whether or not the home market factors support the process of internationalization, and whether or not the conditions found in the home country are able to create competitive advantages on a global scale. Finally, business leaders may use this model to asses in which counties to invest, and to assess which countries are most likely to be able to sustain growth and development. The E- Commerce in Germany: The turnover of e-commerce is still growing. German economic analysts expect a growth of another 10 percent for 2010 . Companies need to sell their products online in order to stay competitive. But in todays online environment it is not only enough to offer their products on the internet, but also a well structured online shop which can be found in search engines. To realize this, companies need web designers and online marketers. There is still a lot of money involved but is it really worth going into this market? This piece of work analyses the German web design industry by using the strategic management tool of the five forces from Michael E. Porter. This tool identifies the key factors that could have an impact on industry competition and whether it is worth entering market or not (Porter, 1980, p.33). This work is limited to the German market because there are differences between other national markets dependent on their technological advance, demographical factors and cultural backgrounds. For instance an emerging nation like Argentina had a growth of 32 percent in the last 12 months in the e-commerce sector and the German market, as a high industrial nation had a growth of only 11 percent The model of Porters five, which is almost thirty years old, is chosen in order to prove that it is still working with a modern industry like the web design industry. Many essential factors have changed in the last thirty years and it has to be proved if the principle The state of competition in an industry depends on five basic competitive forces (Porter, 1980, p.3) is still valid. This external analysis tool was created to cover a wide range of influences affecting an industry. It is used to acquire the awareness about the attractiveness for further research. Companies have to have a good knowledge about their environment but it is not the only model to make decisions.

Intensity of rivalry In November 2009 there were more than 13 million .de-domains registered in Germany. In addition to that Germans also use .com- and .net-domains for their web pages. All of these web pages are created by web designers who often have private intentions to put a profile of them in the internet but the majority have commercial intentions. There is an uncountable amount of agencies, self-employed or part-time web designers who all offer the same product for privates, small companies or whole enterprises just in Germany. There is still a growth of about 10 percent each year, so there is a constant entry of new competition into the market to cover the high demand of web pages. Potential customers have a transparent market where they can choose the company they want. They can compare prices and services very easily through the internet. Furthermore customers do not make decisions due to barriers they have in a market outside the internet. There are neither infrastructural obstacles nor problems to get information for them, so web designers work in an almost perfect competition. They have very low entry barriers because the threshold resources are only a computer and informatics knowledge. The exit barriers are low as well, because an agency does not have many employees or expensive goods. So they have neither social responsibility nor materialistic factors to lose. They have no core competences to distinguish them from others in their industry. Web designers do not have the choice to compete on price, each of them possess a very low market share. In an atomic competition a seller would immediately lose all buyers, if he changes the price. They cannot compete on the product, either. Although there are differences in the quality and the way of programming a web page, the result is always the same. Every web page uses the same standard and has almost the same buttons to standardize it for the users. There is no space for experimental programming. Those who try to launch an innovative web page lose users to other pages which maintain the standards. They have to compete in other ways. A principle of the web design industry is that you have to have a well optimized web page for the search engines like Google, Yahoo or MSN. In this environment the most important competence is that people find your business in the search engines and that your own web page presents a good overview of your work. Besides they have to fight for every new customer. A lot of time is not needed to create web pages but is needed to optimize their own one.It often takes half a working day to optimise a web page for the Google results, because of the extremely high competition. More than 80 percent of the web designers do Benchmarking observing key competences like the corporate design, the success or the strategy. An intensive discussion of established operators suggests the possibility of efficient electronic processes to identify as a template for your own e-shop. Although there are many competitors with very few market shares, the intensity of rivalry is a weak force. The market is still growing and the financial risks are low. Bargaining power of buyers

There are three groups of customers. The buyers of a web page could be private or business customers. But within the group of business customers you also have to differentiate between those who only want a company presentation on the internet and those who want a complete online shop with thousands of products. Non-commercial customers who want to use a web page for personal reasons like their own biography or their wedding do not have the power to negotiate with the agencies. Normally they have a lack of the right understanding of important technical aspects of a web page. They often do not compare different market players and their services or prices. Nevertheless agencies cannot charge a high price because in comparison to other online services a private web page is a low involvement product. It is not vital for the buyers to have this product so they can cancel the project easily, if the price rises too high. Most of the agencies say that customers can negotiate the price, but in fact there is only a small range. Instead of a professional wedding page they could create their own page in one of the social media portals like Facebook for uploading their stories and photos. Another solution for them is to use a home page construction set software which often costs less than 40 The second group contains companies which only want a portal for presenting themselves like small factories, retailers, lawyers or associations. The product they want is more complex than the previous. The amount of separate pages is higher, they have higher demands on the design and the textures and their pages need regular updates. These business customers have a greater awareness of what they want, so they compare competitors and their prices. But their bargaining power is limited as well, because one third of the web designers have fixed prices for their services and those who let you negotiate only give only small discounts. Business customers negotiate on service. They ask for different designs or technical support. In the service sector there are slight differences and agencies have more scope than self-employed web designers.

Companies who wish to have an online shop or other complicated internet applications where the user interacts with the system have bargaining power. This is the high price segment and requires a lot of informatics knowledge and experience from the agency. The involvement is high because the customers have to have a good knowledge of what they want and need, as well as the agencys needs to convince the customer with their competences. A failure in this area means a loss of money. Agencies not only need informatics knowledge, but also marketing knowledge to sell the products to their customers online. In general it is said that the more complex the web page is, the more bargaining power the customer has. There is a transparent market without switching costs and brand identity for the customers and furthermore there is a buyer concentration in the same amount like a firm concentration. The higher the price of the web page and the higher the internet knowledge of the customers, the stronger is this force. (Fischer, 2009, p.13 15; Appendix 2)

2.3 Bargaining power of suppliers

Web designers sell virtual products, so the suppliers of them do not play a big role. (Fischer, 2009, p.40-41) In a classical business there are needs of raw materials and supplies, but in an online business you only have costs for office supplies, hard- and software, rent, office furniture, running costs and advertising. None of these costs are directly related to the product, so the production of a web page only has fixed costs (except personal costs). Most of these costs are insignificant in comparison with the benefits of the product. Suppliers do not have any power or influence on these costs because the ordered quantity of furniture, electricity or office supplies is as high as in private households. The rent neither is an important factor. A web design agency is not dependent on a certain location of its office like advertising agencies which need to be centrally located in a city in order to be findable since the acquisition of customers mostly works online. There are two types of important costs: On the one hand hard- and software like computers or new programs. Prices have decreased during the last ten years and there are many different sellers of computers. In addition to that agencies buy these things normally once every few years. The power of suppliers is limited because the different computers are substitutes of their selves and prices are transparent. (see Appendix 1) On the other hand there are advertisement costs. These are the most significant costs in this sector. Web designers have to make a great effort to spend money for advertising in order to sell their products. The most common form of advertising for them is Google Adwords. Google is the most important tool for companies selling online, so they set the price and it has to be accepted. There are other possibilities to place adverts on the internet, but the whole market adopts Googles prices. (Digital Media Trends, 2009) Suppliers are not able to bargain with the web designers, because they do not spend enough money on them and normally it is easy to switch. Only Google advertisements represent a strong force. All the other suppliers are extremely weak.

2.4 Threat of entry A newcomer has the same costs in producing a web site as those who are established in this sector. As you can only decrease costs per piece slightly by using already existing templates, economies of scale do not play a role for a web designer. The cost advantage of experienced market players is only reflected in the existing soft- and hardware they have. The main resources for a web page are time and knowledge and the fix costs are low, therefore the possibility to cut costs is only given on a limited scale. For building up a new web design company there is only little tangible capital required. Most of the required capital is intangible for instance knowledge and experience. The knowledge is easily available in blogs and books, but the experience is needed to put it into practice. (McKay and Marshall, 2004, p.74) Another entry barrier is the brand identity which is an important factor. Customers do not have the same brand awareness like in other businesses, but if in the e-commerce business

there is a need of a good online reputation, so you have to present references as well as evidence that you are able to optimize a customers web site in search engines. It is also a noteworthy obstacle that web designers who stay in the business for years already have good positions in the search engines and new entrants have to make a great effort to drive them out of these positions. The existing companies continue improving their positions as well, so the entrants are obliged to work much harder than the existing competition when they start up. Established firms have an advantage in the experience they gained. They already made the mistakes which new entrants still have to make. They have to contemplate a lot of small matters which can improve a customers web page. (Chaffey et al., 2009, p.506-510) An advantage for new market player is that they do not have to expect retaliations from existing agencies. In a perfect competition the market share of each participant is so small that it is not worth fighting for. (Lipsay and Christal, 2007, p.153) On the contrary. In the ecommerce you can only survive if everyone creates links to each other, thus a community was created on the internet where web designers help each other and give hints to new ones. The more you help for free, the more clients you can acquire, because you are demonstrating competence and trust. (Fischer, 2009, p.333) It has become more difficult in the last five years to enter the web design industry, but nowadays it is still possible building up your own business without great capital efforts but with a great time and knowledge investment. (see Appendix 1)

2.5 Threat of substitutes A substitute is a product with similar features to the initial product. In this context replacements for commercial web sites are other shops where you could buy the same product, books and magazines as well as institutions where you can spend leisure time. (McKay and Marshall, 2004, p.75) In figure 2 you see an outline about the other possible substitutes. Actually, the model of the diversification steps is to amplify own product portfolio, but it is also useful to identify substitutes. Figure 2: Substitutes of a web site But a web site is a relatively young product which lately has started to be a substitute for those products. The buyer propensity of the classical shops is decreasing and even inexperienced people have started to buy online. The turnover of e-commerce is not only increasing, but also the possibilities of online leisure time activities. Mostly everything from everyday life can be done online, and as a result a countermovement is emerging where people wish to have again a haptic experience. But this is just a niche movement which really cannot compete with a modern online shop. (Schfer-Mehdi, 2006, p.47) Another substitute of a web page is the mobile internet. Technology goes on and web designers have to keep their informatics knowledge up to date, because customers start demanding that a web page has to be accessible with their mobile or blackberry. In

November 2009 the mobile internet already had a market share of 1.7% with a rising tendency, so future online shopping will take place on the way. At the moment is not a real danger given that the mobile net drives the internet out of business. It has to be seen as a complement. (Team23 GbR, 2009) The last substitute worth mentioning is the social platforms where companies and privates can present themselves without having their own web page. In the huge portals like Facebook or Twitter they can install an interactive page with communication features. Web designers have to convince their potential clients purchasing their own web page to meet their marketing objectives. The social platforms are only interesting for those who go without an online shop, hence for those who do not want to spend much money anyway. The switching costs are enormously high because they have to change from a free product to a paid product and the advantages are not apparent right now. Before entrepreneurs think about contracting an agency they also have the choice to buy home page software where they can build up their own web site according to the modularity. Fashion Industry An industry is a group of firms that offer a product or class of products that are similar and are close substitutes for one another According to Porter, the five forces are essential to be aware of, when creating a strategy to gain competitive advantages in an industry . When analysing an industry it is hard, if not impossible, not to mention and in some way make use of Porters five forces. Porter has created a highly useful concept for examining industries, and he was the first to categorize industries and the first researcher to deal with the concept industry. Many have commented on his model, and it has been the object of debate since its release in 1979. The outcome of his analysis framework is a structured industry view that provides the required knowledge to make a positioning strategy. Porters five forces examines the level of competition in an industry, influenced by the threat of new entrants, the bargaining power of customers or suppliers and the threat of substitute products or services According to Porter, market shares are gained when the forces are taken into account in strategic planning. Competition in an industry is not manifested only in competitors, but in all the five forces that shape the industry He emphasizes that the awareness of these forces can help a company stake out a position in its industry that is less vulnerable to be attacked, hence creating competitive advantages . To establish a good and competitive strategy for dealing with the five forces, a company needs to understand how the forces work in the industry, and how they affect the industry, because it is the industry structures that drive the competition in the long run. Lastly, every industry has a set of fundamental economic and technical characteristics, which give rise to the competitive forces The bargaining power of buyers has great effect on the attractive value of a market. Powerful buyers, retailers or endconsumers can gain more value by forcing down prices, demanding better quality or better service, all at the expense of industry profitability. Penetration of the North-German market is only possible if the Germans want to buy. There are two kinds of buyers; the retailers and the end-consumers, and each fashion company needs to convince both groups of the

uniqueness of its products. The buyers can play the companies in the industry of against each other, demanding lower prices and better service. The buyers size and the possibility of substituting products are factors that enhance the buyers negotiation power and small companies in a fragile financial state may have trouble refusing any kind of order. The threat of substitute products is alternative products that perform the same or a similar function. E.g. a dress from a Danish fashion brand versus a dress from a German or French brand Substitute products reduce the profitability of an industry by limiting the price that can be charged, especially when supply exceeds demand. But substituting products can be of a more broad kind, such as electronics, travels etc.. It is important to take the relative price of these substituting products into consideration, because the threat of substituting products can be very strong and more crucial than the competing companies in the industry. Substituting products affect prices and profit, which consumers benefit from, as seen during the financial crisis, where the prices on fashion items have been reduced heavily and sales periods are extended to make sure everything is sold . The threat of 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 In this case, new entrants could be another fashion industrys entrance such as the Spanish or English fashion industry. New entrants will try to penetrate the market if the industry is considered attractive and has high profits or growth. But penetration also depends on the accessibility of the market. It can be hard to obtain market shares, if new entrants have difficulties finding distribution channels or communicating their image out to consumers. For instance, the individual Danish fashion brands need the right agents to create the right contacts to the right people, to get their clothes on the market. An assessment of the competitive form of the industry can give a good impression of the accessibility of the market. If there are many suppliers, as in the fashion industry, the entrance barriers are generally considered as low The bargaining power of suppliers concerns the manufacturers of the fashion clothing. Fashion manufacturers are often situated in Eastern or Southern Europe or in Asian countries such as China, India and Bangladesh where labour is inexpensive (Company A; Rye, 2009). Powerful suppliers can capture higher revenues by charging higher prices, changing delivery times or limiting quality or services (Porter, 2008). The Danish fashion companies are often not in a position to bargain about prices and delivery time, because the companies are small and independent, and the suppliers do not depend on them for their revenues. Large companies like H&M, on the other hand, are in in a much stronger position to bargain and require special services: