Don’t Call It A Comeback: Porter’s Five Forces Model

In part one of this series, which can be found here, we started to take a look at strate­gic analy­sis method­olo­gies. The first up was the Flag­ship Model devel­oped by Alan Rug­man and Joseph D’Cruz. It is pre­sented as an alter­na­tive to the bet­ter known and used Five Forces Model which was devel­oped by Michael Porter. In this slice of the series I’m going to jump back and take a look at the Five Forces Model. But more impor­tantly for this con­ver­sa­tion, pro­vide much needed con­text. The essence of any strate­gic analy­sis is to relate the strengths of the orga­ni­za­tion to it envi­ron­ment. The Five Forces Model was specif­i­cally devel­oped in to help mold one’s com­pet­i­tive strat­egy by under­tak­ing a crit­i­cal eval­u­a­tion of a set of five major con­cerns. Three of the forces refer to com­pe­ti­tion from exter­nal sources while the remain­der focus on inter­nal threats. The model was orig­i­nally pre­sented in 1979 as just one ele­ment of the com­plete Porter strate­gic mod­els. The busi­ness model vul­ner­a­bil­ity points that Michel Porter iden­ti­fied con­sisted of those ele­ments close to a com­pany that affect its abil­ity to serve its cus­tomers and make a profit. More specif­i­cally: I.   Threat of New Entrants: Porter has laid out eight bar­ri­ers to mar­ket entry. The level of exist­ing of which dic­tates the ease of which an out­side force can move into a niche. 1.    economies of scale — cost per unit of deliv­ered product/service 2.    prod­uct dif­fer­en­ti­a­tion — per­ceived unique­ness (think value) 3.    cap­i­tal require­ments — invest­ment of time and money 4.    switch­ing costs — cost to con­sumer to switch mea­sured in money and tem­po­rary lost pro­duc­tiv­ity 5.    dis­tri­b­u­tion chan­nels — abil­ity and/or cost to deliver prod­uct 6.    gov­ern­ment pol­icy — rules, reg­u­la­tions, and tar­iffs 7.    cost advan­tages inde­pen­dent of scale economies — access to favor­able inputs; labor, mate­r­ial… 8.    com­peti­tor response II.  Threat of Sub­sti­tute Prod­ucts: How easy is it to sub­sti­tute a prod­uct or ser­vice? The ability/desire to sub­sti­tute is often enhanced by the cur­rent level of ser­vice or prod­uct com­modi­ti­za­tion. III.  Rivalry Among Com­peti­tors: This is the best under­stood and vis­i­ble forces. It man­i­fests itself in the form of adver­tis­ing bat­tles, price com­pe­ti­tion, and attempts to dif­fer­en­ti­ate. A clas­sic bat­tle that has been rag­ing for decade is Coke ver­sus Pepsi (dif­fer­en­ti­a­tion). a more con­tem­po­rary bat­tle is the US cell phone pro­vides Ver­i­zon ver­sus AT&T (adver­tis­ing, dif­fer­en­ti­a­tion, and price). IV.  Bar­gain­ing Power of Buy­ers: Can the buyer dic­tate win­ners and also rans (think Wal-mart’s influ­ence) V.  Bar­gain­ing Power of Sup­pli­ers: How much power the sup­pli­ers have over other indus­try firms. As noted ear­lier, the essence of any strate­gic analy­sis is to relate the strengths of the orga­ni­za­tion to it envi­ron­ment. An envi­ron­ment that includes com­peti­tors, cham­pi­ons, and alter­na­tives. Over the 30 year period since the Five Forces Model was develop tech­nol­ogy lower the cost of entry and in cer­tain niches allowed the con­ver­sion of prod­ucts into bits. Addi­tion­ally, the improve­ment in the speed and access of global com­mu­ni­ca­tions has expanded mar­kets from domes­tic to regional to inter­na­tional allow­ing a host of new com­pet­i­tive issues to jump into the pool. I can hear you say­ing, wait a minute I run a small­ish shop that is exclu­sively focused on ser­vic­ing a local clien­tele. Well let me put this ques­tion to you. Do you have a web-site, Face­book Fan Page, Twit­ter account… well you get what I’m dri­ving at. Essen­tially every busi­ness today has a global fin­ger­print. What con­cerns me the most is the poten­tial for clients to reach out to a com­peti­tor and pulling them into your mar­ket. They will and have doe this. In the video con­tent niche there are ser­vices and mod­els spring­ing to life that look to deliver con­tent directly between the creator(s) and con­sumer. They view them­selves as infra­struc­ture ver­sus the incumbent’s cura­tor mind­set. Busi­ness model reeval­u­a­tions of this sort are a fact of life. This is why we must mas­ter tech­niques that keep our fin­gers on the pulse of the mar­ket­place and frame our under­stand­ing of com­pet­i­tive advan­tages at both the local and national lev­els. I don’t want any­one to be con­fused about my think­ing. I def­i­nitely believe that the Five Forces Model has its own place in any type of cor­po­rate or strate­gic analy­sis. Oth­er­wise why would I be wast­ing your time dis­cussing the sub­ject. Its just that the Five Forces Model is hard pressed in the cur­rent envi­ron­ment. That is why I advo­cate con­tin­u­ously eval­u­ate and upgrad­ing our tool chest such that we can develop busi­ness mod­els that exploit strate­gic opportunities.