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.