A discussion about a 40-year-old business model and two new dimensions that businesses must now consider
Before exploring Michael Porter’s five forces model, allow me to paraphrase a biography of the man himself to qualify his work.
Who is Michael Porter?
Michael E. Porter is a professor, based at Harvard Business School. Professor Porter, the author of 17 books and over 125 articles, is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions. Professor Porter’s ideas on strategy are the foundation for modern strategy courses, and his work is taught at the Harvard Business School and at virtually every business school in the world”.(www.worldcongress.com).
This article describes each element of porters five forces while proposing two potentially new dimensions that leaders need to consider today.
To appreciate the model that Porter proposed back in 1979, let’s consider the following keywords for context.
“A strategy is a set of actions that managers take to increase their company’s performance relative to rivals” (Hill & Jones, 2008).
Put simply a strategy is a plan of action.
In strategy, the environment means everything and everyone outside the organisation: competitors, customers, governments (Lynch, 2006).
The industry environment poses the most immediate threat to all companies, one that needs constant monitoring, a process known as ‘competitor analysis’.
The “technique for analyzing the competitive environment was developed by Michael Porter in his famous book Competitive Strategy: Techniques for analyzing industries and Competitors (1980).” (Tiernan et al, 1996).
An “edge that enables an organization to deal with market environmental forces better than its competitors” (Lysons & Farrington, 2006)
The Five Forces Concept
Porter believed the single most important thing for a company when formulating a strategy is how to deal with competitive rivalry in their respective industry.
As such, a business should explore and identify its competitive advantage. Porter argued that fives forces shape the degree of market competition and he identifies these as follows:
- The degree of rivalry among existing competitors
- The threat of substitute products and services
- The threat of new entrants into the market
- The bargaining power of suppliers
- The bargaining power of buyers
Porter’s Five Forces Model
Understanding the Five Forces
To expand further, allow me to briefly drill down into each force:
№1 — The degree of rivalry among existing competitors: Some industries are more competitive than others. Higher competitive rivalry occurs in the following circumstances:
- When competitors are of equal size
- If a market is growing slowly
- When fixed costs are high
- Difficult to differentiate products or services
- Difficult or expensive to exit the industry
№2 — The threat of substitute products and services:
- The ability of customers to switch to a substitute
- The possible threat of obsolescence
- A reduction in profit margin by dropping prices
№3 — The threat of new entrants into the market: Barriers to entry include: Economies of scale, product differentiation, capital requirements, access to distribution channels, government policy.
№4 — The bargaining power of Suppliers: Porter suggests that suppliers are powerful when the following are true:
- Few suppliers to choose from
- No alternative supplies/services on offer
- A supplier undertakes the value-added process of their proposition
№5 — The bargaining power of Buyers: Buyers and consumers have more bargaining power if:
- Buyers are concentrated and are few
- The product/service offered is of no difference to others available
Favourable and unfavourable
There are also favourable and unfavourable characteristics of both competitive environments, part of the framework to build an analysis.
The idea is to gather as much information on each of the five forces that impact your specific industry. Once the relevant data is gathered, the results can map a visual as to how competitive or uncompetitive an industry is.
This process should feed into the development of the most appropriate strategy to sustain a competitive advantage.
Reconstruction of the Five Forces
Given that Porter’s five forces model is now over four decades old, is it time to look at other market dimensions? Features that were not available or have evolved since Porter developed his model.
Let’s look at two such dimensions:
- A sixth force — Complementors, and
- A seventh force — Owned digital assets
A Sixth Force: Complementors
Former CEO of Intel, Andrew Grove, argued that Porter’s model ignored a sixth force: “the power, vigor, and competence” of complementors.
Complementors are companies that sell products that add value (complement) the products of companies in an industry because when used together, the products better satisfy customer demands. For example, the complementors to personal computer industry are the companies that make software applications to run on personal computers. (Hill & Jones, 2009).
Online “Complimentors” are writers, creators of unique content or influencers in the social media sphere who promote brands or products.
A Seventh Force: Unowned digital assets
Writing this article is an example of an unowned asset, a third-party platform, unlike an owned asset like a website or an email marketing database.
Leveraging third party assets is a powerful way to tap into vast audiences in order to engage with new consumers, in new markets. This approach offers immediate access to a cohort of consumers that were difficult or costly to access in generations past.
Seventh forces sprung during the digital revolution, which was not around when Porter framed his initial proposition.
Given the sheer scale of the web, it is my opinion that this force warrants its own dimension rather than being an extension within the “Power of Buyers” or “Power of Buyers” dimensions.
To conclude, with Porter’s “three types of competitive advantage” in mind, choosing the right strategic approach is also relevant when using the five forces model to analyze a business or market sector.
Porter’s Generic Strategies
Having discussed the forces that shape business strategy, Porter's other proposition refines an appropriate market position. The objective is to capture, sustain and develop market share.
Porter put forth three generic strategies to identify with:
- Cost Leadership — One example is the low-cost retailer, Lidl
- Differentiation — An example is an Innovative company like Dyson.
- Focus — An example would be a niche market, like Airbnb or Uber
Having used Porter’s five force analysis on several occasions during my career, I can validate that it is a very practical and powerful tool. It enables leaders to build a competitive profile of the industry they are competing in.
Porter’s five forces is highly relevant during a global crisis.
The beauty of Porter’s five forces is that it invites people to think strategically, encouraging them to adopt the “Helicopter View” approach. The model is most effective when it is used regularly. Continuous remodelling enhances the ability to react to opportunities or threats that arise in the industry.
To sustain a competitive advantage companies must be well informed as to what’s going on within their industry.
Adopting the five forces model, along with SWOT and PESTLE analysis, leaders can continuously scan their environment with the objective to protect, grow market share or better still, innovate.
Innovation is the central issue in economic prosperity. — Michael Porter