The Five Competitive Forces That Shape Strategy - Michael E. Porter

                           It was once unanimously believed that the only force influencing any business was direct competition. Porter’s post-1979 seminal essays point out 5 forces – viz., competition from one’s rivals, the bargaining power of suppliers and buyers, and the threats of new entrants in the industry and of substitutes (products/services).

                          These forces have the power to determine ROI, as seen in – the airline industry where the forces are strong (and that is least profitable with 6% ROI), and the beverages industry where the forces are benign (and that is more profitable with 38% ROI).

                          The 5 forces are not deterministic or inescapable. Businesses can increase profitability/efficiency by repositioning themselves at the point where the forces are at their weakest (as per Paccar in the heavy-truck industry that has sustained its business by targeting individual truckers). The brilliance of Porter’s tool lies in its recognition that businesses constantly evolve and restructure themselves (as per Apple’s success as the major music download platform in the music industry).

                           Strategic repositioning demands our comprehension of the “factors” that influence the forces. The threat of new entrants is determined by the barriers that deter entry (price wars/economies of scale, government regulations, capital investment/sophistication of technology required). The power of buyers depends upon their concentration in the market, their switching costs, their capacity for forward/backward integration, and the significance of their need (indispensable/easily substituted). The power of suppliers depends on their/their buyers’ industry concentration, their capacity for forward/backward integration, their buyers’ switching costs, and the extent of product standardization. The threat of substitutes is influenced by the number of substitutes available within/outside the industry. If available within, then it is innovation that will determine the supply chain for that product/service. Lastly, direct competition from rivals increases with the existence of numerous equal players in an industry with low switching costs, high capital investment and storage costs, slow growth rate, greater product standardization, and high exit barriers.

                           In the mid-1990’s, Bradenburg and Nalebuff identified a 6^th force – the role of complementors (the government/ the archetypal Intel-Microsoft pair that offer complementary products). This was rejected by Porter as both complementors had already been accounted for in his theory (in the threats of new entrants/substitutes).

                            Porter’s theory situates strategic analysis within the world of market forces. An amateur strategist/economist might ask – what of non-governable non-market forces (political/economic/social/cultural) and the x-factor that can be speculated by using logic? The former could be controlled by conglomerates (as history has proven) yet the sum of this control would eventually be cancelled by the latter’s principle that every action has an equal and opposite reaction.

                           How a business could benefit by using these additional tools to speculate while repositioning would be by considering time frames and business cycles, both advised by Porter. The advantage gained by repositioning could be protected for as long as possible till the business is willing to trade from its bank of advantages for a ‘disadvantage/growth freeze’ as per its need at that future point in time, thus providing it enough time to reassess itself, regain efficiency, and achieve a successful 'metamorphosis'. 

© The Sacred Dome (Jan 2013 – current).