Porter's five forces analysis - Strategic Management

A journey around the outer circle of Figure begins with what I see as the essential first step in competitor analysis: obtaining a detailed understanding of the competitive arena. To do this, we used the principles of Porter.

Porter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business school in. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit.

Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average.

A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.

Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.[1] Porter's five forces is based on the Structure-Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.Figure gives a simplified view of our industry map. The main difference between this map and the real one is that the real map contains more competitor assessments, uses a personal system of abbreviations and includes more analysis of the buying decision. Figures and show our assessment of the evolution of the market for the type of service that we provide.

Industry-map

UK-market for management development and training

The second decision centred on the problem of industry definition. Figure highlights some of the issues. The provision and delivery of management training and development services sounds a neat industry. However, the suppliers to it, of which a few are illustrated in the figure, are frequently engaged in related businesses. This has at least two implications: how statistical information is collated; and the gradual merging of some of the activities outside the circle with those inside it. Government frequently looks at the industry as if it was supplied only by academic institutions, and often speaks of total UK training when it actually means non-managerial training.

How-industries overlap in the management training and development

Stratagic-groupings

The related activities of providers change the dimensions of the circle. Three examples clarify this statement:

  1. As management consultants, we frequently combine consultancy and training
    skills to produce a solution for clients that broadens the traditional use of training and lies both inside and outside the circle. It is indeed one of the areas of differentiation that we seek.
  2. Academic qualifications moved into the industry when business schools began to offer tailored MBA degrees to individual companies and consortia of companies. An additional twist is that we run courses for two clients that are accredited by two different business schools towards their MBA degrees.
  3. Distance learning has been a growth sector of the industry. Not surprisingly, some of the traditional correspondence schools have developed products. that compete in the industry, and organisations such as the Open University offer their products to corporate customers, as well as to private individuals.

From what I have said, it is apparent that the boundary of the industry, even as defined, is constantly changing. It is also apparent that different views could be based quite logically on the actual boundaries of the industry. This suggests a need for careful study of some of the key competitors, including some with whom we do not compete directly, to identify the directions in which they could move and which would change the shape of the market in which we compete.


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