Tuesday, December 31, 2013

Porter's Five Forces

Prof. Michael Porter’s created his Five Forces analysis as a framework for industry analysis and business strategy development, in 1979. He developed it in response to the more popular and commonly used (at the time, and still today) SWOT analysis, which he considered as unrigorous and/or too ad-hoc.

Porter is a Professor at Harvard Business School.  He is regarded as a leading authority on company strategy and the competitiveness of nations and regions. His work is recognized by global governments, corporations and within academic circles. He also chairs Harvard Business School's program dedicated for newly appointed CEOs of very large corporations.

Porter has penned about 18 books. He is also a lifelong academic. His attempt at a for-profit venture - or foray into real business if you’d prefer - was his co-founding of The Monitor Group. However, it was sold to Deloitte Consulting in 2013 through a structured bankruptcy proceeding.

I explored Porter’s work 3 decades ago while completing undergraduate study, and again more recently during a stint at grad school, as part of an MBA Strategic Management curriculum.

This blog posting may appear a little academic, but I thought to use everyday examples to allow for a little fun and familiarity, in order to illustrate the Five Forces Analysis concept. Let’s explore a short summary of the Five Forces, as shown in the illustration above (image: Wikipedia).

Threat of new entrants
Example:  Apple displaced Blackberry as the smartphone or mobile device, of choice

Threat of substitute products or services
Example:  Apple’s market share - taken from Blackberry - was itself eroded by Android devices, led by Samsung. Furthermore, an iPhone 5 replaced an iPhone 4, leading to better Apple client retention and some new clients/users, via the launch of a substitute device.

Bargaining power of customers (buyers)
Example: Resellers like Best Buy, Verizon, etc. often wield great power in determining the ultimate sales success (and/or failure) of new products. This often results in product companies (e.g. Apple and others) to consider opening their own, dedicated product retail stores. Today, aggressive marketing and readily available product information allow retail customers to make informed shopping decisions based on features, price, etc. by themselves, in advance of possible purchase.

Bargaining power of suppliers
Example: The more a corporation buys from one single supplier, the more beholden the corporation may become to the bargaining power of the supplier. This may impact quality control, manufacturing lead times, etc. Vertical integration strategies become more desirable (where a corporation starts to ‘own’ the entire supply chain), i.e. from manufacturing all the way through to retail in these examples.

Intensity of competitive rivalry
Example: We - as potential consumers - are able to witness (and benefit from) vendors’ competitive rivalry, daily. The intensity of their competitive offerings allows us to be able to consider ever better products, featuring enhanced user features and/or usability, often at continuously lower (real) retail prices. As in, the devices get ‘better’, but prices keep declining!

Back to Prof. Porter:  Upon review, would one consider the Five Forces to be groundbreaking academic discovery and/or innovation? 

I report, you decide.

One of the benefits of a Harvard pulpit, complemented by a captive audience (students) as consumers of one’s work, allows for the privilege of publishing thought-leadership of this nature. Concepts like Five Forces are then regurgitated without much further thought, to business leaders and graduate school students all over the world. Consumers who lap up the academic knowledge shared with insatiable appetites, while trying to outsmart the next guy in business.

As for me, I thrive on counter-opinion. For this reason only, I automatically default to questioning everything that may be presented as The Five Forces, The Ten Commandments, The Ten Best Movies, Ten Worst Dressed People, etc.  Questioning, usually in this order: (1) according to whom? (2) really? and (3) maybe there's more to it than just this?!  Meaning... these are BesterInvestor's Three Steps To Questioning Anything!

In my personal business experience (including an occasional taste of success), somebody’s Ten Steps To Achieving Success may often have seen me starting somewhere in the middle, or at number 10 and working my way back to begin... or enjoying success achieved while being completely oblivious to the existence of ten steps that should have been followed! This may also be the reason why there are so many self-help books at the bookstore?

In business, as within life in general... it remains far better to question... than to simply believe!