Porter’s 5 Competitive Forces – Applying Principle to Your Firm

Operational strategy is the artful process by which management identifies, evaluates, and shapes the most effective processes, services, resources, and other orchestrated operational activities internally and externally to deliver results to key stakeholders. The delivery of such service, requires careful analysis, planning, implementation, and monitoring to ensure effective and efficient outcomes.

Here, we’re going to look at Harvard Business School Professor and industry rockstar, Michael Porter’s 5 Competitive Forces that Shape Strategy.  In doing so, think about how these five forces apply to your organization. Let’s get started…

1. 1. Supplier Power. Here, one evaluates the power supplier(s) has on your operational strategy. Think of it this way, if your suppliers have more influence on opening and closing the gates of supplies,

      

      costs, and time, you’re heavily dependent on that relationship. Likewise, if one day your supplier decided his or she doesn’t want to do business with you or skyrockets the cost of doing business, your business will be significantly impacted. Putting all of your eggs in one basket is risky business, even with suppliers. So, here one may truly want to evaluate his or her supplier mix – identifying the who, what, where, when, and terms of suppliers. Then identify the risks associated with the current supplier situation, alternatives to overcome or minimize the effect of those risks, shape supplier initiatives within operational strategy planning, implement, and monitor supplier power.

   2. Buyer Power. Here, one evaluates the influence the consumers have on driving down the prices of products and/or services. If your industry is heavily impacted by consumer demand, and consumers have the ability to shift the prices of that demand, one must identify the risks that are associated with such buyer power. Certainly, one wants to provide a product or service as a price that the market responds to and is profitable. However, if there is too much buyer power on prices of the products or services, there is risk that may experience significant peaks and valleys. Likewise, depending on the size of your buyers purchasing power, the buyers may dictate the terms to you and you identify whether or not you can accept those terms. This is often the case with wholesalers and manufacturers that are trying to get their products on the shelves of big-box retailers.
   3. Competitive Rivalry. Here, one evaluates his or her competition. If there is significant direct competition, there are plenty of other opportunities for customers to use your rivals and not you. So, one should become the expert in what products and services are offered within his or her firm, as well as competition. Having a sound understanding of similarities and differences features, prices, warranties, and so on, provides management with the opportunity to identify areas in which his or her firm can capitalize upon to provide greater value to choose their firm over the competition.
   4. Threat of Substitution. Here, one evaluates what customers could switch out your product or service for themselves. For example, if you’re a marketing consulting firm, and your prospective customer doesn’t want to pay for your services, he or she could outsource similar services to a discounted firm, software application, or some other platform in which he or she would receive comparable service or product. This is an opportunity for management to evaluate alternatives, create unique features that aren’t easily replaceable, and build that value for customers to see the “why factor” of purchasing the product or service from your firm.
   5. Threat of New Entry. Here, one evaluates how easy it is to start a business in this industry. If it is relatively easy, then there is higher risk. Management that can create proprietary systems, processes, and management of such, provide a greater barrier to prospective competition. The flipside, an organization that doesn’t, market penetration for the new entry is less of a threat to the prospective new entrant.

In all, Porter hits home the importance to evaluate objectively one’s organizational position. Specifically, looking at the risk associated within suppliers, buyers, current competition, substitution, and the threat of prospective competition. Often times, management can get caught up working within their business that they underestimate these 5 competitive forces that shape organizational strategy and sustainability. So, take some time to visit these competitive forces and identify where you are today, where you would like to be, and what you can do to effectively shape your operational strategy dealing with these areas.

 

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by Katie Doseck, MBA, Ph.D.

Chief Visionary and Strategic Ace Up Your Sleeve | Viral Solutions LLC