Senior IT Business Leader & Global Trade Expert having successfully led multi-million dollar projects.
Siddique Mohammed, is a Product Leader and an Alumnus of Exec. MBA in Product Leadership at the Institute of Product Leadership & CMR University. This article is published with the author’s permission and was first published on LinkedIn
After my last article “Demystifying Strategy for Product Leaders” on competitive advantage, I’d want to make a humble attempt on how we, as product leaders, can be Samurais of our industry. A samurai needs to undefeated in duels, Porter’s five forces teaches us how industries are able to sustain different levels of profitability. Porter’s competitive analysis technique has been practiced since the publication of his book “Techniques for analyzing industries and competitors” in 1980.
Let me tell you about Professor Michael E. Porter before I explain his framework: “Professor Porter has been, and still is, the most influential global thinker on strategy. His contributions are numerous and as relevant today as when he first developed them.” —Costas Markides, Robert P. Bauman Professor of Strategic Leadership, London Business School. Source : Harvard Business School
Five Forces Framework
Porter’s Five Forces framework helps us analyze the level of competition within a certain industry. It is useful to understand the root cause of profitability in an industry before we
Launch a new product
Enter a new industry sector
Need to refine/reconfigure the existing strategy
The combined strength of these forces aids us in gaining a strategic competitive edge and therefore determine the industry’s desirability.
Force 1 – The threat of substitutes
Companies in one industry are forced to compete with alternatives from other industries. Myself being a carbon footprint conscious citizen ,would say an electric car is a substitute for using oil in the dimension of energy. Before pre-pandemic times, using shared pool transit options such as Uber/Ola for work commute was a substitute for using a car. As substitutes’ price-performance alternative grows more appealing, it becomes increasingly difficult for these businesses to earn a profit.
Another example is the Game Zone in Indian shopping malls, which serve as a substitute for going to a multiplex theatre in the same mall to watch a movie. Our kid’s Influence the decision maker to the game zone; as job to be done(JTBD) in this case is spending quality time with family. Also an alternative of watching Netflix at home comes at a lower price.
The reasoning for substitute threats are
Force 2 – The threat of new entrants
If a firm is profitable, it may be vulnerable to new entrants who will either imitate or develop a similar/better version of the product. This threat could curb the achievable profits.
The reasoning for new entrant threats are
Force 3 – Bargaining power of suppliers
Suppliers can impose bargaining power on industry players by raising prices or reducing the quality of purchased goods and services. As a result, suppliers can squeeze profit out of a sector that is unable to recover costs. Two notable examples are the semiconductor and aviation industries.
Suppliers are powerful when
Force 4 – Bargaining power of Buyers
Negotiations for a major multi-year supply contract of components by the large-size electronic behemoth could be a good example of bargaining power. We can use our bargaining power as customers by postponing the purchase for a long time or purchasing a used car.
Buyers and consumers bargaining power threats are:
Force 5 – Rivalry among existing competitors
Few industries are far more competitive than others, do we know why?
A good indicator of competitive rivalry is the concentration ratio of an industry. The lower this ratio is, the more intense its rivalry will be.
The reasoning for such a higher competitive rivalry is attributed to,
Strategy leaders have made few more additions to Porter’s five forces : “Complementors” and “Other Factors”. I’m referring to “Other Factors” as they have an impact on the five forces.
Force 6 – Complementors
Companies that sell complementary products or services sell items or provide services that are compatible with those in a certain industry. When a leisure customer travels by plane (airline industry), he or she is most likely going to a tourism-related destination and will use services like hotels and vehicle rental agencies. Another example is social media influencers to promote a brand or product. If complementors should be a separate force or a factor that influences these five forces is an expert discussion. To summarize, a customer would benefit from a combo product, such as a frankfurter and a bun.
Force 7 – Other Factors
Other factors not Forces to consider are
Technology and Innovation : Technology is rapidly growing , as example Shipper’s freight visibility offering provides up-to-the-minute information which improves coordination. Latest technologies are enhancing product performance and it is easier to boost a product’s information content.
Government : Government is a factor that can influence Porter’s five forces. Government policy can favor unions to raise Supplier force . Decision for increase in tariffs on raw material could dent the profit margins .
Industry growth rate : Biggest call-out is not to make a decision just based on the industry growth story . The presence of rapid growth may make it attractive to enter into the industry but it also means forces such as new entrants are high due to a low barrier , suppliers could be powerful etc.
If you want to start a new business or you have an established business with a new line of products; five forces framework will show the opportunities and threats associated with the choices you made.
Competition is not about beating rivals, it is about competing for wallet and/or mind share.
Want to know more about Michael Porter? Here is the link to his biography.
Harvard Business Review – How Competitive Forces Shape Strategy published by Michael E. Porter.
Inspired by the articles of The Strategic CFO.