A brief assignment on micro and macro economic drivers. Globalization and Technology.

POSTED BY LOGANJEHALL MAY 6, 2012 LEAVE A COMMENT FILED UNDER ECONOMICS, ESSAY, GLOBALIZATION, MBA, TECHNOLOGY

What do you consider to be the principal micro- and macro-economic forces driving change in the global economy in recent years and, using specific examples, explain why and how these forces have made global corporate management more complex? This essay will isolate two key factors that influence micro and macro economic policies and how they make corporate management more complex. Technology is a micro-driver and I will illustrate how this affects the competitiveness of a firm. Globalisation is a macro-driver and I will highlight how this makes global management more complex as it has both expansionary and diminutive affects on trade and economic growth.

Writing, printing, and electricity are historical examples of technological development, and recent additions include the internet, lasers, mass production and flexible manufacturing (Malecki, 2002). Labour and capital have been the conventional inputs behind output expansion, but recent theoretical developments place innovation at the heart of microeconomic development (Helpman, 1998 & Grossman and Helpman, 1990). Porter goes on to argue that the competitive advantage of a firm arises from technology and the efficiency with which conventional inputs are utilised (Snowdon & Stonehouse, 2006). Porter explains that competitive advantage developed within the framework of Porters Five Forces model (Porter, 2008) is the fundamental factor attributing to microeconomic development, arising from strategies of innovation and development. For an overview see Appendix 1. Business strategy should focus on technological advances, and how this can further business efficiencies. Kodak was a victim of technological substitution, with the advent of digital technology and the rise of its competitor, Fujifilm (The Economist, 2012). Constant, exponential increases in technology require constant investment and management to maintain competitive advantage, thus making management more complex.

The Internet is arguably the most significant leading technology of recent era (Malecki, 2002), and creates complementary products that increase productivity (Helpman, 1998) but also competition by drastically reducing the marginal costs for production (Bakos & Brynjolfsson, 2000), thus market entry. The increase in e-commerce firms is an example, where barriers to entry are virtually zero. Managers must be sure to identify potential entrants and substitutive products early so as to plan effectively.

The need to use technology and innovate quickly is required to deal with the shifting paradigm of global competitiveness. Firms should gauge the affects technology has on the boundaries of both vertical and horizontal integration perhaps necessitating boundary redefinition to establish efficiency (Afuah, 2003). Understanding performance related affects of technology and in

particular the Internet within organisations (Conner & Prahalad, 1996) is necessary. To assess the affect that technology has on the whole innovation chain, firms must note the effect technological change has on its suppliers (Brandenburger & Stuart, 1996). Firms should communicate with suppliers as businesses have become more inter-dependant, and collaboration via the value-chain should be considered. A strategist can gain a competitive edge for profits through the industry structure manifested through the elements of Porters Five Forces model (Porter, 2008), and utilise technology to achi eve this.

Globalization enabling technologies include the Railroad, Steamship and the Telegraph. Open, free trade was characterised by Dennis Robertson (1940) as an engine of growth and globalizers have demonstrated higher growth rates (Bhagwati & Srinivasan, 2002). Since countries have shifted from inward to outward looking policies, we have seen an explosion in world trade. Bhagwati & Srinivasan (2002), argue that comparative advantage is key in explaining trade patterns and that freer trade should help in the reduction of poverty. Porter counters this argument suggesting the traditional trade theory based around land, labour and capital has limitations, because of the liquid capital market (Snowdon & Stonehouse, 2006). The international movement of large sums of money at the click of a mouse has obvious implications for multi -nationals, as currency speculation can quickly alter trading environments and currency values, thus quickly changing costs of production and sale. Keniche Ohmae further alludes to the Invisible Continent with visible, borderless and invisible worlds in our new economy, and that these new online businesses can acquire others to perpetuate growth without regulation by nation states. (Ohmae, 2000).

Porter stipulates that no longer the quantity of labour affects your competitiveness but rather the specialisation and quality of labour. Porter argues for the competitive advantage of nations by saying National prosperity is strongly affected by competitiveness, which is the productivity with which a nation uses its human, capital, and natural resources (Snowdon & Stonehouse, 2006). Krugman talks of a new economic geography, in which specialised clusters emerge within nation states (Krugman, 1994). Examples include financial sectors in London, technology clusters in Silicon Valley, and low-end apparel manufacture in China. Firms must understand location is a key component to their operations, and that varying the location of parts of the value chain may be more profitable. The iPod is assembled in many countries, before eventually being made in china. To ensure continual price competitiveness this complexity must be understood. Globalization has dramatically altered the volume of goods traded, due to such innovations as the cargo container, which has in turn led to vastly complex value chains.

There has been a tendency toward decentralisation around the world, and increased heterogeneity of preferences (Alesina, 2003). He implies that ethnic heterogeneity and even racial prejudice can interfere with the implementation of good growth enhancing policies. Therefore businesses must empathise with cultural norms in all countries in which the firm is to operate. Alesina goes onto articulate that bigger is not always better, and insinuates economic integration results in political disintegration. It is interesting to note current political debates in the Eurozone, aimed at increasing fiscal cohesion. Furthermore, Grossman & Helpman (1991) argue a link between trade intervention and long-run growth, thus suggesting globalization does not present the optimum. Krugman suggests that we require more global policy coordination to ensure long-term growth, such as with the

Financial Transaction Tax (FTT). Firms must understand individual national policies and how these will affect trade and operations. If a firms objective is to maximize profit, then being ready to move operations based on national policies is vi tal. It has been argued that globalisation has increased negative externalities, in particula r environmental issues. However Porters competitive advantage model suggests that better resource productivity would offer an advantage of efficiency over competing firms, and that therefore increased globalisation might decrease pollution (Porter & Van der Linde, 1995). Companies should look at increased resource productivity as a method to make itself more competitive in the global market and thus decrease pollution, which adds complexity of externality management. Firms can measure their environmental impact, and use this as a litmus test for production efficiency. Managers should promote an innovative working environment to further production efficiency. Utilising technological developments is one method of micro-economic change that affects macro-economies.

In conclusion, it can be seen that technology and globalization affect micro and macro-economies, and that both add to the complexity of corporate business management in a global world.

APPENDIX 1

Porters Five Forces Model

Diagram 1: This diagram illustrates the key components of Porters Five Forces Model (Maxi -Pedia, 2012). Porters Five Forces Model is a framework for industry analysis and the development of competitive strategy created by Michae l Porter in 1979. It is used to assess the potential profitability of a market, and thus the attractiveness for investment. The process is used by business strategists when looking at new potential markets and businesses and is used to gauge the expected returns on investment. It should be used to shape strategy to increase company competiveness.

An unattractive market place is one where these factors combine to decrease potential profitability, where it approaches pure competition. In these instances one can only expect normal profits.

This model is more concerned with microeconomic

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Porters five forces model Automobile Industry & analyse investment

Topic:

Apply The Porter's Five Forces Model On Automobile Industry And Analyse The Attractiveness Of The Industry For Investment Purpose

Evolution Of Porter's Five Forces Model

Five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. Michael Porter is a professor at Harvard Business School andis a leading authority on competitive strategy and international competitiveness.Michael Porter was born in Ann Arbor, Michigan. Five forces uses concepts developing, 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 industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".

Introduction

Five Forces Model By Michael Porter

Five Forces model of Michael Porter is a very elaborate concept for evaluating company's competitive position. Michael Porter provided a framework that models an industry and therefore implicitly

alsobusinesses asbeing influenced by five forces.Michael Porter's Five Forces model is often used in strategic planning. Porter's competitive fiveforces model is probably one of the mostcommonly used business strategy tools and has proven its usefulness in numerous situations when exploring strategic management models . Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. It is useful to use Porter's five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). 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. Porter's five forces include : Three forces from 'horizontal' competition * Threat of new entrants or barriers to entry * Threat of substitute products or substitutes * Threat of established rivals or competitive rivalry Two forces from 'vertical' competition * The bargaining power of buyers or buyers * The bargaining power of suppliers or suppliers

Force 1: Barriers To Entry

Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example: Cost advantages (economies of scale, economies of scope)

Access to production inputs and financing,

Government policies and taxation

Production cycle and learning curve

Capital requirements

Access to distribution channels Patents, branding, and image also fall into this category.

Force 2: Threat Of Substitutes

Every top decision maker has to ask: How easy can our product or service be substituted? The following needs to be analyzed: How much does it cost the customer to switch to competing products or services?

How likely are customers to switch?

What is the price-performance trade-off of substitutes? If a product can be easily substituted, then it is a threat to the company because it can compete with price only.

Force 3: Competitive Rivalry

In this,we have to analyze the level of competition between existing players in the industry. Is one player very dominant or all equal in strength/size?

Are there exit barriers?

How fast does the industry grow?

Does the industry operate at surplus or shortage?

How is the industry concentrated?

How do customers identify themselves with your brand?

Is the product differentiated?

How well are rivals diversified?

Force 4: Bargaining Power Of Buyers

Now the question is how strong the position of buyers is. For example,cancustomerswork together to order large volumes to squeeze your profit margins? The following is a list of other examples: Buyer volume and concentration

What information buyershave

Competitive price

How loyal are customers to your brand

Price sensitivity

Threat of backward integration

How well differentiated your product is

Availability ofsubstitutes Having a customer that has the leverage to dictate your prices is not a good position.

Force 5: Bargaining Power Of Suppliers

This relates to what your suppliers can do in relationship with you. How strong is the position of sellers?

Are there many or only few potential suppliers?

Is there a monopoly?

Do you take inputs from a single supplier or from a group? (concentration)

How much do you take from each of your suppliers?

Can you easily switch from one supplier to another one? (switching costs)

If you switch to another supplier, will it affect the cost and differentiation of your product?

Are there other suppliers with the same inputs available? (substitute inputs)

Need For Porter's Five Forces Model

In general, any CEO or a strategic business manager is trying to steer his or her business in a direction where the businesswill develop an edge over rival firms. Michael Porter's model of Five Forcescan be used to better understand the industry context in which the firm operates. Porter's Five Forces model is a strategy tool that is used to analyze attractiveness of an industry structure. Porter's Five Forces modelviews thebusiness fromoutside. It focuses on assessing competitive position within industry .Porter's Five Forces model in the internal view.

Automobile Industry
The auto manufacturing industry is considered to be highlycapital and labor intensive. The major costs for producing and selling automobiles include: Labor - While machines and robots are playing a greater role in manufacturing vehicles, there are still substantial labor costs in designing and engineering automobiles. Advertising Each year automakers spend billions on print and broadcast advertising, furthermore, they spent large amounts of money on market research to anticipate consumer trends and preferences. The auto market is thought to be made primarily of automakers, but auto parts makes up anotherlucrative sector of the market. The major areas of auto parts manufacturing are: Original Equipment Manufacturers (OEMs) - The big auto manufacturers do produce some of their own parts, but they can't produce every part and component that goes into a new vehicle. Companies in this industry manufacture everything from door handles to seats. Replacement Parts Production and Distribution - These are the parts that are replaced after the purchase of a vehicle. Air filters, oil filers and replacement lights are examples of products from this area of the sector. Rubber Fabrication - This includes everything from tires, hoses, belts, etc. In auto industry, a large proportion of revenue comes from selling automobiles. The parts market is even more lucrative. For example, a new car might cost $18,000 to buy, but if you bought, from the automaker, all the parts needed to construct that car, it would cost 300-400% more ./p> A significant portion of an automaker's revenue comes from the services itoffers with the new vehicle. Offering lower financial rates than financial institutions, the car company makes a profit on financing. Extended warranties also factor into the bottom line. Greater emphasis on leasing has also helped increase revenues. The advantage of leasing is that it eases consumer fears about resale value, and it makes the car sound more affordable. From a maker's perspective, leasing is a great way to hide the true price of the vehicle through financing

costs. Car companies, then, are able to push more cars through. Unfortunately, profiting on leasing is not as easy as it sounds. Leasing requires the automakers to accurately judge the value of their vehicles at the end of the lease, otherwise they may actually lose money.

Indian Automobile Industry

The Indian automobile industry is the tenth largest in the world with an annual production of approximately 2 million units. Indian auto industry, promises to become the major automotive industry in the upcoming years and the industry experts are hopeful that it will touch 10 million units mark. Indian automobile industry is involved in design, development, manufacture, marketing, and sale of motor vehicles. There are a number of global automotive giants that are upbeat about the expansion plans and collaboration with domestic companies to produce automobiles in India.

Major Car Manufacturers

The major car manufacturers in India are Maruti Udyog, Hyundai Motors India Ltd., General Motors India Pvt. Ltd., Honda Siel Cars India Ltd., Toyota Kirloskar Motor Ltd., Hindustan Motors etc.The two-wheeler manufacturers in India are Honda Motorcycle & Scooter India (Pvt.) Ltd., TVS, Hero Honda, Yamaha, Bajaj, etc. The heavy motors including buses, trucks, auto rickshaws and multi-utility vehicles are manufactured by Tata-Telco, Eicher Motors, Bajaj, Mahindra and Mahindra, etc. The passenger car segment in the Indian auto industry is growing by 8-9 percent.

Commercial vehicle will grow by 5.2 per cent.

India is a potential emerging auto market.

Motorcycles contribute 80% of the two-wheeler industry.

India is the largest two-wheeler manufacturer in the world.

India's motorcycle segment will grow by 8-9 percent in the coming years. 11. India is the fifth largest commercial vehicle manufacturer in the world. 12. India has the number one global motorcycle manufacturer. 13. In Asia, India is the fourth largest car market.

Unlike the USA, the Indian passenger vehicle market is dominated by cars (79%).

Used Car Market

The new chapter in the automobile industry is that of used cars. The massive demand of used cars indicates that cars are becoming increasingly popular. Those who can't afford the luxury cars and their high prices are opting for used cars. In today's time, customers are conscious and diligently investing on car dealership. Car buyers are investing heavily a lot of time for both to sell a car and buy car. There's also a number of car websites that have offering detailed information on new car prices, used cars, car reviews, Chevrolet cars, jaguar cars and luxury cars.

Market Share
At present major Indian, European, Korean, Japanese automobile companies are holding significant market shares. In commercial vehicle, Tata Motors dominates over 60% of the Indian commercial vehicle market. Tata Motors is the largest medium and heavy commercial vehicle manufacturer.Car manufacturers in India dominate the passenger vehicle market by 79%. Maruti Suzuki is the largest car producer in India and has 52% share in passenger cars and is a complete monopoly in multi purpose vehicles. In utility vehicles Mahindra holds 42% share. Hyundai and Tata Motors is the second and third car producer in India The automobile Industry in India is now working in terms of the dynamics of an open market. Many joint ventures have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. Also a very large number of joint ventures have been set up in the autocomponents sector and the pace is expected to pick up even further. The Government of India is keen to provide a suitable economic, and business environment conducive to the success of the established and prospective foreign partnership ventures. $5.7 billion is the investment envisaged in the new vehicles projects.

Porter's Five Forces Model On Automobile Industry

1. Barriers to Entry - It's true that the average person can't come along and start manufacturing automobiles. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of many automobile companies. Globalization the tendency of world investment and businesses to move from national and domestic markets to a worldwide environment, is a huge factor affecting the auto market. More than ever, itis becoming easier for foreign automakers to enter the Domestic market .Automobiles depend heavily on consumer trends and tastes. While car companies do sell a large proportion of vehicles to businesses and car rental companies (fleet sales), consumer sales is the largest source of revenue. For this reason, taking consumer and business confidence into accountshould be ahigher priority than considering the regular factors like earnings growth anddebt load . 2. Threat of Substitutes - Rather than looking at the threat of someone buying a different car, there is also need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles. Trucks and sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller sedans and light trucks. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute. 3. Competitive Rivalry - Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly (A market condition in which sellers are so few that the actions of any one of them will materially affect price) which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace, historically they have tried to avoid pricebased competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales. Every year, car companies update their cars. This is a part of normal operations, but there can be a problem when a company decides to significantly change the design of a car. These changes can cause massive delays and glitches, which result in increased costs and slower revenue growth. While a new design may pay off significantly in the long run, it's always a risky proposition 4. Bargaining Power of Suppliers - The automobile supply business is quite fragmented (there are many firms). Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power. For parts suppliers, the life span of an automobile is very important. The longer a car stays operational, thegreater theneed for replacement parts. On the other hand, new parts are lasting longer, which is great for consumers, but is not suchgood news for parts makers. When, for example, most car makers moved from using rolled steel to stainless steel, the change extended the life of parts by several years. 5. Bargaining Power of Buyers -The bargaining power of automakers are unchallenged. Consumers may become dissatisfied with many of the products being offered by certain automakers and began

looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars.

Example : Porter's 5 Forces Model Of The NANO Car

There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector. As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete .

BARRIERS TO ENTRY
Time and cost of entry - Time is most essential thing while launching a product in any market. The launch of the NANO is quite viable as the demand of the small car is on the rise in the market. By the cost of the entry we mean the initial capital required to set up a new firm is very high, it makes the chances of the chances of new entrants are very less. Knowledge and Technology - Ideas and Knowledge that provides competitive advantage over others when patented, preventing others from using it and thus creates barrier to entry. The TATA motors have great knowledge/ experience in the automobile industry and has renowned technological advantage because of the recent acquisition and mergers. Product Differentiation and Cost Advantage - The new product has to be different and attractive to be accepted by the customers. Attractiveness can be measured in the terms of the features , price etc. At this level the price of the NANO car was one thing that is attracting customers. And above all this the image , trust the name TATA carries with it. Government Policy and Expected Retaliation - Although government's job is to preserve free competitive market, it restricts competition through regulations and restrictions. The government tried to promote the TATA Motors to start a plant by providing land and tax rebates. But the unexpected retaliation by the local people surface in the setting up of the plant which costed the company a lot. Access to Distribution Channels - When a new product a launched a well developed distribution is must for its success. The TATA motors had a advantage of well established distribution channel across the world.

SUBSTITUTES
Price band - The threat that consumer will switch to a substitute product if there has been an increase in price of the product or there has been a decrease in price of the substitute product. If the price of the NANO car will increase the main expected customers ie the one switching from bike to car will not move to car and will remain in the bike only. Thus the price is kept checked in this manner. Substitutes performance - The performance of the substitute sector will also play a important role in the success of the NANO car. If the price of the Bike segment increases or the price band of the small segment fall , it will have effect on the quantity required in the market. Its just on the price but also the features and the other services associated or it may be the status symbol story. The success of the electric car segment with player like REVA can also effect the demand of the NANO.

Buyers willingness - Products with improving price/performance tradeoffs relative to present industry products. It will determine the willingness of the buyer to but the NANO car.The willingness of the customers to go forward try the new product in the market ie 'NANO'. They might be willing to go for the test products like Maruti 800 , Santro etc.

COMPETITIVE RIVALRY
Number and Diversity of Competitor - This describes the competition between the existing firms in an industry. the current Business Policy & Competitive Strategy scenario, the small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Hyundai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted. Now to be competitive in market other companies have to either slash rates of their existing model or have to go back to the drawing board and build again. Price Competition - Advertising battles may increase total industry demand, but may be costly to smaller competitors. Products with similar function limit the prices firms can charge. Price competition often leaves the entire industry worse off. NANO is the only player so it has the price freedom but as the Maruti and Honda are also planning to launch the car in the same segment the price competition will start. Exit Barriers - Even if the product fails in the market its not that easy for the company to exit the market just like that because of the heavy investment it has made in the initial stage. If the NANO fails or falls flat the TATA motors will not be in a state to slow done the product even when NANO production line can be used by the other products after few modification as for NANO only the new product line were setup and huge cost were incurred. Product Quality - Increasing consumer warranties or service is very common these days. To maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly. NANO enjoys the monopoly are there are no competitors in this segment.

BUYERS
Switching Costs - If switching to another product is simple and cheap the customers does not think much before doing it. In case of NANO car the switching cost from bike to car is too high. Thus increasing the demand of the car many fold. Number of customers/ Volume of sales - If there are few buyers then they are able to dictate the terms. They pull down the cost by Bargaining. The bargaining power of buyer is high as there are lot of choice available to the buyer and the service do not vary from one manufacturer to the other. They force the manufactures to improve the quality. All this can be clearly seen in the case of NANO car the price tag at which it has been offered or the quality of the NANO car no compromises has been done at any front. Brand Image - The brand image of the TATA and the segment in which the NANO has been the most attractive thing in the entire package.

SUPPLIERS
Number and Size of Suppliers - A company to manufacture its products requires raw material, labor etc. If there are few suppliers providing material essential to make a product then they can set the price high to capture more profit. Powerful suppliers can squeeze industry profitability to great extend. In case of NANO the supplier are limited and the size of the suppliers are big enough to bring about the controlling

power in the price of the car. The NANO car has more than 128 suppliers in all and the major portion of the building cost of the car is the parts supplied by the suppliers. Unique Service / Product - Suppliers' products have few substitutes. Supplier industry is dominated by a few firms. The some parts of the NANO car are obtain from the supplier who them are big enough and limited substitutes are available against them. So the entire production line depends upon them only. Ability to substitute - Suppliers' products have high switching costs. In many case even when substitute are available its not that easy to opt for substitute as the next product in the assembly line depends upon it. If the change in the any part is brought about the long list of depended parts also have to be changed , which in most cases is not feasible to do.

Tata Motors Strengths

The internationalisation strategy so far has been to keep local managers in new acquisitions, and to only transplant a couple of senior managers from India into the new market. The benefit is that Tata has been able to exchange expertise. For example after the Daewoo acquisition the Indian company leaned work discipline and how to get the final product 'right first time.' Tata Motors Limited acquired Daewoo Motor's Commercial vehicle business in 2004 for around USD $16 million. The company has had a successful alliance with Italian mass producer Fiat since 2006. This has enhanced the product portfolio for Tata and Fiat in terms of production, knowledge exchange , logistics and its infrastructure. In the summer of 2008 Tata Motor's successfully purchased the Land Rover and Jaguar brands from Ford Motors for UK 2.3 million. Two of the World's luxury car brand have been added to its portfolio of brands, and has undoubtedly off the company the chance to market vehicles in the luxury segments. NANO is the cheapest car in the World. The range of Super Milo fuel efficient buses are powered by super-efficient, eco-friendly engines.

Tata Motors Weaknesses

The company's passenger car products are based upon 3rd and 4th generation platforms, which put Tata Motors Limited at a disadvantage with competing car manufacturers. Despite buying the Jaguar and Land Rover brands Tata has not got a foothold in the luxury car segment in its domestic, Indian market. The brand associated with commercial vehicles and low-cost passenger cars to the extent that it has isolated itself from lucrative segments in a more aspiring India.

 Other competing car manufacturers have been in the passenger car business for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in terms of quality and lean production. Sustainability and environmentalism could mean extra costs for this low-cost producer. This could impact its underpinning competitive advantage. Obviously, as Tata globalises and buys into other brands this problem could be alleviated.

Attractiveness Of The Automobile Industry For Investment Purpose

Economic reforms and deregulation have transformed that scene. India has already become one of the fastest growing automobile markets in the world. The Indian automobile industry is going through a technological change where each firm is engaged in changing its processes and technologies to maintain the competitive advantage and provide customers with the optimized products and services. Starting from the two wheelers, trucks, and tractors to the multi utility vehicles, commercial vehicles and the luxury vehicles, the Indian automobile industry has achieved splendid achievement in the recent years. In the Indian economy, auto industry maintains a high-flying place. Automobile industry has a strong multiplier effect and is capable of being the driver of economic growth. A sound transportation system plays an essential role in the country's rapid economic and industrial development. The well-developed Indian automotive industry skillfully fulfils this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three wheelers, tractors etc. The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. Continuous economic liberalization over the years by the government of India has resulted in making India as one of the prime business destination for many global automotive players. The automotive sector in India is growing at around 18 per cent per annum. The auto industry is just a multiplier, a driver for employment, for investment, for technology. The Indian automotive industry started its new journey from 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic route.The automobile sector has been contributing its share to the shining economic performance of India in the recent years. With the Indian middle class earning higher per capita income, more people are ready to own private vehicles including cars and twowheelers. Product movements and manned services have boosted in the sales of medium and sized commercial vehicles for passenger and goods transport. Side by side with fresh vehicle sales growth, the automotive components sector has witnessed big growth. The domestic auto components consumption has crossed rupees 9000 crore and an export of one half size of this figure.

India is on the peak of the Foreign Direct Investment wave. FDI flows into India trebled from $19 billion in 2006-07 and $25 billion in 2007-08. By AT Kearney's FDI Confidence Index 2006, India is the second most attractive FDI destination after China, pushing the US to the third position. It is commonly believed that soon India will catch up with China. India is up-and-coming a significant manufacturer, especially of electrical and electronic equipment, automobiles and auto-parts . The country is expected to witness over Rs 30,000 crore of investment by 2010.Over the next one year, some 20 new cars will be seen on Indian roads. Maruti Udyog has set up the second car plant with a manufacturing capacity of 2.5 lakh units per annum for an investment of Rs 6,500 crore (Rs 3,200 crore for diesel engines and Rs 2,718 crore for the car plant itself). Hyundai and Tata Motors have announced plans for investing a similar amount over the next 3 years. Hyundai will bring in more than Rs 3,800 crore to India, Tata Motors will be investing Rs 2,000 crore in its small car project. General Motors will be investing Rs 100 crore, Ford about Rs 350 crore and Toyota announced modest expansion plans even as Honda Siel has earmarked Rs 3,000 crore over the next decade for India - a sizeable chunk of this should come by 2010 since the company is also looking to enter the lucrative small car segment. Commercial vehicle segment, Ashok Leyland and Tata Motors have each announced well over Rs 1,000 crore of investment. Mahindra & Mahindra's joint venture with International Trucks is expected to see an infusion of at least Rs 500 crore. Hero Honda is about to establish its fourth manufacturing plant. Bajaj Auto and TVS Motors are moving to the excise-free zones of Himachal Pradesh and Uttaranchal for putting up new capacity. The growth of the Indian middle class along with the growth of the economy over the past few years has attracted global auto majors to the Indian market. Moreover, India provides trained manpower at competitive costs making India a favoured global manufacturing hub. The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in markets such as Europe, US and Japan on the other have resulted in shifting of new capacities and flow of capital to the Indian automobile industry. Global auto majors such as Japanese auto majors Suzuki, Honda and Korean car giant Hyundai are increasingly banking on their Indian operations to add weight to their businesses, even as numbers stay uncertain in developed markets due to economic recession and slowdown. Moreover, according to a study released by global consultancy firm Deloitte, at least one Indian company will be among the top six carmakers that would dominate the global auto industry by 2020. According to the study, the car industry would see a massive capacity building in low-cost locations like India as manufacturers shift base from developed regions.

Production
Although the sector was hit by economic slowdown, overall production (passenger vehicles, commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in 2007-08 to 11.17 million vehicles in 2008-09. Passenger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million. In recent times, India has emerged as one of the favourite investment destinations for automotive manufacturers. German car major Audi will start assembling its sports utility vehicle Audi Q5 from mid-2010. The company plans to assemble more cars locally at its Aurangabad plant instead of importing completely built units (CBUs).

Ford India commenced commercial production of its compact car Figo, and diesel and petrol engines at a new factory in Chennai. The Figo will be built exclusively in India and exported to Asian countries and South Africa.

Japanese major Nissan has decided to shift the entire production of its small car, Micra, from the UK to India. After production of the Micra begins here, Nissan plans to manufacture four more models in India, involving a total investment of over US$ 412.2 million.

Suzuki Motorcycle India (SMIPL), a wholly-owned subsidiary of Japanese auto major Suzuki Motor Corporation, plans to double production capacity of its two-wheelers to 300,000 units by the end of the current fiscal year. The company will invest US$ 26.77 million.

Volkswagen has set a target to localise production in India to about 80 per cent in 2-3 years from the current levels of almost 50 per cent as it seeks to offer cars at more competitive prices.

Domestic Market
According to figures released by the Society of Indian Automobile Manufacturers (SIAM), domestic passenger car sales have increased 32.28 per cent to reach 145,905 units in January 2010 from 110,300 units in the same month last year. Across all categories, total sale of vehicles increased 44.94 per cent to 1,114,157 units in January 2010, against 768,698 units in the January 2009.

Road Ahead
The Indian auto industry is likely to see a growth of 10-12 per cent in sales in 2010, according to a report by the global rating firm, Fitch. According to its report, Indian Auto Sector Outlook, competition in the country's auto sector is likely to increase due to increasing penetration of global original equipment manufacturers (OEM).

Conclusion
The average person can't come along and start manufacturing automobiles. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of many automobile companies.Rather than looking at the threat of someone buying a different car, there is also need to also look at the likelihood of people taking the bus, train or airplane to their destination. The auto industry is considered to be an oligopoly. Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. The bargaining power of automakers are unchallenged. Consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars Indian automobile industry has achieved splendid achievement in the recent years. India is on the peak of the Foreign Direct Investment. The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in markets such as Europe, US and Japan on the other have resulted in shifting of new capacities and flow of capital to the Indian automobile industry. India is a significant manufacturer of automobiles and auto-parts. Global auto majors such as Japanese auto majors Suzuki, Honda and Korean car giant Hyundai are increasingly banking on their Indian operations to add weight to their businesses .The car industry would see a massive capacity building in low-cost locations like India as manufacturers shift base from developed regions. Although the sector was hit by economic slowdown but it doesn't effect the overall production of automobiles. In recent times, India has emerged as one of the favourite investment destinations for automotive manufacturers. The Indian auto industry is likely to see a growth of 10-12 per cent in sales in 2010.Competition in the country's auto sector is likely to increase due to increasing penetration of global original equipment manufacturers

References
http://www.workosaur.com/auto-industry-overview/ http://www.ibef.org/industry/automobiles.aspx http://www.investopedia.com/features/industryhandbook/porter.asp http://ayushveda.com/blogs/business/indian-automobile-industry-and-michael-porters-five-forces-modelof-industry-forces/ http://www.indiastudychannel.com/projects/2663-A-STUDY-OF-CONSUMER-SATISFACTION-INAUTOMOBILE-INDUSTORY-IN-URBAN-CITY.aspx http://www.scribd.com/doc/18220669/Michael-Porters-Five-Forces-Analysis-TATA-Motors http://www.automobileindia.com/automobile-industry/ http://www.wikinvest.com/industry/Auto_Makers >

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Porters 5-forces revisited. Although widely critized Porters 5-forces probably still is the most widely used model for industry analysis among business school students today. As many students run into problems when they use the model it is of interest to see if the model could be updated in a way that took into account some the criticisms that has been raised against it. In the following I will present such a possible update. As most readers will know the 5 main forces in Porters model are: e industry

The three most important criticisms of the model, I have come across, are:

out view of an industry (the critique presented by the resource-based school) global economy and internet many industry boundaries are blurring to such an extent that it becomes meaningless to talk about industries. - and micro level factors into account Personally I dont find the first criticism fully justified. It is true that Porters own conclusions based on the model were rather static (if there is fierce competition in an industry, stay away - because you will get low returns), but in his Competitive advantage of Nations his view is much more dynamic (fierce competition can be good for you, because you learn from it and if you survive it might be your route to become a world class player)1 . This has however more to with how your

application of the model is than with the model in itself. There is several dynamic elements in the model e.g. threat of entry and experience as and entry barrier. The second criticism has Porter himself acknowledged When it comes to the third I still find that the majority of industries have fairly stable boundaries. I think it is more a question of growing interdependence between different industries just as we see a growing interdependence between different markets in the ever more globalized world. The fourth criticism has also been acknowledged by Porter in his development of the Diamond fra The Competitive Advantage of Nations and in his development of the Value Chain concept. To the above criticism I will add a couple of my own. First I think it is a general problem in management and marketing theory that many of the prominent theorists do not relate their contributions to the generally recognized basic micro and macro economic models and theory like what is normal practice in other sciences. This also goes for Porter who has never drawn a line back 1 For an analysis on this development in Porters views see A Porter Exegesis by A.P. De Man printed in Scandinavian Journal of Management Vol. 10, No. 4, pp 437-450, 1994 to the fundamental economic theories on how markets function although his thinking clearly is based upon it. Second one of the most common problems for students who use 5-forces in an industry analysis is that they overlook the fact that many industries are closely locked together with other industries like cars with petrol and roads, stereo equipment with music, computer hard ware with computer soft ware and so forth. It is true that Porter himself is aware of the fact and in his books refers to this as linkages to other markets. Many students however base their use of the model on Porters articles where this fact is not mentioned. And it is not something which is so to say in focus in his model. In the following I will try to revise Porters 5-forces in a way that takes the above criticisms into account. As might be expected from the above I find that the best starting point is our basic economic theory.

And here I will start with the factors that economists have seen as the most important characteristics of a market. These characteristics have been described as the conditions for a perfect market. As the reader may know they are the following: 1. Large number of buyers and sellers of roughly equal size 2. Perfect information 3. Homogeneous products i.e. both buyers and sellers must be without preferences 4. No barriers to entry or exit 5. Absence of economic friction like transport costs Now everybody agrees that these conditions are unrealistic for most markets in the world. But that is beside the point. The point is that according to our fundamental theory as a science within economics these factors characterises a market and determines how it will function. This should be understood so that it will have a great impact on the function of a market whether the sellers are few or numerous, if the information are unevenly distributed between sellers and buyers, if their are barriers to entry or exit and so on. Implicit in the two conditions no preferences and no barriers is the condition that the market in question must not be linked to another market. From our micro economic theory we know that linkages take the form of on the demand side substitute or complementary products and on the supply side common cost between two different products or substitute production factors. Now as the relationship between products with common costs and complementary products are quite similar we can add the following market describing factors: 6. Substitute and complementary products and production factors. Linkages between markets can however take another form. A form which Porter himself have dealt with namely the vertical chain of the industry. When we compare Porter and our model of the market this chain already partly has surfaced because we are dealing with suppliers current players buyers. The point made e.g. Supply Chain Management theorists is that you have to

analyse the whole vertical chain because of the interdependencies between all actors in this chain. Porter use the term upstream and downstream vertical chain which we also will use. This will constitute our next market describing factor: 7. Length and complexity of upstream and downstream vertical chain The last of the criticisms I will take into account here is the criticism that Porter is static. As mentioned earlier threat of entry is a dynamic element of Porters model because it focuses on a possible future event. The experience factor focuses on linkages back in time. But it is not only threat of entry which is of interest when we try to dynamize the model. Possible new suppliers and possible new customers are of the same interest. The eight describing factor is therefore: 8. Past, current and possible future actors and their activities on the market in question. Now how can we put all these factors together in a model describing the factor which governs the competition in an industry. The starting point is naturally the current players and their rivalry just as it is in 5-forces. Now their rivalry is determined on basically these factors:

t barriers capacity build in large increments etc. These factors are actually and not surprisingly very close to Porters factors. But they are expressed in terms and a language that directly connect to basic economic theory. A few more comments may be appropriate. Traditionally textbooks when dealing with preferences and distribution of information (market transparency) have focused on these factors among buyers, assuming that sellers where more or less equal on these factors. But that is not the case in real life and the existence of preferences and unevenly distributed information among sellers is the current players own goals, intents and resources regarding what kind of business they want to and can manage

(based upon their knowledge and experience = level of information). In this way the model takes the resource-based view2 or Hamel and Prahalads strategic intent3 into account. The factors mentioned by Porter in this context are: A) number and size of competitors, B) industry growth, C) differentiation and switching costs, D) high fixed costs or a perishable product, E) capacity build in large increments, F) high exit barriers and G) diversity among sellers in goals. Point A, C, E, F and G follows directly from my points. Industry growth B) is actually connected to the number of potentially new customers and is therefore a factor which must be analyzed as part of the relation between the industry and its customers. High fixed costs and perishable products D) relates both to the fact that if these factors are present in a market they create a strong preference (for the seller) for sale in the current period over sales in coming periods4 . So using our basic economic term preferences in a dynamic sense also covers the factor mentioned by Porter. 2 See for example A Ressource-based View of the Firm by Birger Wernerfelt in Strategic Management Journal, Vol 5., 1984. 3 Strategic Intent by Gary Hamel and C.K. Prahalad in Harvard Business Review May_june 1989 4 E.G. is the mobile communication market where the sellers offer large incentives to consumers in order to make them use mobile communication earlier than they would have if they have had to pay full price from day one. That way the mobile communication operators utilise their capacity (costs) earlier than otherwise possible. Their capacity is very

much like a perishable product in that it is not possible to sell the unused 50 % capacity in one period in any future periods. That sale is forever lost. The next point is the customers and their bargaining power. As our starting point we will again use our basic economic factors:

f preferences and their relative strengths

transport cost, capacity build in large increments etc. Porters own factors in this connection were: A) Concentration or purchases in large volumes B) Product differentiation C) Level of profit D) Importance of product (seen from a buyer point of view) E) Product influence on buyers profit F) Integration threat Factor A) has a lot to do the relative distribution of numbers and size between buyer and sellers and it is certainly logical seen from traditional economic point of view that size includes the size of orders placed by buyers on sellers market. Factor B) has to do with preferences and whereas Porter concentrates on preferences among buyers I think it just as important to look at preferences among the sellers towards the buyers. It can be very important for a seller if a high profiled buyer by his product! Factor C relates to numbers and relative size. Factor D and E both relates to the existence of preferences. So actually the relative distribution of preferences between sellers and buyers comes out as a very important factor in determining their relative bargaining power. Factor F has to do with a combination of relative size, relative distribution of information, the

existence of barriers and economic friction. It is easier and therefore more credible (all things being equal) for the larger company to integrate backwards or forwards, it is easier for a company operating in a very complex environment (high content of information) to integrate a up- or downstream company that it is the other way round and it is easier to enter a market with low barriers and low economic friction that the other way round. So its is the relative distribution of these factors between buyers and sellers that determines the credibility of forward or backward integration. Now according to my earlier remarks there are still some factors missing in this analysis. First their is the relative distribution of information regarding sellers upstream vertical chain among buyers and information among sellers concerning buyers downstream vertical chain. This information is of course connected to credibility of integration. It can however work two ways. The more complex the more difficult to integrate but on the other hand if control and direct access is of importance to e.g. seller the mere complexity can be a motivation to integrate and see/build this as part of a core competence. Porter mentioned market growth as an important factor in the internal rivalry. But growth for the existing sellers is something happening among their customers either more customers appearing in the market or the existing customers buying more per customer. But growth is a factor connected to number and size of players and has therefore already been dealt with. What can be added is that the really important factor is the relative growth among sellers versus buyers. If the number and size of sellers is growing faster than the number and size of buyers the sellers will experience this as very hard competition although the market is growing and you therefore per se would expect a lower level of competition than in a market with low growth. Similarly you can have markets were there is stagnation among buyers, but because the sellers leave the market at an even faster rate there is very little competition among the remaining sellers. You can argue that this is what happened to market for record players, where the remaining no. 1 player Ortofon enjoys healthy profits in a market, which until recently shoved negative growth. Gillette could until the eighties be

used as a similar example. The last factor I will deal with is the existence of complementary or substitute products. Typically substitute products will strengthen the bargaining power of buyers whereas complementary products will weaken the position of the buyer. That is why sellers often find it profitable to sell complete systems to buyers (and especially systems that makes it impossible for buyers to use substitute parts) they can charge a higher price. The existence of substitute and complementary products is of course part of the preference factor in that substitutes can weaken a buyers preference for a specific product whereas the existence of a complementary product can strengthen a preference for a specific product. The third point is the suppliers which as Porters also remarks more or less mirrors buyers bargaining power. I will therefore not elaborate on this category. I will however remind the reader about my earlier remarks concerning the fact that just as customers has preferences regarding which suppliers to use, suppliers might have preferences regarding which customers to serve and that their bargaining power thereby is diminished. It should be sufficient to mention just-in-time arrangements or small parts producers with equipment dedicated to serve a large OEM-producer as examples. The fourth factor is threat of entry. Now as can be seen from above I have already dealt with two types of entry. Forward or backward integration from suppliers or customers. If we use normal business logic other types of entry will typically come from either actors in possession of either substitute products/production factors or complementary products/production factors. The first type could be PLM which engages in both plastic, aluminium and glass containers for beers and soft drinks. The second type could be Philips or Sony that invests in the music business. These types of entry (and the possibility of) clearly influences how these industries works. The only form of entry that is not connected to the above is a purely financial entry. It is unlikely that such an (possible) entry actually influences the competition in an industry and it could therefore in my opinion be

excluded from an industry analysis. Remember if an entry in any way is determined by a logic whereby the entering company can leverage an existing competence the entry will be categorised as an entry based on a complementary production factor. And if the entry is successful it is because the existing players has overlooked the importance of that competence (which might in earlier times have been unimportant in that particular industry). But when the kind of entry which poses a threat to an industry can come from both customers, suppliers, actors with substitute products or production factors and actors with complementary products or production factors it is not logical to have a separate force in the model called threat of entry. All 4 boxes contain potential candidates that could conceive entering the existing players business. In my model the threat of entry box is therefore substituted with a box consisting of actors using complementary products or complementary production factors. This also connects the model to the resource-based view of the firm. The analysis must now contain both companies outside the business but with (core) competencies that potentially can be leveraged in the business analysed. Similarly the analysis must constitute competencies that current players possess that can be leveraged in other thereby creating cost linkages between these businesses and the business in question. The factors you have to look into her is e size between the linked industries. If one of the industries is considerably larger than the other entry is only likely from the larger to the smaller not the other way -how) between the industries the more similar the more likely is cross-over entry. Porters experience effect curve is an example of barrier to entry based differences in the possibility of gaining information on how to operate in a specific market. us the customers e.g. value of sale of systems, use of same distribution channels etc. Microsofts merge of windows and internet explorer can

explain their engagement in both these two businesses. The value for the two complementary systems for customers were large and the distribution channels were the same. Here we analyse how leveraging complementary products can influence customer preferences. -over of preferences. It was likely that customers that relied on Windows would rely on Internet explorer whereas it is probably not likely that drivers would be willing to pay more to drive on a highway constructed by GM, should they consider entering that industry. The last box contains as in Porter substitute products. As mentioned earlier I also include substitute production factors. The factors you have to look into here is lative size of the use of the substitute in your industry vs. the potential use of that substitute. If the substitute is under utilised the likelihood of entry increases. the fewer the number of substitutes the more likely an entry will be because only in the case of few substitutes will the entering company by entering effectively reduce the amount of competition it is facing he relative profits in industries producing substitutes. An entry from a low profit industry to a high profit is more likely than the other way round especially if this factor is combined with the fact that the companies in the low profit industry is larger than the companies in the high profit industry

likely from businesses that know more about (often have closer relationships with) the customers of the industry in question than from industries where the level of knowledge is lower.

level preferences to a business with low level of preferences is more likely than the other way round. A good example of that was Golgates entry into the toothbrush market. A vice versa

entry would have been virtually impossible. This points to the fact that companies selling products with low levels of Brand Identity are vulnerable even in positions were they enjoy healthy profits and their current competitors also sell products with low levels of Brand Identity. As threat of entry is general for all boxes it is treated as a factor concerning all these boxes and it is especially the inclusion of this element that makes the analysis dynamic. The factors you have analyse here is: but not only within the existing industry you will have to analyse whether actors coming from one of the other four boxes also will enjoy economies of scale deriving from joint cost (reduction) they incur by leveraging their competencies. which of the 4 boxes represents players with sufficient capital to enter your industry itching cost which players from the 4 boxes will face the lowest switching cost and are therefore the most likely to enter no different from Porter, but the point is important because it is here that the past brings to bear. In a truly dynamic analysis we will have to analyse both the past, the present and the future. Important points here are the experience curve, established relationships, proprietary rights, governments licensees, favourable locations, access to raw materials etc. The above revised version of Porters 5-forces takes into account the criticisms that I initially raised against his model. I might add a remark concerning the premisis relatively stable industry barriers that Porter bases his model on. One might argue that my revision doesnt alter this fact. To this I will say first and foremost that industry barriers in most cases still are rather stable and secondly that the revised model focuses much more on linkages with other industries by explicitly including complementary products and production factors and substitute production factors in the model. It is my hope therefore that this revised model can be of use to many industry analyst by at the same

time using probably the most popular model for this purpose, changing it according to criticism from other business theorists and in my opinion not least linking the model and its content to established economic theory. Complementary Products Production factors, -processes and competencies Internal rivalry among existing players Substitutes Products Production factors, -processes and competencies Rivalry between customers and linkages to downstream chain Rivalry between suppliers and linkages to upstream chain In all boxes the analysis must take into account past, current and potential players All arrows represents bargaining power, potential threat of entry and/or actual

activities in linked industries Steen Ehlers, november 2009

Rethinking and reinventing Michael Porters ve forces model Tony Grundy Craneld School of Management, UK Michael Porters ve competitive forces model has been a most inuential model within business schools but has perhaps had less appeal to the practising manager outside of an MBA and certain short business school courses. In this article it is argued that whilst there are a number of reasons why the model has not achieved greater currency, most importantly it can be developed a lot further. The paper looks at a number of important opportunities for using Porters model in an even more practical way, including: mapping the competitive forces, which can vary signicantly over market and competitive terrain and within the same industry; understanding its dynamics; prioritizing the forces; doing macro analysis of the sub-drivers of each of the ve forces; exploring key interdependencies, both between and within each force. Copyright 2006 John Wiley & Sons, Ltd. ested in taking his concepts to an even more macro level, particularly to the competitive advantage of countries, rather than to micro economics. Porters model, whilst it has done extremely well in occupying textbook space, does not seem to have captured the imagination of other theorists. In contrast with the resource-based theory of competitive advantage, which has spawned a considerable literature, it seems to have become, as it were, frozen in time. The ve competitive forces model propelled strategic

management to the very heart of the management agenda Strat. Change 15: 213229 (2006) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/jsc.764 Strategic Change *Correspondence to: Tony Grundy, Craneld School of Management, Craneld University, Craneld, Bedford MK43 OAL, UK. E-mail: a.grundy@craneld.ac.uk Introduction When Michael Porter conceived the ve competitive forces model, it propelled strategic management to the very heart of the management agenda.The framework became a centrepiece of texts on business strategy and strategic management, and essential examination material on MBA and similar courses globally. But what has become of his original ve competitive forces? It would appear to be the case that not a great deal has occurred to develop this thinking since the early 1980s (except, perhaps, for Hamel and Prahalad, 1994). Porter appears to have been more interCopyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006214 Tony Grundy Today, and well over 20 years since Porters original, major publication, there is still relatively little real awareness amongst mainstream managers, both at senior and middle levels of Porters original concept. If one were

to take a sample based on attendees at strategic management courses at a particular business school, for example, it could be estimated that between 15% and 20% were familiar with these early Porter concepts and perhaps only 5% had actively used this at an explicit, analytical level. Interestingly, if this is compared with the awareness level of basic SWOT analysis, a crude estimate is of 9095% awareness and at least 50% active use. Whilst Porter was propelled to fame on the back of this and other intellectual advances, it seems an odd, if not disappointing, phenomenon that this original breakthrough has had somewhat little currency amongst practising managers. Why is this the case? Some possible reasons for this are that: Porters framework is relatively abstract and highly analytical.

Whilst Porters original framework explained the criteria for assessing each of the ve competitive forces, he did so in the language of micro-economic theory, rather than in terms of its practicalities. His model was highly prescriptive and somewhat rigid, leaving managers, and indeed teachers in business schools, generally inhibited from being playful, exible and innovative in how they applied this powerful framework.

Whilst the framework does help to simplify micro economics, its visual structure is relatively difcult to assimilate and its logic is somewhat implicit. Managers tend to like analytical concepts spelt out in very simple terms, otherwise they nd it difcult to adapt to their default, uid strategic management style *sometimes characterized as logical incrementalism (Quinn, 1980) or as emergent strategy (Mintzberg, 1994)+. In this paper, it is argued that Porters ve competitive forces model is a vitally important concept and one that certainly merits the attention of all practising senior managers. It is also argued that to operationalize it more effectively requires signicant further development. This is demonstrated with a practical example taken from the health club market, which has grown signicantly in many countries over the past 10 years, but has been heavily impacted by shifts in competitive pressure. However, it is rst necessary to examine how Porters model could be developed further by studying the existing literature to see to what extent it has been developed, if at all. The literature has it moved on? Academics do not seem to have been minded to explore and expand Porters framework, with very few attempts to develop Porters

model having been made. Whilst there are references to Porters model in many research papers, the principal contribution of this paper is to expand Porters model into a far richer system of analysis, which managers can then operationalize and subsequent changes in their practices can then be studied in future research. A critique of the model: value and limitations Porters ve competitive forces are depicted in Figure 1. Porters starting point was that he wanted to account for long-term variances in the economic returns of one industry versus another. His genius resided in distilling the complex micro-economic literature into ve explanatory or causal variables to explain superior and inferior performance, through: 1. The bargaining power of the buyers. 2. Entry barriers. 3. Rivalry. 4. Substitutes. 5. The bargaining power of the suppliers. The value of Porters model was thus that it appeared to offer the following attributes: Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006

DOI: 10.1002/jsc It simplied micro-economic theory into just ve major inuences. It effectively and before its time applied systems thinking. It showed how competitive rivalry the central box of the model is very much a function of the other four forces. It helped to predict the long-run rate of returns in a particular industry. It went beyond a more simplistic focus on relative market growth rates in determining industry attractiveness. It helped combine inputoutput analysis of a specic industry with industry boundaries via entry barriers and substitutes. It emphasized the importance of searching for imperfect markets, which offer more national opportunities for superior returns. It emphasized the importance of negotiating power and bargaining arrangements in determining relative market attractiveness. It focused managers on the external environment for more than traditional SWOT analysis. There are, however, several limitations to Porters framework, such as: It tends to over-stress macro analysis, i.e.

at the industry level, as opposed to the analysis of more specic product-market segments at a micro level. It oversimplies industry value chains: for example, invariably buyers may need to be both segmented and also differentiated between channels, intermediate buyers and end consumers. It fails to link directly to possible management action: for example, where companies have apparently low inuence over any of the ve forces, how can they set about dealing with them? It tends to encourage the mind-set of an industry as a specic entity with ongoing boundaries. This is perhaps less appropriate now where industry boundaries appear to be far more uid. It appears to be self-contained, thus not being specically related, for example, to PEST factors, or the dynamics of growth in a particular market. It is couched in economic terminology, which may be perceived to be too much jargon from a practising managers perspective and indeed, it could be argued that it is over-branded.

Porters model was thus a valuable and workable concept but one that had some signicant practical drawbacks, unless of course the model was developed further. This paper now argues that Porters concept merely scratches the surface of its full potential. Perhaps the very success of Porters original model led to it not being adequately Porters ve forces model 215 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Substitutes Suppliers Buyers Potential Entrants Threat of substitute products or service Threat of new entrant Bargaining power of suppliers Bargaining power of buyers Source: Competitive Strategy, Porter Rivalry among existing firms Industry

Competitors Figure 1. These forces determine industry protability.216 Tony Grundy challenged or developed further, and indeed it could be claimed that this process is now well overdue. The ve competitive forces are interdependent with other strategic analysis tools, which deal with the external environment and with each other, and this can be developed into a more comprehensive and coherent system. Suggestions for further analysis include: 1. The model can be prioritized within a force eld analysis format. 2. The individual forces can be broken down at a micro level. 3. The framework can be transformed into a more dynamic model, both at the industry level and at a more micro, transactional level. 4. The ve forces analysis needs to be applied, segment by segment, across the business. The following subsections seek to develop Porters model, both to improve its analytical power and to increase its range of applications. This is illustrated in the context of a fastchanging market the health club industry. Interdependencies of the model The inuences on the ve competitive forces

are examined rst. Conventional strategy literature highlights the need to think about factors outside the industry. Indeed, PEST (or political, economic, social and technological factors) is possibly the second most widelyknown strategy technique after SWOT analysis. However, there is a profound gap between PEST and SWOT analysis, and this is only partly met by Porters ve forces. A linking technique is that of Grundys growth drivers (Grundy, 2004). Figure 2 gives an example of growth driver analysis, helping us to represent the forces that, directly or indirectly, cause or inhibit market growth over a particular time period. Space precludes an in-depth development of this model here, but this will be used in conjunction with the ve competitive forces later in the paper in the analysis of the health club industry. However, an important feature to note here is that it is part of a system (see Figure 3 below). Figure 3 captures, in an onion model format, the key domains that need to be thought through, within the overall competitive climate, beginning with: PEST factors growth drivers Porters ve competitive forces competitive position.

These layers of the onion are highly interdependent, which might be a very useful phenomenon for managers to learn about and to apply. For example, where the PEST factors are generally hospitable, growth is encouraged and the full impact of the ve competitive forces may not be felt and may thus be latent. However, where the PEST factors become Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Internet takes off Expectations bubble bursts Self-fulfilling disaster Uncertainty about the future growth drivers growth brakes Dot com losses Figure 2. Growth drivers: dot.com market for shares, 2000.inhospitable, this will clearly dampen the growth drivers, and if the growth drivers within a particular market are themselves

tightening, for example due to life-cycle effects, then this will put a disproportionate and adverse pressure on Porters ve forces, particularly in the bargaining power of buyers, and also upon rivalry. Furthermore, a highgrowth environment may encourage entrants and a low one will discourage these.The result can lead to a collapse in condence and in prices unless there are lots of exits, for example, in the health club market in the UK in 20023, as will be seen later. Indeed, it may be helpful not to call it Porters ve forces model, particularly when introducing it to a team or wider organization. An alternative is to call it competitive pressures, which is less jargon-laden but includes the ve forces more as a checklist. This relabelling of the model has many attractions, especially as it may seem strange and foreign to everyday management discourse. This may mean that early adopters will feel self-conscious using it with their colleagues. As probably most intellectual contact with the technique is typically via a management text, an MBA or on a public strategy programme rather than on an in-company event, individual managers may feel reluctant to use it with their more novice peers. Besides these external interdependencies, Porters ve competitive forces are themselves highly interdependent with each other again something only implicit in Porters and other

texts. Figure 4 now plots their main interdependencies. Porters ve competitive forces are therefore both highly interdependent with the other subsystems in the external environment, rather than being relatively stand-alone. This gure plots the interdependencies internal to the ve competitive forces: Porters ve competitive forces are highly interdependent Between bargaining power of buyers and entry barriers: buyers may actively encourage new entrants, thus reducing entry barriers. Between bargaining power of buyers and substitutes: buyers may actively search for Porters ve forces model 217 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Political factors Economic factors INDUSTRY LIFE CYCLE

Technological factors Social factors GROWTH COMPETITIVE DRIVERS PRESSURE Customers Company & Competitors - Some Generic Systems Figure 3. The competitive climate.218 Tony Grundy substitutes, thereby encouraging them in a similar fashion. Between entry barriers and bargaining power of suppliers: new entrants may seek to enter the market by backward integration, either by acquiring suppliers or via alliances. Between substitutes and bargaining power of suppliers: suppliers may seek to leapfrog over existing industry competitors by marketing and selling substitutes. The rened model in Figure 4 thus illustrates the extent to which each of Porters ve forces needs to be understood as a wider, interacting

system as in systems thinking rather than as a self-contained unit. Whilst Porters original concept explains some of these system interdependencies, these are underdeveloped and implicit. Indeed, the conventional input output industry boundaries model, which appears to have been the starting point for the ve forces, can be put to one side. Indeed, some new and quite interesting opportunities can be developed. The ve forces do need to be prioritized. Porters teaching methodology (as per his Harvard Business School video cases) involves ticking each force for whether it is favourable, neutral or unfavourable. The scores are: Favourable Neutral Unfavourable Unfortunately, because of the original composition of the model, it is dened as being mainly about negative strategic characteristics like buyer power, supplier power, rivalry and substitutes it is quite difcult to apply the above scoring method. For instance, where buyer power is high, the models user is encouraged to think this is a bad thing, therefore the score is one tick, or plainly

unfavourable. In many instances, especially on initial learning, the models scores can come out incorrectly. Porters model, as it is currently framed, thus presents an immediate barrier to its assimilation. Furthermore, the above scoring does not take into account the relative importance and weighting of each score. Whilst two-dimensional grids can do this trade-off, the approach is still a little cumbersome. An alternative approach is to borrow from the vector format, originally applied in force eld analysis, for enablers and constraints of organizational change. Not only does this model easily separate out whether a force is favourable or unfavourable, but the length of the arrows can also be used to illustrate its incidence or severity and its Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc ENTRY BARRIERS BARGAINING POWER OF SUPPLIERS RIVALRY BARGAINING POWER OF BUYERS SUBSTITUTES

New Entrants encouraged Search for substitutes Forward integrations Backward integration Figure 4. Porters ve competitive forces: key internal interdependencies.importance. Also, where a force can be split into sub-forces (discussed in the next subsection) it can depict these sub-forces easily. Figure 5 gives an example of this format within the funeral industry. Here the funeral business is depicted as being relatively attractive, particularly through the low bargaining power of buyers and less threat of substitutes. Immediately, using this visual picture, one can challenge the judgements supporting these outputs. Most importantly, its overall visual balance gives immediate interpretation of the industrys overall attractiveness more effectively than by simply adding together the ticks as in Porters approach. Figure 5 thus enables the user to choose which of the ve forces is most important, both in isolation and also in terms of its effects on the system. The forces

here are depicted as vector lines, whose length depends on perceived importance and favourability. How each force relates to the others can now be examined, as explored in Figure 6.The rst permutation looks at the bargaining power of the buyers in the centre of the framework. In Figure 6 the bargaining power of the buyers at the centre is increased by competitive rivalry, the availability of substitutes, low entry barriers and low supplier power. The bargaining power of the buyers is thus not a separate element to consider when using the ve forces, but needs thinking through in relation to the others. In Figure 7, the threat of substitutes (at the centre) is now increased by buyers keen to shop around and by low rivalry amongst existing competitors. Entrants may choose to enter via offering substitutes and once again Porters ve forces model 219 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Favourable Unfavourable Very Low Buying

Power Psychological entry barriers Few substitutes Low supplier power Gentlemanly competition Fragmented competition Low real entry barriers Figure 5. Funerals case: sample outputs (3); ve competitive forces. ENTRY BARRIERS SUPPLIER POWER BARGAINING POWER OF BUYERS SUBSTITUTES RIVALRY Figure 6. Porters ve competitive forces: bargaining power.

ENTRY BARRIERS SUPPLIER POWER BARGAINING POWER OF BUYERS SUBSTITUTES RIVALRY Figure 7. Porters ve competitive forces: substitutes.220 Tony Grundy suppliers might seek to leap-frog existing competitors via the route of substitutes. In Figure 8, with entry barriers at the centre, buyers may reduce entry barriers or encourage substitutes by their search for better value. Rivalry will of course discourage entrants and supplier power may do the same. Besides being novel in structure (the ve forces model is always presented in the standard Porter format), Figures 68 give managers far greater exibility in their use of the model and hopefully more insights. In short, there are many interdependencies both external and internal to Porters ve competitive forces, and these are unlikely to be taught at the present time to practising managers, let alone used by

them. This means that they are likely to struggle to get deep insights about the structure and dynamics of their external environment purely by using the conventional model and its associated analysis. The next subsection attempts to examine the forces within forces. This is more helpful and easier to remember for managers than the relatively ad-hoc qualitative considerations in the conventional texts. The micro competitive forces Whilst Porter does give some narrative help for assessing the ve forces, this is not presented in the very powerfully distilled and visual format of his original model. For example, for competitive rivalry, Porter asks us to think about things like the relative concentration of rivals, such as how many are in the marketplace and with what mass, together with the number of different strategic groups of similar competitors. By extracting from Porters text and by observation of the main considerations which managers actually make, a pilot framework can be developed to move the ve forces down to another level. Additionally, Porter merely lists these considerations and managers appear often inclined to consider them as additive. However, the next set of gures show how the effects may be additional amplied

by each set of micro forces. Each one of the ve forces may therefore have some sub-ingredients, which are worthwhile exploring. The following models are potentially viable frameworks put forward for further experimentation and research to test their resilience and to learn from their application more generally. A particularly interesting application would be to use these to explore how the ve forces work at a micro level even for individual business transactions. Figures 913 can be used either literally to think through each force visually, or as a convenient way of thinking of their underlying drivers. Taking the bargaining power of buyers (Figure 9) rst, this appears to be a function of: Importance in terms of value added. Urgency in terms of lead times to consumption. Discretion and emotion. Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc SUPPLIER POWER BARGAINING POWER OF BUYERS SUBSTITUTES ENTRY BARRIERS

RIVALRY Figure 8. Porters ve competitive forces: entry barriers. EMOTION BARGAINING POWER OF BUYERS DISCRETION IMPORTANCE URGENCY Figure 9. Buyer power: micro forces.The choice of these criteria is quite interesting. Importance and urgency we derive from prioritization. Urgency can be measured according to the lead times required to satisfy the need. Discretion is dened as being the extent to which customers have to full a need or not. For example, in most European countries a funeral is perceived to be essential and non-discretionary. Finally, emotion is a very often neglected force in management, albeit one that is of relatively obvious signicance to customers. Taking an everyday practical example of this: in the case of a toothache, which comes on very suddenly, an individual might be advised by a dentist who reports that he believes the root is nearly dead and advises root canal treatment. This treatment is both urgent and important, and is also

not discretionary. It is also highly emotional. Should you shop around for the cheapest price for a treatment? Probably not, indeed as a customer you would be very price-indifferent and may choose to pay some 300 for it to be xed, even if this involved borrowing the money. These micro forces are interdependent. For example, to some extent discretion may go down if the purchase is highly emotional.Also, importance may tend to reduce the degree of discretion. Turning now to theory and to the next set of micro forces or entry barriers, Figure 10 can be examined. These entry barriers can be usefully broken down into the following ingredients: Physical: is it possible to get access to customers or to resources? Information: to what extent is it possible to acquire knowledge not only about the what of the industry, but also about its how? (The latter being bound up in tacit competences.) Economic: what will it actually cost to enter the market? Psychological: is this a market where it is comfortable to be?

To illustrate the nal point, the funeral business appears, using Porters ve forces, to be a highly attractive market. However, for the vast majority it would not seem to be a psychologically attractive industry to enter. In Figure 11 competitive rivalry is also a function of the following: Commitment to the market. The number of players. Their strategy and disposition. Their similarity to or difference from one another. The number of competitors refers here to the sheer quantity of players in the market. The more similar they are, the more likely that competition will be head-on. Also, the more deeply committed they are, the more severe the rivalry will be. Finally, their mind-set will inuence the manner of their competition with one another. Clearly, these micro forces Porters ve forces model 221 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc PSYCHOLOGICAL ENTRY BARRIERS PHYSICAL IMFORMATION

ECONOMIC Figure 10. Entry barriers: micro forces. MIND-SET RIVALRY SIMILARITY Porters Micro Forces -Rivalry COMMITMENT NUMBER Figure 11. Porters micro forces: rivalry.222 Tony Grundy are also interdependent as, for example, the existence of a small or large number of rivals might shape their mind-set. Also, their commitment and more general mind-set are also clearly interlinked. Turning next to the force of substitutes, Figure 12 displays its more micro-level forces. The gure reveals the following: Do it yourself in-sourcing the activity, for example by making an expensive, sourcedout consultancy service an internal one. Other technologies looking at other ways of achieving the same value, for example elearning has substituted many technical training areas. Emotional the extent to which the purchase is emotional or not. Bundling or unbundling the customers ability to do something either as part of something else, or to take a packaged offering and to capture value it by breaking up the value-added activity into its smaller

components. Again, the micro forces may be interdependent and other technologies may facilitate bundling and unbundling. The nal analysis is Figure 13, which examines supplier power. These four micro forces can be summarized as follows: Unique knowledge if the supplier(s) has some unique capability this will obviously enhance their power. Size and number where there are a very small number of very large suppliers this will obviously increase their power. Resource scarcity where resources are scarce and preferably permanently, this again will help promote supplier power. Forward integration the suppliers capacity to integrate forward in the industry chain will improve their competitive power. Clearly, aspects of this force and of the others too suggest linkages and overlaps with the resource-based theory of competitive advantage. Again, these micro forces are interdependent. For instance, where there are few suppliers and high resource scarcity, this will multiply supplier power.Also, where suppliers have unique knowledge, this might facilitate towards integration, perhaps through strategic alliances. Whilst there may be other ways of

grouping the various sub-forces within the framework, these models do seem to be both plausible and practical, and go beyond the fragmentary and narrative approaches found in the literature. Also, it has been demonstrated here that each one contains some rich and insightful interdependencies. One principal benet is that they encourage managers to think in more depth about each force rather than at a supercial level. Secondly, they will help managers to understand how these subforces interact with each other. For example, just as the interdependencies were drawn for Figure 4, the original ve forces, the same could be done for these Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc BUNDLING OR UNBUNDLING SUBSTITUTES OTHER TECHNOLOGIES EMOTIONAL DO IT YOURSELF Figure 12. Porters micro forces: substitutes. FORWARD INTEGRATION

SUPPLIER POWER SIZE AND NUMBER RESOURCE SCARCITY UNIQUE KNOWLEDGE Figure 13. Porters micro forces: supplier power.gures. For instance in Figure 9, the importance of a purchase is linked with its emotional content, discretion is partly linked to urgency, and urgency needs to be traded off with importance. Competitive dynamics Porters ve competitive forces is traditionally a very static model, which diminishes its usefulness, but it can be given a more dynamic perspective and quite easily. Competitive dynamics can be explored at a macro and a micro level.At a macro level, these can be seen impacting dynamically over the industry cycle, for example for the bargaining power of the buyers and entry barriers (Figure 14). As an industry reaches maturity, entry barriers often increase (favourable) but the bargaining power of the buyers also increases (unfavourable). Each one of the ve competitive forces can be plotted individually in a similar way.

The benet of the model in Figure 14 is that it encourages managers to think about how industry structure is likely or liable to change in the future. It also helps them to reect on why the industry has changed in recent times. Besides modelling competitive pressure over time, this can also be overlaid by, for example, growth drivers over time (high versus low). The competitive forces may also vary over time at the level of an individual business transaction (at a micro level). For instance, where a large management consultancy gets involved with a blue-chip client, during the tendering stage the customers bargaining power might be high. However, once the consultants start to do work it often becomes increasingly difcult for the client to control variations and the total cost of further stages of work. Another typical example is that of going into a restaurant where bargaining power of the buyer diminishes in stages: (a) when they go into the restaurant, (b) when they sit down, (c) when they order and (d) when they have courses 1, 2 and 3. Of course it is possible to walk out or pay for the meal so far, but this is psychologically difcult,

especially where the buyer is a group of people. The relevance of Figure 15 is that it allows managers to use the ve forces at an everyday level and to track the impact of these forces, especially of bargaining power over a typical transaction lifecycle. Besides plotting these dynamics at both a macro and a micro level, it is also important to examine their underlying drivers. Not only are these a function of the industry lifecycle effects and of the cumulative learning of key players, but also of a particular mind-set. Mind-set is emphasized by at least some writers on strategy, yet primarily in the company-specic rather than industry context. The industry mind-set has been dened as:The perceptions, expectations and assumptions about the industry now and future. Porters ve forces model 223 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Favourable Unfavourable TIME Industry cycle Entry barriers

Bargaining of buyers Figure 14. Macro-level competitive dynamics.224 Tony Grundy The signicance of this concept is that: Managers should beware thinking that the structural properties of Porters ve forces are a given. In part, these forces are a reection of a softer mind-set of the industry. This mind-set is often shared between players within the industry and can be disrupted by players who can and will think differently. The strength and homogeneity of an industry mind-set will reduce the responsiveness of the industry to disruptive change and to facilitate rapid market share build-up by a new entrant. For example, in the UK Dyson Appliances built a dominant market share of the carpet cleaner market with a bagless model in just two and a half years. Its competitors were in a state of shock and denial for a further two years before they imitated the company. Dyson now sells its products in the USA. It helps us to link external analysis and Porterian competitive strategy with the resource-based theory of competitive advantage of the rm, by highlighting how mindset can help a company to transcend the competitive forces and by deploying different marketing and innovative skills. By studying the industry mind-set and by using the more advanced analysis techniques of competitive forces, which have

been explored here, managers can achieve strategic breakthroughs. Mapping competitive forces: horizontally and vertically Porters Competitive Strategy (1980) focused principally on analysis at the industry level. However, this could be inappropriate, particularly as the competitive landscape for a business might be of highly variable attractiveness. For example, consider the fees for a one-day strategy course, comparing rates from independent consultants to that of a business school, with daily rates ranging from 1000 to over 10,000 per day. When Porter posed the question Why are some industries more attractive than others?, it is necessary to answer with It depends on which product/ market/sector you are talking about. Industry structures are like a landscape and highly variable in their attractiveness, meaning that Porters model must be used in a more discriminating and localized way to describe them. This attractiveness can be represented in two-dimensional space, horizontally across sectors and vertically, in terms of the extent to which it is focused on differentiation versus cost leadership. Simple matrices like Figure 16 might help managers in their thinking. Three ticks means favourable, whilst two ticks are neutraland one tick is unfavourable.

Figure 16 illustrates this with the different sectors of the funerals industry. Figure 17 now examines the competitive forces map within the carpet cleaning market Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Favourable TIME Transaction cycle Bargaining power Figure 15. Micro-level competitive dynamics.in the UK, 19952004. Previously, apart from one or two deluxe models like the Kirby, the vast majority of models were of similar perceived use value and price. Following Dysons entry with a bagless, cyclonic, modernlooking and premium-priced model, the competitive map of the industry was altered. The majority of purchases became cyclonic and premium-priced, but they left a void at the bottom of the market, whereby 20034, new entrants emerged and Hoover began to capture share with light, cyclonic, cheap machines priced at 3050 each. Here the overall competitive shape of the market has moved from a more pyramid shape to an eclipse. Pictures like Figure 17 can help managers to explore and create competitive changes. A nal application of Porters ve forces is at a micro level to departments, projects and

to individual roles, for each one of Porters ve forces may be very relevant to each one of these situations. For example, an individual may face rivals, might be substituted or have to try to fend off new entrants to his/her valueadding role. In conclusion it is necessary to break down the analysis of Porters ve forces on a segment-by-segment or on a mini strategy basis. This helps to make Porters framework far more context-specic and applicable at the rm level. Indeed, Porters model can be applied right down to the project level and to the level of an individuals role where there may be variable rivalry, substitutes, bargaining power, etc. Indeed, in teaching Porters ve forces these less obvious applications are often found to be perceived of higher value by managers. The above has explored more advanced ways of applying Porters ve forces at a more general level. This can now be applied more specically using the health club industry in the UK as an example. Competitive pressure in the health club industry 19952004

(a case study) In 1995 the UK health club industry was at a turning point.The recession of the early 1990s Porters ve forces model 225 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Substitutes Rivalry Entry barriers Buyer Power Basic funerals Deluxe funerals Pre-need market Overall attractiveness Supplier Power 13 11 14 Figure 16. Porters ve forces: segmentation. Kirby Dyson Dyson Lookalikes Residual bagged machines New, light machines

Premium Bagged Differentiation Vertical Cost Leadership Segments Segments Horizontal Figure 17. Mapping the ve competitive forces the carpet cleaning market, 2004.226 Tony Grundy had inhibited growth but had also sustained a low competitive rivalry. However, key players in the industry had identied considerable latent growth as the rate of penetration of the potential market was low. These conditions triggered a wave of major expansion as the economy grew again through new site development. Also, existing players grew by acquisition, creating greater industry concentration, hopefully a positive factor. Many buyers were relatively new to the market, being either newcomers to a gym, or because of industry churnas many people rapidly dropped out of the gym. This meant that many were unsophisticated in their information available, making it easier for companies to charge reasonably high prices relative to the standard and value added of what they actually offered. Current margins were good, sites in the industry were available and reasonably cheap, and the industry mind-set was very positive. Over 19962001 there followed a major expansion in capacity with players chasing market share and neglecting the future set of ve competitive forces which it was just about to

encounter. Just as Hamel and Prahalad extolled us to think about future competitive position as well as present competitive position, so we should anticipate competitive dynamics (see Figure 15) by thinking about future competitive forces and against the surrounding growth drivers and PEST factors (see Figure 3). One company that took advantage of this opportunity was Topnotch. In the 1990s Topnotch was a small chain of independent health clubs with an appeal to the younger market segments and with a theme of excitement. Fundamentally, however, Topnotch was a lowest price operator with a lack of scale and little brand awareness two of the critical success factors necessitated by the future ve competitive forces which it was about to enter (after 2001). In 2001, Topnotch oated its shares on the stock market and used these funds, after considerable transaction costs, to expand into a chain of over 20 clubs. For reasons of speed, many of these new sites were acquisitions of existing ones. At the time of otation, nancial markets saw this market as very attractive seeing growth prospects but not perhaps inquiring

into probable trends and discontinuities in both growth drivers and PEST factors. They therefore played a highly encouraging role in this expansion. The effect of 9/11 on the service economy and of economic slowdown generally had a particularly sudden and adverse effect on this industry, and especially on Topnotch. This can be analysed using an extended Porters ve forces combined with fromto analysis (see Table 1). Overall, the fromto analysis represents a negative shift in forces and one signicant enough to cause a decline in margins. When combined with volumes being lower than expected and with over-enthusiastic expansion of many companies central costs, the effect was, predictably, prot warnings across the industry. By 2002, Topnotch, like many other chains, was in nancial trouble. Yet Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc Table 1. Porters ve forces: fromto analysis From To Because of Bargaining power of buyers Medium High Buyers more discerning, experienced and price-sensitive Rivalry Medium Very High Companies desperate to nd health club

capacity producing discounting, etc. Substitutes (threat of) Medium Medium/High Buyers can nd alternatives thus saving money Entry barriers Low/Medium Medium Sites now so expensive hard to enter but could change again Suppliers Low staff Low staff Variable High sites Medium sitesinstead of looking for further ways to adapt the industry mind-set, the reactive response of the industry generally was simply to reduce their largely unnecessary costs. In 2002 Topnotch went into administration, although a major part of it is still in operation today. Clearly the above was a very painful learning process for all of those involved, particularly investors and many staff, and also for the entrepreneurs who led this growth surge, into the teeth of the (future) ve competitive forces. If an in-depth analysis had been performed as of 19968 of the future competitive climate for 20014 (Figure 3), then much of this nancial pain might have been avoided. As Matthew Harris, CEO of the original Topnotch and of its remaining, independent sites, today reects: I hadnt really heard about the ve competitive forces to be honest. I had absorbed a lot of management theory from various sources, especially the nancial stuff but I just felt from everything I saw, heard about and imagined, that we could only

win through this growth. I rst saw Porters ve forces well after we had gone over the precipice. It didnt seem very helpful at the time as I couldnt see what I could really do with it in that situation and it did seem quite theoretical. Looking back on the experience and reecting on the competitive situation as we have now, I can see its now obvious relevance. Besides the obvious cost reduction which it implied we are now focusing on how we can turn the buying power of the buyers to our advantage in our marketing strategy. I can certainly see how the forces interplay with each other and with the rest of what is going on and even down to a very specic transaction like someone joining or leaving us. In sum, the short case above has helped to bring alive some considerations of this paper, particularly of the interdependency of the forces both within each other, with PEST factors and growth drivers. It also illustrates how operating managers, however senior, can fail to see the full potential of the technique. Conclusions: possible ways forward

This paper has shown how Porters ve competitive forces model could be much developed by: Combining it and interrelating it with other tools such as growth drivers and PEST factors. Examining other systemic interdependencies. Prioritizing it with the competitive force eld type of analysis. Examining the sub-forces at work. Examining the dynamics and the impact of the industry mind-set. Segmenting markets to examine the variations within the competitive landscape. Porters model thus offers signicant potential for both further conceptual development and for practical application. Other areas, which are beyond the scope of this paper, are its application to: 1. Acquisition decision-making. 2. Alliances. 3. Account management, especially in understanding the industry structure, critical success factors, options and areas of possible company value-added customers. 4. Negotiating large contracts. It would be of considerable help here both in decisionmaking and in deal-making. Perhaps because the technique was born in

economics and perhaps because it was so very successful initially, signicant attempts to apply it across a range of practical management issues or to evolve it further appear to have failed to occur. Unless we in the academic world are prepared to reinvigorate old concepts and in an imaginative way as proposed in this paper, techniques like Porters ve forces might be destined to fall into the same lifecycle phase Porters ve forces model 227 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc228 Tony Grundy of maturity and decline as real businesses.This would be a shame because the model, if applied properly and more subtly, will generate very important insights for managers. Without signicant rethinking and development they may become forgotten due to new management trends, which may turn out to be less powerful and far more supercial. Besides applying new ideas to the teaching and practical application of Porters ve forces, this also offers a most promising area for future research, especially to explore how managers respond to using more advanced and detailed approaches to Porters model as contained here. Future research could, for example, focus on questions such as:

When using Porters ve forces model, how do managers cognitive perceptions and emotions interact with each other to shape their judgements? To what extent does introducing managers to Porters ve forces subsequently inuence their thinking, discussions, decisions and actions, and how if at all?

What are the barriers, as perceived by managers, to using their model effectively and why do these exist?

Where managers have not been made aware of Porters model, to what extent do they conceptualize their competitive environment in similar ways or not? How might managers perceive the relevance of Porters ve forces to the more micro project and individual role level? Hopefully this paper will excite strategy academics to revisit its power and potential. Biographical note Tony Grundy is a Senior Lecturer in Strategic Management at Craneld University School of Management and an active independent management consultant. Tony is the author of 17 books, including Be Your Own Strategy Consultant published by Thomson Learning.

Before joining Craneld, his previous career spanned Ernst and Young, BP, ICI and KPMG. Tony is on the editorial board of Strategic Change. References Avila EA. 2001. Competitive forces that drive engineer recruitment and retention. Leadership and Management in Engineering 1: 1723. Chen JCH, Cheng PP, Chen Y-S. 2001. Decision criteria: a theoretical foundation of Pareto principle to Porters competitive forces. Journal of Organizational Computing and Electronic Commerce 11(1): 114. Covey S. 1989. The Seven Habits of Highly Effective People. Simon and Schuster: London. DeWit B, Meyer R. 1988. Strategy: Process, Content, Context. International Thomson: London. Grant RM. 1991. The resource-based theory of competitive advantage: implications for strategy formulation. California Management Review 33(3): 114135. Grundy AN. 1995. Breakthrough Strategies for Growth. Pitman Publishing: London. Grundy AN. 1997. Strategy mix and the industry mind-set. Journal of General Management 22(4): 1630. Grundy AN. 2001. Competitive strategy and

strategic agendas. Strategic Change 10(5): 247260. Grundy AN. 2003. Mergers and Acquisitions. Capstone Press: Oxford. Grundy AN. 2004. Rejuvenating strategic management The Strategic Option Grid. Strategic Change 13: 111123. Grundy AN, Brown LR. 2002a. Be Your Own Strategy Consultant Demystifying Strategic Thinking. International Thomson Publishing: London. Grundy AN, Brown LR. 2002b. Strategic Project Management. International Thomson Publishing: London. Hamel E, Prahalad CK. 1994. Competing for the Future. Harvard Business School Press: Boston, MA. Johnson G, Scholes K. 1989. Exploring Corporate Strategy. Prentice Hall: Hemel Hempstead. Lewin K. 1935. A Dynamic Theory of Personality. McGraw-Hill: New York. Lynch R. 1997. Corporate Strategy. Pearson Education: Harlow. Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jscMahan JF, McGowan RA. 1998. Modelling industry political dynamics. Business and Society 37(4): 390414. Mintzberg H. 1994. The Rise and Fall of Strategic

Planning. Prentice Hall: Hemel Hempstead. Mintzberg H, Quinn JB, Ghoshal S. 1995. The Strategy Process. Pearson Education: Harlow. Passemard D, Kleiner BH. Competitive advantage in global industries. Management Research 23(718): 111118. Pecotich A, Hattie J, Li P-L. 1999. Development of industries: a scale for the measurement of perceptions of industry structure. Marketing Letters 10(3): 403. Porter EM. 1980. Competitive Strategy. The Free Press/Macmillan: New York. Porter EM. 1985. Competitive Advantage.The Free Press/Macmillan: New York. Porter EM. 1990. Competitive Advantage of Nations. Macmillan: New York. Quinn JB. 1980. Strategies for Change Logical Incrementalism. Richard D. Irwin: Illinois. Senge P. 1990. The Fifth Discipline The Art and Practice of the Learning Organisation. Century Business. Thomson and Strickland. 1978. Strategic Management Concepts and Cases. Irwin/McGrawHill: New York. Thurlby B. 1998. Competitor forces are also subject to change. Management Decision 36(1): 1925. Ward FW, Novak M. 1997. How rationality shapes business ethics. Journal of Business Ethics 16(12/13): 13811392.

Porters ve forces model 229 Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/js

porter's five forces model

Michael E Porter's five forces of competitive position model and diagrams
Michael Porter's famous Five Forces of Competitive Position model provides a simple perspective for assessing and analysing the competitive strength and position of a corporation or business organization. A free Five Forces diagram in MSWord is available here. (Porter's Five Forces diagram pdf here.) American Michael Porter was born in 1947. After initially graduating in aeronautical engineering, Porter achieved an economics doctorate at Harvard, where he was subsequently awarded university professorship, a position he continues to fulfil at Harvard Business School. His research group is based at the Harvard Business School, and separately he co-founded with Mark Kramer the Foundation Strategy Group, 'a mission-driven social enterprise, dedicated to advancing the practice of philanthropy and corporate social investment, through consulting to foundations and corporations'. A prime example of someone operating at a self-actualization level if ever there was one. After his earlier work on corporate strategy Porter extended the application of his ideas and theories to international economies and the competitive positioning of nations, as featured in his later books. In fact in 1985 Porter was appointed to President Ronald Reagan's Commission on Industrial Competitiveness, which marked the widening of his perspective to national economies. By the 1990's Porter had established a reputation as a strategy

guru on the international speaking circuit second only to Tom Peters, and was among the world's highest earning academics. Porter's first book Competitive Strategy (1980), which he wrote in his thirties, became an international best seller, and is considered by many to be a seminal and definitive work on corporate strategy. The book, which has been published in nineteen languages and re-printed approaching sixty times, changed the way business leaders thought and remains a guide of choice for strategic managers the world over. Aside from his innovative thinking, Porter has a special ability to represent complex concepts in relatively easily accessible formats, notably his Five Forces model, in which market factors can be analysed so as to make a strategic assessment of the competitive position of a given supplier in a given market. The five forces that Porter suggests drive competition are:
porter's five forces

1. 2. 3. 4. 5.

Existing competitive rivalry between suppliers Threat of new market entrants Bargaining power of buyers Power of suppliers Threat of substitute products (including technology change)

Typically this five forces model is shown as a series of five boxes in a cross formation, item 1 being central. (Pdf diagram here, MSWord diagram here.) Porter's Five Forces model can be used to good analytical effect alongside other models such as the SWOT andPEST analysis tools. Porter's Five Forces model provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position, as might be used when creating strategy, plans, or making investment decisions about a business or organization.

Porter is also known for his simple identification of five generic descriptions of industries: 1. Fragmented (eg, shoe repairs, gift shops) 2. Emerging (eg, space travel) 3. Mature (eg, automotive)

4. Declining (eg, solid fuels) 5. Global (eg, micro-processors) And Porter is also particularly recognised for his competitive 'diamond' model, used for assessing relative competitive strength of nations, and by implication their industries: 1. Factor Conditions: production factors required for a given industry, eg., skilled labour, logistics and infrastructure. 2. Demand Conditions: extent and nature of demand within the nation concerned for the product or service. 3. Related Industries: the existence, extent and international competitive strength of other industries in the nation concerned that support or assist the industry in question. 4. Corporate Strategy, Structure and Rivalry: the conditions in the home market that affect how corporations are created, managed and grown; the idea being that firms that have to fight hard in their home market are more likely to be able to succeed in international markets.
5. 6. Introduction: Interest in the study of the forces that impact an organization has continued to rise, particularly those that have shown to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were all based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector. As Porter's five forces analysis deals with factors outside an organization that influence the nature of competition within it, the forces inside the organization (microenvironment) that influence the way in which organizations compete, and so the organization's likely profitability is conducted in porters five force model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, illustrating that the competitive environment is created by the interaction of the five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, buyer's power and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces. Porter's five forces analysis: The original competitive forces model identified the five forces which would impact on an organization's behavior in a competitive market. These include the following;

7.

8. 9.

10. -The rivalry between the existing sellers in the market place. 11. -The power exerted by the customers in the market place. 12. -The impact of the suppliers on the sellers. 13. -The threat of potential entrants in the market 14. -The threat of substitute products becoming available in the market 15. Understanding each of these forces nature gives organizations the necessary procedures to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998). Thus the following diagram illustrates the porter's five forces as noted in the market. 16. Five forces analysis of an industry:

17. In the illustration above all the arrows point inwards denoting influence or power, thus if an industry looked like this competitive rivalry would be very fierce and profit streams would emerge low. 18. Force one: The Threat from Potential entrants 19. Average industry's profitability is influenced by both potential and existing customer. It's usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. (Porter, 1980b; Sanderson, 1998) .The most common forms of entry barriers are as follows, Economies of scale e.g. the benefits associated with bulk purchasing, Government action e.g. the introduction of new laws, Distribution channels e.g. ease of access for competitors, Capital requirements and product differentiation. 20. Force two: The Threat of Substitutes 21. The threat that this force poses to an industry's profitability largely depends on the relative price-to-performance ratios of the different types of services or products to which customers can turn to satisfy the same basic need. 22. Force three and four: The Power of Buyers and Suppliers 23. Both buyers and suppliers can influence profit margins by exercising their power. The more power they have, the lower margins there are likely to be, thus it's important to measure their respective power and if (and how) that influence may change. Thus buyer's power is likely to be high when purchases represent a substantial proportion of total sales by the producer. For example Marks & Spencer effectively 'tie' their suppliers by taking most of what they (the supplier) produce ,thus switching costs are low, engage in vertical integration if prices are too high and if entry barriers are low the buyer turns into a producer. 24. Force five: The threat of competitive rivalry. 25. Rivalry is the most obvious of the five forces in an industry; it helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. Rivalry, while important, is only one of several forces that determine industry attractiveness. This force is located at the centre of the diagram and is most likely to be high in those industries where there are threats of substitute products and existing power of suppliers and buyers in the market. 26. A company therefore will take fair advantage of its strengths, improve its weaknesses and avoid taking wrong steps, with a clear understanding of where power lies. Thus it is important to understand the situation and to look at each of the forces individually in order to apply this planning tool effectively. 27. Any company if it is to be successful in achieving its objectives and in establishing appropriate marketing strategies then it must seek first to understand the nature of its competitive environment. If a company is in a full position to understand fully the nature of the Porter's five forces, and thus appreciate the most important, it will be in a stronger position to defend itself against any threats and largely influence the forces with its strategies. The situation is fluid, and the nature and relative power of the forces will change. Consequently, contributing greatly to the company's SWOT analysis. 28. SWOT analysis: 29. Introduction: 30. An evaluation of an organization's strength and weaknesses in relation to environmental opportunities and threats is generally referred to as SWOT analysis. Thus it is an extremely useful tool for understanding and decisionmaking for all sorts of situations in business and organizations and hence it is an acronym for Strengths, Weaknesses, Opportunities and Threats. Its main objective is to measure a business unit, a proposition or idea. 31. Strengths: 32. These determine an organization's strong points hence should be from both internal and external customers. If it gives the firm a comparative advantage in the market place then it is definitely a distinctive competence. Strengths arise from the resources and competencies available to the firm. 33. Weaknesses: 34. Determine largely an organization's weaknesses. This should be not only from the organizations own point of view, but also moreover importantly, from those of the customers. It is best for an organization to acknowledge its weaknesses which may seem difficult however, but it is positive to handle this bitter reality for its own good. 35. Opportunities:

36. They are basically the marketplaces but also can be found everywhere, such as the changes in technology, government policy and social patterns. An opportunity is a major situation in a firm's environment. Key trends are one source of opportunities. Overlooked market segment identification, regulatory circumstances or changes in competitive circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm. 37. Threats: 38. They are the most unthinkable, despite the fact that they are external factors that are out of our control, we still have to face them for example, the recent economic slump in Japan. Hence it is vital to be prepared and face threats even during turbulent times. Threat can be said to be a major unfavorable situation in a firm's environment. They are key impediments to the firm's current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm's success. 39. Thus it is always essential to note that the internal factors are always within and under the control of an organization such as finance, operations, marketing and other areas. On the other hand, external factors are out of the organization's control, such as political and economic factors, technology, competition, and other areas. 40. A successfully conducted SWOT analysis involves identifying the things an organization does particularly well (strengths) or bad (weaknesses) at present .The factors that in the future may give the potential to grow and increase its profits (opportunities) or may make its position weaker (threats). Opportunities and threats are experienced from changes in the environment, and at times can have their origin inside the organization - for example, if key machinery or people, functioning very effectively at present, are likely to break down or retire in a few years' time, that is a threat. Under a marketing perspective in SWOT analysis - a factor can be strength or a weakness, but not both. 41. Illustration: - a firm's IT system may deliver perfect management reports but poor production control information. This cannot be put down as both strength and a weakness as they partially cancel each other out, managers therefore have only two choices: either they upgrade the system or they do not (Mintzberg, 1990). Hence therefore you need to come to a definite and concrete answer to the question: On balance, is the IT system a strength or a weakness? Perhaps the lack of good production information is important, in which case the system needs to be upgraded. Perhaps it is vital to maintain the flow of management information, in which case the system should not be touched (Thompson, 2002). SWOT analysis then aims to differentiate factors from being bad or good for the company's performance. 42. SWOT analysis thus has among many managers been a framework of choice for a long time simply because of a perfect sound strategy formulation - matching a firm's opportunities and threats with its strengths and weaknesses. For SWOT analysis to be effective accurate internal analysis that consists of the identification of specific strengths and weaknesses around which sound strategy can be built, should be observed and followed.

Porters Five Forces

Assessing the Balance of Power in a Business Situation

Assess the balance of power in a business situation, with James Manktelow & Amy Carlson.

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.

Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations.

Understanding the Tool:

Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are: 1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 3. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. 4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. These forces can be neatly brought together in a diagram like the one in figure 1 below: Figure 1 - Porter's Five Forces

Using the Tool:

Mind Tools on Strategy: SWOT Analysis TOWS Analysis PEST Analysis Core Competence Analysis Value Chain Analysis Porter's Five Forces Porter's Generic Strategies Bowman's Strategy Clock Scenario Analysis To use the tool to understand your situation, look at each of these forces one-by-one and write your observations on our free worksheetwhich you can download here. Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above. Then, mark the key factors on the diagram, and summarize the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single "+" sign for a force moderately in your favor, or "--" for a force strongly against you (you can see this in the example below). Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however looking at things in this way helps you think through what you could change to increase your power with respect to each force. Whats more, if you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one.

This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools. The classic article which introduces it is "How Competitive Forces Shape Strategy" in Harvard Business Review 57, March April 1979, pages 86-93.

Example:
Martin Johnson is deciding whether to switch career and become a farmer he's always loved the countryside, and wants to switch to a career where he's his own boss. He creates the following Five Forces Analysis as he thinks the situation through: Figure 2 - Porter's Five Forces Example - Buying a Farm

This worries him: The threat of new entry is quite high: if anyone looks as if they're making a sustained profit, new competitors can come into the industry easily, reducing profits. Competitive rivalry is extremely high: if someone raises prices, they'll be quickly undercut. Intense competition puts strong downward pressure on prices. Buyer Power is strong, again implying strong downward pressure on prices. There is some threat of substitution. Unless he is able to find some way of changing this situation, this looks like a very tough industry to survive in. Maybe he'll need to specialize in a sector of the market that's protected from some of these forces, or find a related business that's in a stronger position.

Key Points:
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations. It works by looking at the strength of five important forces that affect competition: Supplier Power: The power of suppliers to drive up the prices of your inputs. Buyer Power: The power of your customers to drive down your prices. Competitive Rivalry: The strength of competition in the industry. The Threat of Substitution: The extent to which different products and services can be used in place of your own. The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down). By thinking about how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of your position and your ability to make a sustained profit in the industry. You can then look at how you can affect each of the forces to move the balance of power more in your favor.

Porter's Five Forces Analysis

Brief Description
The Five Forces Model is a tool that can be used to analyze the opportunities and overall competitive advantage of you, your organization, or your project. It is comprised of five forces that can assist in determining the competitive intensity and potential attractiveness within a specific area. This can be developed to assist in analyzing a specific project and the strategic opportunities for this project, as well as the strategic opportunities, effectiveness and profitability of your organization as a whole. Within the Five Forces Model the following forces are identified:

1. 2. 3. 4. 5.

Competition New entrants End users/Buyers Suppliers Substitutes

History
The five forces were originally identified and developed by Michael E. Porter while working for the Harvard Business School and the Boston Consulting group. Both were looking for a new and updated version for developing strategies in the area of competitive advantage. He applied the principles of microeconomics and business strategy to analyze requirements in individual sectors. Developing the five forces in line with the business goals of utilizing an organizations / projects limited resources on its greatest potential opportunities. In the 1990's after criticism the five forces model was augmented by several different individuals in order to include a sixth force effectively completing the model. The overall consensus was that the model was lacking an external factor, while exactly what factor has been extensively debated and discussed the three main possibilities are: Complementary products/ The government/ The public.

When to use
The Five Forces Model is important for organizations to develop concise evaluations within a specific area. This will allow you to analyze your organization or project by looking at the specific internal and external forces and how they can potentially affect effectiveness and attractiveness.

How to use
The first three of the forces are external factors while the last two are internal factors that could affect you, your organization and /or project. For each factor you must look at exactly who, what, why and how these factors could potentially effect you, your organization and/or your project.

Porters Five (5) Forces Analysis to identify competitive opportunities and attractiveness in any industry or market
Michael Porter (Harvard, Competitive Strategy 1980) developed the so called 5 Five Forces Analysis model to better identify factors that shape the character of competition, to assess the structural attractiveness and business value of any industry and to pinpoint strengths and weaknesses in a company.

Sponsor : Digmind competitive intelligence software

In addition to and in combination with the SWOT analysis, the Five Forces model by Michael Porter provides another analysis tool to identify opportunities and risks when entering untapped territory in any industry or market. Porters Five Forces model, other than a SWOT analysis, provides clear action a nd thus does not rely solely on subjective judgment. If the actions that derived from the Five Forces model are synchronized with business requirements and goals it can become a substantial business driver in the competitive environment. What is the Five Forces analysis? Five Forces analysis model definition by Vernon Prior (The Language of Business Intelligence): Five forces industry analysis helps to assess and manage the long-term attractiveness of an industry. It is designed to explain the relationship between the five dynamic forces that affect an industrys performance; these are the: intensity of competitive rivalry; threat from new entrants; threat from substitutes; bargaining power of buyers; bargaining power of suppliers.

Objective The Five Forcers Analysis model wants to identify what factors shape the character of competition within an industry.

Porters Five Forces model targets the assessment of the structural attractiveness of the analyzed industry. Finally the Five Forces Analysis pinpoints strengths and weaknesses in a company and discovers opportunities or threats within the industry. Methods Assess the strength of each of the five forces affecting competition in the chosen industry. Assess the companys position compared to the underlying causes of each force (see example: substitutes) Devise a plan of action that may include: 1) Positioning the organization to provide the best defense against competitive forces 2) Influencing the balance of the forces through strategic moves and other pro-active measures 3) Anticipating shifts in the forces and positioning the organization and its goals and actions accordingly

Threat of Entry: Determinants Economy of scale Brand identities, marketability Capital requirements (raw materials, technology) Access to distribution

 Absolute cost advantages Goverment policies, legislation Rivalry Determinants: Projected industry growth (fight for market shares) Fixed costs expectations (projected on forecasts) Brand identity Numerous competitors with equal power and resources Lack of differentation Determinants of Supplier Power: Supplier concentration, density Switching costs, effort Forward integration threats Presence of substitute inputs (plus projected) Importance of volume to suppliers Determinants of Substitution Threat: Buyer propensity to substitute Relative price of substitutes Switching costs, other barriers Determinants of Buyer Power: Buyer concentration Buyer volume Ability to backward integrate Substitute products Price sensitivity (incl. perceived price value) Low profits

On top of the sheer Five Forces analysis there needs to be concise action as push back parameters when externall threats and risks are detected. Read more on some of the five forces push back strategies here.

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