PART 1: LESSON TOPICS:

Five Forces Analysis – Competitive Advantage Assessment

https://www.investopedia.com/terms/p/porter.asp (Watch Video)
Reference: investopedia.com/ difference-between-porters-5-forces-and-pestle-analysis
https://www.investopedia.com/articles/investing/103116/pitfalls-porters-5-forces.asp
(Watch Video)

Porter’s five forces is a widely used framework for analyzing industries. It refers to the
competitive influences shaping the corporate strategies that are likely to be successful. The
framework has held up well over time and continues to be a staple of the coursework for
business classes. There are, however, some blind spots that you should be aware of.

Porter's Five Forces is a model that identifies and analyzes five competitive forces that
shape every industry and helps determine an industry's weaknesses and strengths. Five
Forces analysis is frequently used to identify an industry's structure to determine corporate
strategy.

Porter's model can be applied to any segment of the economy to understand the level of
competition within the industry and enhance a company's long-term profitability. The Five
Forces model is named after Harvard Business School professor, Michael E. Porter.

Porter's 5 forces are:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products1

KEY TAKEAWAYS

 Porter's Five Forces is a framework for analyzing a company's competitive

environment.
 It is a frequently used guideline for evaluating the competitive forces that influence a
variety of business sectors.
 The model has drawbacks, including that it is backward-looking, making its findings
mostly relevant only in the short term; that limitation is compounded by the impact
of globalization.
 It was created by Harvard Business School professor Michael E. Porter in 1979 and
has since become an important tool for managers.
 These forces include the number and power of a company's competitive rivals,
potential new market entrants, suppliers, customers, and substitute products that
influence a company's profitability.
  Five Forces analysis can be used to guide business strategy to increase competitive
advantage.
 Another big drawback is the tendency to try to use the five forces to analyze an
individual company, versus a broad industry, which is how the framework was
intended.
 Also problematic is that the framework is structured so that each company is placed
in one industry group when some companies straddle several.
 Another issue includes the need to assess all five forces equally when some
industries aren't as heavily impacted by all five.

Understanding Porter's Five Forces

Porter's Five Forces is a business analysis model that helps to explain why various industries
are able to sustain different levels of profitability. The model was published in Michael E.
Porter's book, Competitive Strategy: Techniques for Analyzing Industries and Competitors in
1979.1

The Five Forces model is widely used to analyze the industry structure of a company as well
as its corporate strategy. Porter identified five undeniable forces that play a part in shaping
every market and industry in the world, with some caveats. The Five Forces are frequently
used to measure competition intensity, attractiveness, and profitability of an industry or
market.

Michael Porter first outlined the five forces in a 1979 Harvard Business Review article, and
later in his book Competitive Strategy: Techniques for Analyzing Industries and
Competitors (1980). They are;

1. Competition in the Industry

The first of the Five Forces refers to the number of competitors and their ability to undercut
a company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company.

Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices. Conversely, when competitive rivalry is low, a company has greater
power to charge higher prices and set the terms of deals to achieve higher sales and profits.

Competitive rivalry. This force is used to sum up the level of competition within an industry.
If there are a multitude of players all trying to undercut each other, then profit margins will
reflect that. The airline industry is a great example of this: Carriers are always attacking each
other with competing routes and trying to steal customers away. A lot of money has been
lost in airlines.

2. Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened.
An industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.

The threat of new entrants to the market. Companies in markets with high barriers to
entry—whether through regulation, high fixed and/or start-up costs, protected intellectual
property, etc.—face less competition than companies in markets with lower barriers. Oil
and gas exploration is an example of a tough market to enter because it requires a lot of
capital to be able to spread the risks of an unprofitable drill across multiple leases.

3. Power of Suppliers

The next factor in the Porter model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how
unique these inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would depend on a
supplier.

As a result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching
costs between rival suppliers, a company can keep its input costs lower and enhance its
profits.

The power of the suppliers. If the number of suppliers for a sector is limited, then those
suppliers have a lot of pricing power over their client companies. This can lead to the
suppliers doing better than the buyers. Microsoft in the 1990s is nearly a textbook example
of this dynamic. Microsoft’s operating system drove huge profits for the company while the
margins for the personal computers being sold to the public with Windows grew ever
thinner, and PC manufacturers saw their profits erode.

4. Power of Customers

The ability that customers have to drive prices lower or their level of power is one of the
Five Forces. It is affected by how many buyers or customers a company has, how significant
each customer is, and how much it would cost a company to find new customers or markets
for its output.

A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

The Five Forces model can help businesses boost profits, but they must continuously
monitor any changes in the Five Forces and adjust their business strategy.

The power of the buyers. If an industry moves product through retailers or distributors,
then the buyers can exert the same type of pricing power to eat up the profit margin. When
an industry has to deal with the Walmarts of the world, they sometimes have to give up
more than a simple volume discount to get their goods listed. And if they try to push back,
there will be another supplier willing to bend over backward to work with that buyer.
5. Threat of Substitutes

The last of the Five Forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will have more power to increase
prices and lock in favorable terms. When close substitutes are available, customers will have
the option to forgo buying a company's product, and a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a
company to adjust its business strategy to better use its resources to generate higher
earnings for its investors.

Availability of substitutes. Substitutes are the products or services a customer can use to fill
the same need. For example, if a cup of coffee costs too much to buy, a customer can switch
to tea or simply start brewing their own at home.

The Blind Spots

Porter’s five forces have several weaknesses.

1. The first is in its composition. As a static model, it provides a snapshot of the wider
industry at some point in the past. This can be useful for informing short-term
strategy, but the window of applicability for the information coming out of Porter’s
five forces has also been narrowed by rapidly evolving external factors. These are
trends like globalization and rapid technological advances that weren’t as prominent
when Porter devised his framework.

For many industries, the immediate domestic competition—sharing the same

challenges of labor, shifting regulatory environments and so on—are less worrisome
now than global competitors who can provide goods and services all over the world,
thanks to advances in technology and logistics. Expanding the intake for the model
to consider all the different competitive environments around the world makes the
analysis more cumbersome for the return (a snapshot for short-term strategy).

2. The other weakness is that a lot of people use Porter’s five forces in ways it was
never intended. Trying to apply Porter’s five forces to a specific company rather than
an industry as a whole is the most common mistake. Porter’s five forces can provide
information to enlighten strategic discussions, but it isn’t an individual-company
analysis tool. Business owners are better off using a SWOT analysis for their specific
business and Porter’s five forces as data input, if at all. Investors can use Porter’s five
forces to look at the attractiveness of taking a position in an industry, but they’ll still
need to dive into company-specific financials unless they use a vehicle like an
industry-specific ETF.
 3. Another challenge in applying Porter’s five forces is defining the industry clearly.
Companies can straddle multiple industries, depending on their business lines. They
can’t group companies with similar business lines and call it an industry. Instead,
Porter’s five forces would be done for each business line and then amalgamated.
This is one reason investors tend to frown upon a company that spreads itself too
widely because it is challenging for companies to succeed in so many different
sectors. That said, the straddle strategy does seem to work well in emerging
economies before complexity in the form of regulations and access to capital for
competitors pushes companies to focus on industries where they have the biggest
edge. Which, of course, goes back to the challenges of applying Porter’s five forces in
an unevenly globalized market.

4. In the hands of the business, the value of the information coming out of Porter’s five
forces can be further compromised by honest mistakes, like not considering all the
alternatives, including those that fill one or two of the functions you provide instead
of the whole package. For example, Nikon and Apple are competitors when it comes
to cameras, but you could put companies like Apple and Google in Porter’s five
forces for a multitude of industries because their tech reaches into almost every
industry in some sense.

5. Last, the biggest mistake is paying equal attention to all five forces. For most
industries, there will be one or two forces that outweigh all the others. Looking back
at some of the industries that have seen their Porter’s five forces analysis shift
drastically, it is things like deregulation or dropping of trade barriers that suddenly
made the threat of new entrants spike. These external factors are not as explicit as
they should be in Porter’s five forces analysis.

What Are Porter's Five Forces Used for?

Porter's Five Forces Model helps managers and analysts understand the competitive
landscape that a company faces and to understand how a company is positioned within it.

Is Porter's Five Forces Model Still Relevant?

Yes, even though it was created more than 40 years ago, the Five Forces Model continues to
be a useful tool for understanding how a company is positioned competitively.

What Are Some Drawbacks of Porter's Five Forces?

The Five Forces model has some drawbacks, including:

1. it is backward-looking, making its findings mostly relevant only in the short term;
that limitation is compounded by the impact of globalization.
2. Another big drawback is the tendency to try to use the five forces to analyze an
individual company, versus a broad industry, which is how the framework was
intended.
 3. Also problematic is that the framework is structured so that each company is placed
in one industry group when some companies straddle several.
4. Another issue includes the need to assess all five forces equally when some
industries aren't as heavily impacted by all five.

What's the Difference Between Porter's Five Forces and SWOT Analysis?

Porter's 5 Forces and SWOT (strengths, weaknesses, opportunities, & threats) analysis are
both tools used to analyze and make strategic decisions. Companies, analysts, and investors
use Porter's 5 Forces to analyze the competitive environment within an industry, while they
tend to use a SWOT analysis to look more deeply within an organization to analyze its
internal potential.

The Bottom Line

Porter's Five Forces framework defines the most important criteria to consider when looking
at the competitive landscape of a corporation. High threat levels typically signal that future
profits may deteriorate and vice versa. For example, an early startup in a fast-growing
industry might quickly become shut out if barriers to entry are not present. Likewise, a
company selling products for which there are numerous substitutes will not be able to
exercise pricing power to improve its margins, and it may even lose market share to its
competitors.

The reason Porter's model became so widely adopted is that it forces companies to look
beyond their own immediate business and to their industry as a whole when making long-
term plans. Porter's still plays a vital role in that, but it should not be the sole tool in the
toolbox when it comes to building a business strategy.

The boundaries between industries are becoming blurred, and the uneven pace of
globalization across industries makes the picture even muddier. In this environment, the
shortcomings of Porter’s five forces become apparent.

The most useful thing about Porter’s five forces—and the reason it became so widely
adopted in the first place—is that it encourages companies to look beyond their immediate
business ventures to their industry as a whole when making long-term plans. Porter's still
plays a vital role in that, but it can’t be the sole tool in the toolbox when it comes to building
a business strategy.
PART 2: LESSON TOPICS:
McKinsey 7s Mode
Reference: corporatefinanceinstitute.com/ mckinsey-7s-model/
https://www.investopedia.com/terms/m/mckinsey-7s-model.asp

What is the McKinsey 7S Model?

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.”
The goal of the model is to depict how effectiveness can be achieved in an organization
through the interactions of seven key elements – Structure, Strategy, Skill, System, Shared
Values, Style, and Staff.

The McKinsey 7S Model is a framework for organizational effectiveness that postulates that
there are seven internal factors of an organization that need to be aligned and reinforced in
order for it to be successful.

Understanding McKinsey 7S Model

The 7S Model specifies seven factors that are classified as "hard" and "soft" elements. Hard
elements are easily identified and influenced by management, while soft elements are
fuzzier, more intangible, and influenced by corporate culture. The hard elements are as
follows:

 Strategy
 Structure
 Systems

The soft elements are as follows:

 Shared values
 Skills
 Style
 Staff

The framework is used as a strategic planning tool by organizations to show how seemingly
disparate aspects of a company are, in fact, interrelated and reliant upon one another to
achieve overall success.

Consultants Thomas Peters and Robert Waterman Jr., authors of the management
bestseller "In Search Of Excellence," conceived of the McKinsey 7S Model at consulting
firm McKinsey & Co. in the late 1970s.2
The focus of the McKinsey 7s Model lies in the interconnectedness of the elements that are
categorized by “Soft Ss” and “Hard Ss” – implying that a domino effect exists when changing
one element in order to maintain an effective balance. Placing “Shared Values” as the
“center” reflects the crucial nature of the impact of changes in founder values on all other
elements.
The McKinsey 7-S Model is applicable in a wide variety of situations where it's useful to
understand how the various parts of an organization work together. It can be used as a tool
to make decisions on future corporate strategy.

The framework can also be used to examine the likely effects of future changes in the
organization or to align departments and processes during a merger or acquisition.
Elements of the McKinsey Model 7s can also be used with individual teams or projects.

Structure of the McKinsey 7S Model

Structure, Strategy, and Systems collectively account for the “Hard Ss” elements, whereas
the remaining are considered “Soft Ss.”

1. Structure

Structure is the way in which a company is organized – chain of command and

accountability relationships that form its organizational chart.

The structure of the organization is made up of its corporate hierarchy, the chain of
command, and divisional makeup that outlines how the operations function and
interconnect. In effect, it details the management configuration and responsibilities of
workers.

2. Strategy

Strategy refers to a well-curated business plan that allows the company to formulate a plan
of action to achieve a sustainable competitive advantage, reinforced by the company’s
mission and values.

The strategy is the plan deployed by an organization in order to remain competitive in its
industry and market. An ideal approach is to establish a long-term strategy that aligns with
the other elements of the model and clearly communicates what the organization’s
objective and goals are.

3. Systems

Systems entail the business and technical infrastructure of the company that establishes
workflows and the chain of decision-making.

Systems of the company refer to the daily procedures, workflow, and decisions that make
up the standard operations within the organization.

4. Skills

Skills form the capabilities and competencies of a company that enables its employees to
achieve its objectives.
Skills comprise the talents and capabilities of the organization’s staff and management,
which can determine the types of achievements and work the company can accomplish.
There may come a time when a company assesses its available skills and decides it must
make changes in order to achieve the goals set forth in its strategy.

5. Style

The attitude of senior employees in a company establishes a code of conduct through their
ways of interactions and symbolic decision-making, which forms the management style of
its leaders.

Style speaks to the example and approach that management takes in leading the company,
as well as how this influences performance, productivity, and corporate culture.

6. Staff

Staff involves talent management and all human resources related to company decisions,
such as training, recruiting, and rewards systems.

Staff refers to the personnel of the company, how large the workforce is, where their
motivations reside, as well as how they are trained and prepared to accomplish the tasks set
before them.

7. Shared Values

The mission, objectives, and values form the foundation of every organization and play an
important role in aligning all key elements to maintain an effective organizational design.

Shared values are the commonly accepted standards and norms within the company that
both influence and temper the behavior of the entire staff and management. This may be
detailed in company guidelines presented to the staff. In practice, shared values relate to
the actual accepted behavior within the workplace.

Application of the McKinsey 7S Model

The subjectivity surrounding the concept of alignment concerning the seven key elements
contributes to why this model seems to have a complicated application. However, it is
suggested to follow a top-down approach – ranging from broad strategy and shared values
to style and staff.

Step 1: Identify the areas that are not effectively aligned

Is there consistency in the values, strategy, structure, and systems? Look for gaps and
inconsistencies in the relationship of elements. What needs to change?
Step 2: Determine the optimal organization design

It is important to consolidate the opinions of top management and create a generic optimal
organizational design that will allow the company to set realistic goals and achievable
objectives. The step requires a tremendous amount of research and analysis since there are
no “organizational industry templates” to follow.

Step 3: Decide where and what changes should be made

Once the outliers are identified, the plan of action can be created, which will involve making
concrete changes to the chain of hierarchy, the flow of communication, and reporting
relationships. It will allow the company to achieve an efficient organizational design.

Step 4: Make the necessary changes

Implementation of the decision strategy is a make-or-break situation for the company in

realistically achieving what they set out to do. Several hurdles in the process of
implementation arise, which are best dealt with a well-thought-out implementation plan.

Advantages of the Model

 It enables different parts of a company to act in a coherent and “synced” manner.

 It allows for the effective tracking of the impact of the changes in key elements.
 It is considered a longstanding theory, with numerous organizations adopting the
model over time.

Disadvantages of the Model

 It is considered a long-term model.

 With the changing nature of businesses, it remains to be seen how the model will
adapt.
 It seems to rely on internal factors and processes and may be disadvantageous in
situations where external circumstances influence an organization.

Practical Example

The McKinsey 7S model can be applied in circumstances where changes are being brought
into the organization that may affect one or more of the shared values. Suppose a company
is planning to undertake a merger. It will affect how the company is organized since new
staff will be coming in. It will also affect the structure of the company, along with strategic
decision-making, as new ideas flow in through synergy.

In such a case, the McKinsey 7s model can be used to first identify the inconsistent areas –
here, it would primarily be the structure, staff, and strategy. After identifying the relevant
areas, the company can make effective decisions to optimally re-organize and incorporate
the changes in a way that streamlines the merger process – after conducting extensive
research and analysis of the consequences that the changes bring to the company.
KEY TAKEAWAYS

 The McKinsey 7S Model is an organizational tool that assesses the well-being and
future success of a company.
 It looks to seven internal factors of an organization as a means of determining
whether a company has the structural support to be successful.
 The model comprises a mix of hard elements, which are clear-cut and influenced by
management, and soft elements, which are fuzzier and influenced by corporate
culture.

Frequently Asked Questions

What is McKinsey?

McKinsey & Co. is a global consulting and accounting firm founded by University of Chicago
management professor James O. McKinsey in 1926. The firm specializes in management
consulting for a wide range of corporations, governments, and other organizations.

What are the 7S Factors?

The seven factors are: strategy; structure; systems; shared values; skills; style; and staff.

Why follow the 7S model?

These 7 factors are used by management to identify where a company excels and where it
needs more work, in terms of creating an optimal and efficient workforce. It is also used to
evaluate performance following a merger or other restructuring to identify areas that need
improvement.

End of Part 2
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End of Module