Harvard Economist Michael E. Porter’s work on competition, strategy and value chains in the 70s and 80s still hold relevance to this day as a tool to analyse competition intensity, industry attractiveness and business profitability. A useful starting point for all business students and professionals.
Porter’s Five Forces
The Five Forces described the factors that affected an industry’s competition intensity, and the potential attractiveness and profitability of that market by extension:
- Threat of entry: economies of scale, capital requirements, government policy, customer loyalty, network effects, etc.
- Supplier power: supplier competition, switching costs, input differentiation or substitution, etc.
- Buyer power: price sensitivity, switching costs, accessibility, bargaining leverage, etc.
- Threat of substitutes: relative price of substitution; buyer propensity to substitute; etc.
- Competitive rivalry: price, product, brand, switching costs, exit barriers, etc.
Other Classic Frameworks
The Generic Strategies Framework, first introduced also by Porter, further specifies that depending on a business’ strategic target (e.g. market segment or industry-wide) and strategic advantage (e.g. brand, low cost, etc.), a company would pursue a target strategy that is either cost leadership, differentiation or focused.
Porter’s concept of the value chain with an architecture to think about business improvements with regards to strategy, profitability and its operating environment. It comprises analysis of a firm’s:
- Primary activities: inbound logistics, operations, outbound logistics, marketing & sales, services, etc.
- Support activities: infrastructure, human resources, technology, procurement, etc.
Michael Porter’s most popular work however focused largely on microeconomics factors that affect competition and strategy. Other macro-environmental frameworks such as PESTLE analysis are used in such instances. PESTLE for example looks at the political, economic, social, technological, legal and environmental factors that might affect a business or industry’s operations and outlook. It is commonly applied in some form or variation in business environmental scans.
References
- Porter, M. (1979). How Competitive Forces Shape Strategy, Harvard Business Review, May 1979, Vol 57, No. 2, pp. 137-145.
- Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance.
- IfM, University of Cambridge (2016). Porter’s 5 Forces. Accessed at <https://www.ifm.eng.cam.ac.uk/research/dstools/porters-5-forces/>