R6-Rethinking and reinventing Porter's 5 force model.pdf

8/14/2019 R6-Rethinking and reinventing Porter's 5 force model.pdf

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Rethinking and reinventingMichael Porters five forces modelTony GrundyCranfield School of Management, UK

Michael Porters five competitive forces model has been a most influential 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 sig-

nificantly over market and competitive terrain and within the same industry; under-

standing its dynamics; prioritizing the forces; doing macro analysis of the sub-drivers of

each of the five forces; exploring key interdependencies, both between and within each

force.

Copyright 2006 John Wiley & Sons, Ltd.

ested in taking his concepts to an even moremacro level, particularly to the competitiveadvantage of countries, rather than to microeconomics. Porters model, whilst it has doneextremely well in occupying textbook space,does not seem to have captured the imagina-tion of other theorists. In contrast with theresource-based theory of competitive advan-tage, which has spawned a considerable liter-

ature, it seems to have become, as it were,frozen in time.

The five competitive forcesmodel propelled strategic

management to thevery heart of the

management agenda

Strat. Change15: 213229 (2006)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/jsc.764 Strategic Change

* Correspondence to: Tony Grundy, Cranfield School ofManagement, Cranfield University, Cranfield, BedfordMK43 OAL, UK.E-mail: [email protected]

Introduction

When Michael Porter conceived the five com-petitive forces model, it propelled strategicmanagement to the very heart of the manage-ment agenda.The framework became a centre-piece of texts on business strategy andstrategic management, and essential examina-tion material on MBA and similar courses glob-ally. But what has become of his original five

competitive forces? It would appear to be thecase that not a great deal has occurred todevelop this thinking since the early 1980s(except, perhaps, for Hamel and Prahalad,1994). Porter appears to have been more inter-

Copyright 2006 John Wiley & Sons, Ltd.


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214 Tony Grundy

Today, and well over 20 years since Portersoriginal, major publication, there is still rela-tively little real awareness amongst main-stream managers, both at senior and middle

levels of Porters original concept. If one wereto take a sample based on attendees at strate-gic management courses at a particular busi-ness school, for example, it could be estimatedthat between 15% and 20% were familiar withthese early Porter concepts and perhaps only5% had actively used this at an explicit, ana-lytical level. Interestingly, if this is comparedwith the awareness level of basic SWOT analy-sis, a crude estimate is of 9095% awarenessand at least 50% active use. Whilst Porter was

propelled to fame on the back of this andother intellectual advances, it seems an odd, ifnot disappointing, phenomenon that this orig-inal breakthrough has had somewhat little cur-rency amongst practising managers. Why isthis the case? Some possible reasons for thisare that:

Porters framework is relatively abstract andhighly analytical.

Whilst Porters original framework

explained the criteria for assessing each ofthe five competitive forces, he did so in thelanguage of micro-economic theory, ratherthan in terms of its practicalities.

His model was highly prescriptive andsomewhat rigid, leaving managers, andindeed teachers in business schools, gener-ally inhibited from being playful, flexibleand innovative in how they applied thispowerful framework.

Whilst the framework does help to simplify

micro economics, its visual structure is rel-atively difficult to assimilate and its logic issomewhat implicit. Managers tend to likeanalytical concepts spelt out in very simpleterms, otherwise they find it difficult toadapt to their default, fluid strategic man-agement style [sometimes characterized aslogical incrementalism(Quinn, 1980) or asemergent strategy (Mintzberg, 1994)].

In this paper, it is argued that Porters five com-petitive forces model is a vitally important

concept and one that certainly merits theattention of all practising senior managers. Itis also argued that to operationalize it moreeffectively requires significant further devel-

opment. This is demonstrated with a practicalexample taken from the health club market,which has grown significantly in many coun-tries over the past 10 years, but has beenheavily impacted by shifts in competitive pres-sure. However, it is first necessary to examinehow Porters model could be developedfurther by studying the existing literature tosee to what extent it has been developed, if atall.

The literature has it moved on?

Academics do not seem to have been mindedto explore and expand Porters framework,with very few attempts to develop Portersmodel having been made. Whilst there are ref-erences to Porters model in many researchpapers, the principal contribution of thispaper is to expand Porters model into a farricher system of analysis, which managers canthen operationalize and subsequent changes

in their practices can then be studied in futureresearch.

A critique of the model:value and limitations

Porters five competitive forces are depicted inFigure 1. Porters starting point was that hewanted to account for long-term variances inthe economic returns of one industry versusanother. His genius resided in distilling the

complex micro-economic literature into fiveexplanatory or causal variables to explainsuperior 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 itappeared to offer the following attributes:

Copyright 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006


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It simplified micro-economic theory intojust five major influences.

It effectively and before its time appliedsystems thinking.

It showed how competitive rivalry thecentral box of the model is very much afunction of the other four forces.

It helped to predict the long-run rate ofreturns in a particular industry.

It went beyond a more simplistic focus onrelative market growth rates in determiningindustry attractiveness.

It helped combine inputoutput analysis ofa specific industry with industry boundariesvia entry barriers and substitutes.

It emphasized the importance of searchingfor imperfect markets, which offer morenational opportunities for superior returns.

It emphasized the importance of negotiat-ing power and bargaining arrangements in

determining relative market attractiveness. It focused managers on the external envi-

ronment for more than traditional SWOTanalysis.

There are, however, several limitations toPorters framework, such as:

It tends to over-stress macro analysis, i.e.at the industry level, as opposed to theanalysis of more specific product-marketsegments at a micro level.

It oversimplifies industry value chains: forexample, invariably buyers may need to beboth segmented and also differentiatedbetween channels, intermediate buyers andend consumers.

It fails to link directly to possible manage-ment action: for example, where companieshave apparently low influence over any ofthe five forces, how can they set about

dealing with them? It tends to encourage the mind-set of an

industry as a specific entity with ongoingboundaries.This is perhaps less appropriatenow where industry boundaries appear tobe far more fluid.

It appears to be self-contained, thus notbeing specifically related, for example, toPESTfactors, or the dynamics of growth ina particular market.

It is couched in economic terminology, which

may be perceived to be too much jargon froma practising managers perspective and indeed,it could be argued that it is over-branded.

Porters model was thus a valuable and work-able concept but one that had some significantpractical drawbacks, unless of course themodel was developed further. This paper nowargues that Porters concept merely scratchesthe surface of its full potential.

Perhaps the very success of Porters origi-nal model led to it not being adequately

Porters five forces model 215


Substitutes

Suppliers Buyers

Potential

Entrants

Threat of substituteproducts or service

Threat ofnew entrant

Bargaining power

of suppliers

Bargaining power

of buyers

Source: Competitive Strategy, Porter

Rivalry amongexisting firms

Industry

Competitors

Figure 1. These forces determine industry profitability.


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inhospitable, this will clearly dampen thegrowth drivers, and if the growth driverswithin a particular market are themselvestightening, for example due to life-cycleeffects, then this will put a disproportionateand adverse pressure on Porters five forces,

particularly in the bargaining power of buyers,and also upon rivalry. Furthermore, a high-growth environment may encourage entrantsand a low one will discourage these.The resultcan lead to a collapse in confidence and inprices unless there are lots of exits, forexample, in the health club market in the UKin 20023, as will be seen later.

Indeed, it may be helpful not to call itPorters five forces model, particularly whenintroducing it to a team or wider organization.

An alternative is to call it competitive pres-sures, which is less jargon-laden but includesthe five forces more as a checklist. This rela-belling of the model has many attractions,especially as it may seem strange and foreignto everyday management discourse. This maymean that early adopters will feel self-con-scious using it with their colleagues. As prob-ably most intellectual contact with thetechnique is typically via a management text,an MBA or on a public strategy programmerather than on an in-company event, individ-

ual managers may feel reluctant to use it withtheir more novice peers. Besides these exter-nal interdependencies, Porters five competi-tive forces are themselves highlyinterdependent with each other againsomething only implicit in Porters and other

texts.Figure 4 now plots their main interde-pendencies.

Porters five competitive forces are thereforeboth highly interdependentwith the othersubsystems in the external environment,rather than being relatively stand-alone. Thisfigure plots the interdependencies internal tothe five competitive forces:

Porters five competitiveforces are highlyinterdependent

Between bargaining power of buyers andentry barriers: buyers may actively en-courage new entrants, thus reducing entrybarriers.

Between bargaining power of buyers andsubstitutes: buyers may actively search for



Politicalfactors

Economicfactors

INDUSTRYLIFE

CYCLE

Technologicalfactors Socialfactors

GROWTH

COMPETITIVE

DRIVERS

PRESSURE

Customers

Company &Competitors

- Some Generic Systems

Figure 3. The competitive climate.


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218 Tony Grundy

substitutes, thereby encouraging them in asimilar fashion.

Between entry barriers and bargainingpower of suppliers: new entrants may seekto enter the market by backward integra-tion, either by acquiring suppliers or viaalliances.

Between substitutes and bargaining powerof suppliers: suppliers may seek to leap-frog over existing industry competitors bymarketing and selling substitutes.

The refined model in Figure 4 thus illustratesthe extent to which each of Porters five forcesneeds to be understood as a wider, interactingsystem as in systems thinkingrather than as aself-contained unit. Whilst Porters originalconcept explains some of these system inter-

dependencies, these are underdeveloped andimplicit. Indeed, the conventional inputoutput industry boundaries model, whichappears to have been the starting point for thefive forces, can be put to one side. Indeed,some new and quite interesting opportunitiescan be developed.

The five forces do need to be prioritized.Porters teaching methodology (as per hisHarvard Business School video cases) involvesticking each force for whether it is favourable,neutral or unfavourable. The scores are:

Favourable Neutral Unfavourable

Unfortunately, because of the original compo-sition of the model, it is defined as beingmainly about negative strategic characteristics

like buyer power, supplier power, rivalry andsubstitutes it is quite difficult to apply theabove scoring method. For instance, wherebuyer power is high, the models user isencouraged to think this is a bad thing,therefore the score is one tick, or plainlyunfavourable. In many instances, especially oninitial learning, the models scores can comeout incorrectly. Porters model, as it is cur-rently framed, thus presents an immediatebarrier to its assimilation. Furthermore, the

above scoring does not take into account therelative importance and weighting of eachscore. Whilst two-dimensional grids can dothis trade-off, the approach is still a little cum-bersome.An alternative approach is to borrowfrom the vector format, originally applied inforce field analysis, for enablers and con-straints of organizational change. Not onlydoes this model easily separate out whether aforce is favourable or unfavourable, but thelength of the arrows can also be used toillustrate its incidence or severity and its


ENTRY

BARRIERS

BARGAINING

POWER OFSUPPLIERS

RIVALRY BARGAININGPOWER OFBUYERS

SUBSTITUTES

New

Entrants

encouraged

Search

for

substitutes

Forward

integrations

Backward

integration

Figure 4. Porters five competitive forces: key internal interdependencies.


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importance. Also, where a force can be splitinto sub-forces (discussed in the next subsec-tion) it can depict these sub-forces easily.

Figure 5 gives an example of this formatwithin the funeral industry. Here the funeralbusiness is depicted as being relatively attrac-tive, particularly through the low bargaining

power of buyers and less threat of substitutes.Immediately, using this visual picture, one canchallenge the judgements supporting theseoutputs. Most importantly, its overall visualbalance gives immediate interpretation of theindustrys overall attractiveness more effec-tively than by simply adding together the ticksas in Porters approach. Figure 5 thus enablesthe user to choose which of the five forces ismost important, both in isolation and also interms of its effects on the system. The forceshere are depicted as vector lines, whose

length depends on perceived importance andfavourability.

How each force relates to the others can nowbe examined, as explored in Figure 6.The firstpermutation looks at the bargaining power ofthe buyers in the centre of the framework.

In Figure 6 the bargaining power of the

buyers at the centre is increased by competi-tive rivalry, the availability of substitutes, lowentry barriers and low supplier power. Thebargaining power of the buyers is thus not aseparate element to consider when using thefive forces, but needs thinking through in rela-tion to the others.

In Figure 7, the threat of substitutes (at thecentre) is now increased by buyers keento shop around and by low rivalry amongstexisting competitors. Entrants may choose toenter via offering substitutes and once again



Favourable

Unfavourable

Very Low

Buying

Power Psychological

entry barriers

Few

substitutesLow

supplierpower

Gentlemanly

competition

Fragmented

competition

Low real

entry barriers

Figure 5. Funerals case: sample outputs (3); five competitive forces.

ENTRY

BARRIERS

SUPPLIERPOWER

BARGAININGPOWER OFBUYERS

SUBSTITUTES

RIVALRY

Figure 6. Porters five competitive forces: bargainingpower.

ENTRY

BARRIERS

SUPPLIERPOWER

BARGAININGPOWER OF

BUYERS

SUBSTITUTES

RIVALRY

Figure 7. Porters five competitive forces: substitutes.


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220 Tony Grundy

suppliers might seek to leap-frog existingcompetitors via the route of substitutes.

In Figure 8, with entry barriers at thecentre, buyers may reduce entry barriers orencourage substitutes by their search forbetter value. Rivalry will of course discourageentrants and supplier power may do the same.Besides being novel in structure (the fiveforces model is always presented in the stan-dard Porter format), Figures 68 give managersfar greater flexibility in their use of the model

and hopefully more insights. In short, thereare many interdependencies both external andinternal to Porters five competitive forces, andthese are unlikely to be taught at the presenttime to practising managers, let alone used bythem. This means that they are likely to strug-gle to get deep insights about the structureand dynamics of their external environmentpurely by using the conventional model and itsassociated analysis.

The next subsection attempts to examine

the forces within forces. This is more helpfuland easier to remember for managers than therelatively ad-hoc qualitative considerations inthe conventional texts.

The micro competitive forces

Whilst Porter does give some narrative help forassessing the five forces, this is not presentedin the very powerfully distilled and visualformat of his original model. For example, forcompetitive rivalry, Porter asks us to think

about things like the relative concentration ofrivals, such as how many are in the market-place and with what mass, together with thenumber of different strategic groups of similarcompetitors. By extracting from Porters textand by observation of the main considerationswhich managers actually make, a pilot frame-work can be developed to move the five forcesdown to another level. Additionally, Portermerely lists these considerations and managersappear often inclined to consider them as addi-

tive. However, the next set of figures showhow the effects may be additional amplifiedby each set of micro forces. Each one of thefive forces may therefore have some sub-ingre-dients, which are worthwhile exploring. Thefollowing models are potentially viable frame-works put forward for further experimentationand research to test their resilience and tolearn from their application more generally. Aparticularly interesting application would beto use these to explore how the five forces

work at a micro level even for individual busi-ness transactions. Figures 913 can be usedeither literally to think through each force visu-ally, or as a convenient way of thinking of theirunderlying drivers.

Taking the bargaining power of buyers(Figure 9) first, this appears to be a function of:

Importance in terms of value added. Urgency in terms of lead times to con-

sumption. Discretion and emotion.


SUPPLIERPOWER


SUBSTITUTES

ENTRY

BARRIERS

RIVALRY

Figure 8. Porters five competitive forces: entrybarriers.

EMOTION


DISCRETION

IMPORTANCE

URGENCY

Figure 9. Buyer power: micro forces.


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The choice of these criteria is quite interest-ing. Importance and urgency we derive fromprioritization. Urgency can be measuredaccording to the lead times required to satisfy

the need. Discretion is defined as being theextent to which customers have to fulfil aneed or not. For example, in most Europeancountries a funeral is perceived to be essentialand non-discretionary. Finally, emotion is avery often neglected force in management,albeit one that is of relatively obvious signifi-cance to customers. Taking an everyday prac-tical example of this: in the case of atoothache, which comes on very suddenly, anindividual might be advised by a dentist who

reports that he believes the root is nearly deadand advises root canal treatment. This treat-ment is both urgent and important, and is alsonot discretionary. It is also highly emotional.Should you shop around for the cheapest pricefor a treatment? Probably not, indeed as a cus-tomer you would be very price-indifferent andmay choose to pay some 300 for it to befixed, even if this involved borrowing themoney.

These micro forces are interdependent. For

example, to some extent discretion may godown if the purchase is highly emotional.Also,importance may tend to reduce the degree ofdiscretion. Turning now to theory and to thenext set of micro forces or entry barriers,Figure 10 can be examined.

These entry barriers can be usefully brokendown into the following ingredients:

Physical: is it possible to get access to cus-tomers or to resources?

Information: to what extent is it possible toacquire knowledge not only about the

what of the industry, but also about itshow? (The latter being bound up in tacitcompetences.)

Economic: what will it actually cost to enterthe market?

Psychological: is this a market where it iscomfortable to be?

To illustrate the final point, the funeral busi-ness appears, using Porters five forces, to bea highly attractive market. However, for the

vast majority it would not seem to be a psy-chologically attractive industry to enter.

In Figure 11 competitive rivalry is also afunction 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 thesheer quantity of players in the market. Themore similar they are, the more likely thatcompetition will be head-on. Also, the moredeeply committed they are, the more severethe rivalry will be. Finally, their mind-set willinfluence the manner of their competitionwith one another. Clearly, these micro forces



PSYCHOLOGICAL ENTRYBARRIERS

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.


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222 Tony Grundy

are also interdependent as, for example, the

existence of a small or large number of rivalsmight shape their mind-set. Also, their com-mitment and more general mind-set are alsoclearly interlinked.

Turning next to the force of substitutes,Figure 12 displays its more micro-level forces.The figure reveals the following:

Do it yourself in-sourcing the activity, forexample by making an expensive, sourced-out consultancy service an internal one.

Other technologies looking at other waysof achieving the same value, for example e-learning has substituted many technicaltraining areas.

Emotional the extent to which the pur-chase is emotional or not.

Bundling or unbundling the customersability to do something either as part ofsomething else, or to take a packaged offer-ing and to capture value it by breaking upthe value-added activity into its smaller

components.

Again, the micro forces may be interdepen-dent and other technologies may facilitatebundling and unbundling.

The final analysis is Figure 13, which exam-ines supplier power. These four micro forcescan be summarized as follows:

Unique knowledge if the supplier(s) hassome unique capability this will obviouslyenhance their power.

Size and number where there are a very

small number of very large suppliers thiswill obviously increase their power.

Resource scarcity where resources arescarce and preferably permanently, thisagain will help promote supplier power.

Forward integration the supplierscapacity to integrate forward in the industrychain will improve their competitive power.

Clearly, aspects of this force and of the otherstoo suggest linkages and overlaps with the

resource-based theory of competitive advan-tage. Again, these micro forces are interde-pendent. For instance, where there are fewsuppliers and high resource scarcity, this willmultiply supplier power.Also, where suppliershave unique knowledge, this might facilitatetowards integration, perhaps through strategicalliances. Whilst there may be other ways ofgrouping the various sub-forces within theframework, these models do seem to be bothplausible and practical, and go beyond the

fragmentary and narrative approaches foundin the literature. Also, it has been demon-strated here that each one contains some richand insightful interdependencies. One princi-pal benefit is that they encourage managers tothink in more depth about each force ratherthan at a superficial level. Secondly, they willhelp managers to understand how these sub-forces interact with each other.

For example, just as the interdependencieswere drawn for Figure 4, the original fiveforces, the same could be done for these


BUNDLING ORUNBUNDLING

SUBSTITUTES

OTHERTECHNOLOGIES

EMOTIONAL

DO ITYOURSELF

Figure 12. Porters micro forces: substitutes.

FORWARDINTEGRATION

SUPPLIERPOWER

SIZE ANDNUMBER

RESOURCESCARCITY

UNIQUEKNOWLEDGE

Figure 13. Porters micro forces: supplier power.


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figures. For instance in Figure 9, the impor-tance of a purchase is linked with its emo-tional content, discretion is partly linked tourgency, and urgency needs to be traded off

with importance.

Competitive dynamics

Porters five competitive forces is traditionallya very static model, which diminishes its use-fulness, but it can be given a more dynamicperspective and quite easily. Competitivedynamics can be explored at a macro and amicro level.At a macro level, these can be seenimpacting dynamically over the industry cycle,

for example for the bargaining power of thebuyers and entry barriers (Figure 14). As anindustry reaches maturity, entry barriers oftenincrease (favourable) but the bargainingpower of the buyers also increases(unfavourable). Each one of the five competi-tive forces can be plotted individually in asimilar way.

The benefit of the model in Figure 14 is thatit encourages managers to think about howindustry structure is likely or liable to change

in the future. It also helps them to reflect onwhy the industry has changed in recent times.Besides modelling competitive pressure overtime, this can also be overlaid by, for example,growth drivers over time (high versus low).The competitive forces may also vary overtime at the level of an individual businesstransaction (at a micro level). For instance,

where a large management consultancy getsinvolved with a blue-chip client, during thetendering stage the customers bargainingpower might be high. However, once the con-

sultants start to do work it often becomesincreasingly difficult for the client to controlvariations and the total cost of further stagesof work. Another typical example is that ofgoing into a restaurant where bargainingpower of the buyer diminishes in stages: (a)when they go into the restaurant, (b) whenthey sit down, (c) when they order and (d)when they have courses 1, 2 and 3. Of courseit is possible to walk out or pay for the mealso far, but this is psychologically difficult,

especially where the buyer is a group ofpeople.

The relevance of Figure 15 is that it allowsmanagers to use the five forces at an everydaylevel and to track the impact of these forces,especially of bargaining power over a typicaltransaction lifecycle. Besides plotting thesedynamics at both a macro and a micro level, itis also important to examine their underlyingdrivers. Not only are these a function of theindustry lifecycle effects and of the cumulative

learning of key players, but also of a particu-lar mind-set. Mind-set is emphasized by atleast some writers on strategy, yet primarily inthe company-specific rather than industrycontext. The industry mind-set has beendefined as:The perceptions, expectations andassumptions about the industry now and

future.



Favourable

Unfavourable

TIME Industry cycle

Entry barriers

Bargaining of

buyers

Figure 14. Macro-level competitive dynamics.


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224 Tony Grundy

The significance of this concept is that:

Managers should beware thinking that thestructural properties of Porters five forcesare a given. In part, these forces are a reflec-tion of a softer mind-set of the industry.Thismind-set is often shared between playerswithin the industry and can be disrupted byplayers who can and will think differently.

The strength and homogeneity of an indus-

try mind-set will reduce the responsivenessof the industry to disruptive change and tofacilitate rapid market share build-up by anew entrant. For example, in the UK DysonAppliances built a dominant market share ofthe carpet cleaner market with a baglessmodel in just two and a half years. Its com-petitors were in a state of shock and denialfor a further two years before they imitatedthe company. Dyson now sells its productsin the USA.

It helps us to link external analysis and Por-terian competitive strategy with theresource-based theory of competitive advan-tage of the firm, by highlighting how mind-set can help a company to transcend thecompetitive forces and by deploying differ-ent marketing and innovative skills.

By studying the industry mind-set and byusing the more advanced analysis tech-niques of competitive forces, which havebeen explored here, managers can achievestrategic breakthroughs.

Mapping competitive forces:horizontally and vertically

Porters Competitive Strategy (1980) focusedprincipally on analysis at the industry level.However, this could be inappropriate, partic-ularly as the competitive landscape for a busi-ness might be of highly variable attractiveness.For example, consider the fees for a one-daystrategy course, comparing rates from inde-

pendent consultants to that of a businessschool, with daily rates ranging from 1000 toover 10,000 per day. When Porter posed thequestion Why are some industries moreattractive than others?, it is necessary toanswer with It depends on which product/market/sector you are talking about. Industrystructures are like a landscape and highly vari-able in their attractiveness, meaning thatPorters model must be used in a more dis-criminating and localized way to describe

them. This attractiveness can be representedin two-dimensional space, horizontally acrosssectors and vertically, in terms of the extent towhich it is focused on differentiation versuscost leadership. Simple matrices like Figure16 might help managers in their thinking.Three ticks means favourable, whilst twoticks are neutraland one tick is unfavourable.Figure 16 illustrates this with the differentsectors of the funerals industry.

Figure 17 now examines the competitiveforces map within the carpet cleaning market


Favourable

TIME Transaction cycle

Bargaining

power

Figure 15. Micro-level competitive dynamics.


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in the UK, 19952004. Previously, apart fromone or two deluxe models like the Kirby, thevast majority of models were of similar per-ceived use value and price. Following Dysons

entry with a bagless, cyclonic, modern-looking and premium-priced model, the com-petitive map of the industry was altered.

The majority of purchases became cyclonicand premium-priced, but they left a void at thebottom of the market, whereby 20034, newentrants emerged and Hoover began to captureshare with light, cyclonic, cheap machinespriced at 3050 each. Here the overall com-petitive shape of the market has moved from amore pyramid shape to an eclipse. Pictures like

Figure 17 can help managers to explore andcreate competitive changes.

A final application of Porters five forces isat a micro level to departments, projects andto individual roles, for each one of Porters fiveforces may be very relevant to each one of

these situations. For example, an individualmay face rivals, might be substituted or haveto try to fend off new entrants to his/her value-adding role.

In conclusion it is necessary to break downthe analysis of Porters five forces on asegment-by-segment or on a mini strategybasis. This helps to make Porters frameworkfar more context-specific and applicable at thefirm level. Indeed, Porters model can beapplied right down to the project level and to

the level of an individuals role where theremay be variable rivalry, substitutes, bargainingpower, etc. Indeed, in teaching Porters fiveforces these less obvious applications areoften found to be perceived of higher value bymanagers.

The above has explored more advancedways of applying Porters five forces at a moregeneral level. This can now be applied morespecifically using the health club industry inthe UK as an example.

Competitive pressure in thehealth club industry 19952004(a case study)

In 1995 the UK health club industry was at aturning point.The recession of the early 1990s



Substitutes

Rivalry

Entry barriers

Buyer Power

Basic

funerals

Deluxe

funerals

Pre-need

market

Overall

attractiveness

Supplier Power

13 1114

Figure 16. Porters five forces: segmentation.

Kirby

Dyson Dyson Look-

alikes

Residual bagged machines

New, light machines

PremiumBagged

Differentiation

Vertical

Cost Leadership

HorizontalSegments Segments

Figure 17. Mapping the five competitive forces the carpet cleaning market, 2004.


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226 Tony Grundy

had inhibited growth but had also sustained alow competitive rivalry. However, key playersin the industry had identified considerablelatent growth as the rate of penetration of the

potential market was low. These conditionstriggered a wave of major expansion as theeconomy grew again through new site devel-opment. Also, existing players grew by acqui-sition, creating greater industry concentration,hopefully a positive factor. Many buyers wererelatively new to the market, being either new-comers to a gym, or because of industrychurnas many people rapidly dropped out ofthe gym. This meant that many were unso-phisticated in their information available,

making it easier for companies to charge rea-sonably high prices relative to the standardand value added of what they actually offered.Current margins were good, sites in the indus-try were available and reasonably cheap, andthe industry mind-set was very positive. Over19962001 there followed a major expansionin capacity with players chasing market shareand neglecting the future set of five competi-tive forces which it was just about toencounter.

Just as Hamel and Prahalad extolled us tothink about future competitive position aswell as present competitive position, so weshould anticipate competitive dynamics (seeFigure 15) by thinking about future competi-tive forces and against the surroundinggrowth drivers and PEST factors (see Figure 3).One company that took advantage of thisopportunity was Topnotch. In the 1990s Top-notch was a small chain of independent health

clubs with an appeal to the younger marketsegments and with a theme of excitement.Fundamentally, however, Topnotch was alowest price operator with a lack of scale and

little brand awareness two of the criticalsuccess factors necessitated by the future fivecompetitive forces which it was about to enter(after 2001).

In 2001, Topnotch floated its shares on thestock market and used these funds, after con-siderable transaction costs, to expand into achain of over 20 clubs. For reasons of speed,many of these new sites were acquisitions ofexisting ones.

At the time of flotation, financial markets

saw this market as very attractive seeinggrowth prospects but not perhaps inquiringinto probable trends and discontinuities inboth growth drivers and PEST factors. Theytherefore played a highly encouraging role inthis expansion. The effect of 9/11 on theservice economy and of economic slowdowngenerally had a particularly sudden andadverse effect on this industry, and especiallyon Topnotch. This can be analysed using anextended Porters five forces combined with

fromto analysis (seeTable 1).Overall, the fromto analysis represents a

negative shift in forces and one significantenough to cause a decline in margins. Whencombined with volumes being lower thanexpected and with over-enthusiastic expan-sion of many companies central costs, theeffect was, predictably, profit warnings acrossthe industry. By 2002, Topnotch, like manyother chains, was in financial trouble. Yet


Table 1. Porters five forces: fromto analysis

From To Because of

Bargaining power of buyers Medium High Buyers more discerning, experienced andprice-sensitive

Rivalry Medium Very High Companies desperate to find health clubcapacity producing discounting, etc.

Substitutes (threat of) Medium Medium/High Buyers can find alternatives thus saving money Entry barriers Low/Medium Medium Sites now so expensive hard to enter but

could change againSuppliers Low staff Low staff Variable

High sites Medium sites


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instead of looking for further ways to adapt theindustry mind-set, the reactive response of theindustry generally was simply to reduce theirlargely unnecessary costs. In 2002 Topnotch

went into administration, although a majorpart of it is still in operation today.

Clearly the above was a very painful learn-ing process for all of those involved, particu-larly investors and many staff, and also for theentrepreneurs who led this growth surge, intothe teeth of the (future) five competitiveforces. If an in-depth analysis had been per-formed as of 19968 of the future competitiveclimate for 20014 (Figure 3), then much ofthis financial pain might have been avoided.As

Matthew Harris, CEO of the original Topnotchand of its remaining, independent sites, todayreflects:

I hadnt really heard about the five com-

petitive forces to be honest. I had absorbed

a lot of management theory from various

sources, especially the financial stuff but I

just felt from everything I saw, heard

about and imagined, that we could only

win through this growth. I first saw

Porters five forces well after we had goneover 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

reflecting on the competitive situation as

we have now, I can see its now obvious rel-

evance. 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 marketingstrategy. 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 specific transaction like someone

joining or leaving us.

In sum, the short case above has helped tobring alive some considerations of this paper,particularly of the interdependency of theforces both within each other, with PESTfactors and growth drivers. It also illustrates

how operating managers, however senior, canfail to see the full potential of the technique.

Conclusions: possible ways forward

This paper has shown how Porters fivecompetitive forces model could be muchdeveloped by:

Combining it and interrelating it with othertools such as growth drivers and PESTfactors.

Examining other systemic interdependencies. Prioritizing it with the competitive force

field 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 varia-

tions within the competitive landscape.

Porters model thus offers significant potentialfor both further conceptual development andfor practical application. Other areas, whichare beyond the scope of this paper, are itsapplication to:

1. Acquisition decision-making.2. Alliances.3. Account management, especially in under-

standing the industry structure, criticalsuccess factors, options and areas of possi-ble company value-added customers.

4. Negotiating large contracts. It would be ofconsiderable help here both in decision-making and in deal-making.

Perhaps because the technique was born ineconomics and perhaps because it was so verysuccessful initially, significant attempts toapply it across a range of practical manage-ment issues or to evolve it further appear tohave failed to occur.

Unless we in the academic world are pre-pared to reinvigorate old concepts and in animaginative way as proposed in this paper,techniques like Porters five forces might bedestined to fall into the same lifecycle phase




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228 Tony Grundy

of maturity and decline as real businesses.Thiswould be a shame because the model, ifapplied properly and more subtly, will gener-ate very important insights for managers.

Without significant rethinking and develop-ment they may become forgotten due to newmanagement trends, which may turn out to beless powerful and far more superficial.

Besides applying new ideas to the teachingand practical application of Porters fiveforces, this also offers a most promising areafor future research, especially to explore howmanagers respond to using more advancedand detailed approaches to Porters model ascontained here. Future research could, for

example, focus on questions such as:

When using Porters five forces model, howdo managers cognitive perceptions andemotions interact with each other to shapetheir judgements?

To what extent does introducing managersto Porters five forces subsequently influ-ence their thinking, discussions, decisionsand actions, and how if at all?

What are the barriers, as perceived by

managers, to using their model effectivelyand why do these exist?

Where managers have not been made awareof Porters model, to what extent do theyconceptualize their competitive environ-ment in similar ways or not?

How might managers perceive the rele-vance of Porters five forces to the moremicro 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 StrategicManagement at Cranfield University School ofManagement and an active independent man-agement consultant. Tony is the author of 17books, includingBe Your Own Strategy Con-sultant published by Thomson Learning.Before joining Cranfield, his previous careerspanned Ernst and Young, BP, ICI and KPMG.

Tony is on the editorial board of StrategicChange.

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R6-Rethinking and reinventing Porter's 5 force model.pdf