Sunday, May 28, 2017

Porter's Five Forces - A vital tool for Strategic Analysis

"Sound strategy starts with having the right goal."  ~ Michael Porter

There are many potential definitions of Business Strategy ranging from broader to narrower. But I personally refer to the concept of a Business Strategy by looking back at one of the company's strategy which is very close to my heart  i.e. Apple Incorporation. Apple started its business in the late 1970s, putting  a step forward into the personal computer industry to earn success at an early age. However, the competitors were ready and with this IBM , Windows from Microsoft and Intel with Micro-processor company launched an alternative product which gained more popularity as compared to Apple's product launch and dominated the personal computer industry.
Apple appeared to be languishing as a fact that Apple had its visibility only in 3% of the total personal computer market. By 2002, there were discussions about its unfortunate demise. And also, Michael dell , Dell CEO said at that time that  "Apple should shut down the company and return the money back to the shareholders". 
But then came a light of success with the launch of amazing new products over the next 10 years  like iPod, IPhone, iPad, iTunes which turned the fate of Apple Inc. and now it has revolutionised the digital marketplace. Having said that, I asked few questions to myself with curiosity. What are the factors for its  magical success? Did they change their strategy to gain success? Was this an result of their continuous effort towards development in the company?
I could recall the book that I was reading "The Concept of Corporate Strategy" by the famous strategist Kenneth Andrew. He had a phenomenal way of summarising the underlying concept of business strategy. He very well summarised Strategy as the "decision cycle or pattern that tells company's objective, purpose, goal. Also, focus on the principal policies or plans required to achieve those goals, keeping in vision the company's overall business objective. Also, the economic and non economic factors that a company intends to make to its shareholders, employees, customers, communities."
In order to understand the long run profitability aspects of a particular organisation, we should understand the principle of Five Forces. Before starting with this, we must ask first question to ourselves i.e. the scope of the industry for which we are doing Five Forces.[1]
1. Threat of Entry : This tells how easy or difficult for any new firm to enter into the industry in which one company is already competing in. And if it is an easy move for the new firm, then it is detrimental for the long run profitability potential of that industry.
2. Threat of Substitutes : This by name does not mean the threat from competitors and rivals but it simply means similar products or services in the industry that may potentially steal the sales of that product from that particular  industry.
3. Bargaining Power of Buyers : This basically related to the buying power of customers in an industry. If there are more customers, then they have less powers to decide the price and vice-versa. In case of fewer buyers, a company needs to keep in mind their customers' needs and preferences.
4. Bargaining Power of Suppliers : It is an important dynamic of the supply chain which focuses on who will set the price of a company's product or service.
5. Intensity of Rivalry : I feel for some people, this may be the classic definition of business strategy. This is to understand how strong is the competition among competitors in a particular industry or market industry?

One of my personalised way to understand about these Five Forces is to measure these in  vertical and horizontal axis.  On vertical axis, I may keep potential competitors who are going to eat my lunch. And on horizontal axis, I will put my value chain and its dynamics ranging from my suppliers, to end buyers of my product or a service.



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