Week 4: Porter's Five Forces that Shape Strategy (Clear)

The Five Forces of Strategy have been around for a long time. Michael Porter, a Harvard professor, compiled the strategy more than 30 years ago, but they existed before then.

Here's a diagram to understand the strategy from this image source:

As you can see, there are many things that affect strategy, it's not just as easy as trying to think ahead and hoping that it will work out.

The four outstanding factors that directly can affect the rivalry among existing competitors are: threat of substitute products or services (meaning your customer may switch to a competitor if your products change), bargaining power of buyers (your customer has too much power and your competitor offers a lower price for the same product you have), threat of new entrants (new companies may come in a affect the economy, cost of supplies, etc.) and bargaining power of suppliers (they may drive up the cost which will drive down your profit).

There are some industries, like airlines, who have high tension due to a number of factors including: its one of the least profitable sources to man, constant stream of new airlines (think about the little jets that may be a big problem for your large company trying to fill seats on the plane), low barrier entry (a lot of businesses can get into the area without being held back) and labor (pilots can literally shut you down because of their expense). With all these being considered, there are also industries that don't have as many problems and are low tension like soft drinks. Basically, all forces are attractive for them.

Another two important points to note are zero-sum competition and positive-sum competition. Zero-sum means the consumer is the winner, they get a low price but don't have a choice on the product. Positive-sum competition is where companies compete on different products/things in order to meet the needs of different segments of customers.

Before jumping into the strategy, you need to analyze. Look at how the industry is changing and the five forces will provide you with the tools to understand dynamics. In stepping back, people understand by looking at the industry broadly (try not to look so closely at things and it should help).

Lastly, the number one strategy is alignment which is making good choices and reinforcing others' good choices.

The points of strategy are important to understand because they are vital to the business' success or demise. If you don't know what will positively and negatively impact your company (product supply, customers, etc.) then you won't be able to correctly grasp how to run your business. By the point you realize, if you do, of how you're conducting business wrongly, it may be too late.

In all aspects of business the Five Forces are important. From running a Fortune 500 company to a little clothing boutique in Gainesville, knowing as many aspects of the business and people will help you succeed in times when your competitor may not understand how you are doing so well.

To better understand Porter's Five Forces, I looked at another website to cross-reference what information they had and compared it to what we learned in lecture. At Quick MBA, they explain how important each part of the strategy is. One thing I found interesting was the in-depth analysis explaining to have a competitiveness over rivals you should: change prices, improve product differentiation, creatively use channels of distribution and exploit relationships with suppliers. I believe all of these outlined are good points to make and will be valuable to a business who doesn't know what to do next to become the top company/brand/firm.