Porter's+Five+Force+Model

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//**Porter's HBR article**// //**Five Force Work Sheet**//

The chart above is an expanded version of [|Michael Porter's]widely used "Five Forces" model (search that term on Google images and you will find numerous variations on the chart). It lists many of the details about each of the forces that Porter discusses in his HBR article. The significance of that article cannot be overstated. A whole generation of business school analysts have been influenced by Porter, and his terms are widely used by corporate rating services such as Standard and Poor's.

The key to understanding Porter's model is to see the chart as a description of a "competitive landscape," similar to ones used by evolutionary biologists to study natural ecology. The forces are not companies; rather they are the conditions which shape the playing field on which companies do business. In that sense, companies are like different species of plants and animals that inhabit a natural ecology; the forces are the environmental conditions that affect the ecology (rainfall, seasonal temperature, etc.).

Two common misconceptions which many people have about such landscapes, both with respect to nature and business, are:

• all players on a landscape must compete with each other for survival • to succeed a player must eliminate the competition (the zero-sum game model).

The first point ignores the fact that many companies, like many species, cooperate in order to survive (see cooperative game theory). Indeed, Porter's basic model assumes that buyers are companies that sell their products or services to yet other companies (i.e. it is a business to business - B2B - model which can be adapted to the retail marketplace) The second misconception is a particularly dangerous one which too often causes managers to make stupid strategic choices. A company succeeds by gaining market share, but there are many ways to do so that don't involve an adversarial battle to the death with competitors. Markets can be expanded by attracting new customers or by creating new products and services.

Thus the "fifth force" which sits at the center of Porter's chart -- rivalry among existing firms -- is a special force in and of itself. It may or may not be an important factor in a particular landscape. In fact, head to head competition for a fixed pool of customers should be avoided whenever possible, something which managers who keep chanting "know your competition" often overlook. As Porter's own analysis shows, head to head competition destroys return on investment (ROI), though in the short run it can benefit consumers who pay less for some product (Coke vs. Pepsi). In the long run, head to head competition hurts markets since it either exhausts the resources of all players (e.g. the airline industry) or allows the winner to dictate prices.

What most often happens in business is what happens in evolution. Players lose market share (i.e. "fitness") not because they are "eaten" by the competition but because they fail to adapt to the changing landscape (i.e. they leave behind fewer copies of their products or services). Porter's model, therefore, should be used to understand the dynamics of the primary forces shaping a landscape rather than being applied in some rote fashion to a static picture of one's competitors. The art of strategic analysis is anticipating how a market will change so that resources deployed on today's landscape will maximize return on investment on some future landscape. Companies which practice that art badly are simply left behind. How to use Porter's model The purpose of your strategy report is to explain whether or not your player has a coherent strategy which will allow it to gain market share with Gen-Y consumers. To write the report, therefore, you must break this task into its three component parts:

__Identify the one or two most important forces shaping your players competitive landscape__ Focus here on the landscape not the company. You want to eliminate forces that are not important and zero in on the one or two forces which will determine the shape of the landscape going forward. You can find a a worksheet to help you brainstorm the landscape in the assignment folder for the strategy report on Blackboard It has suggestions for how to think about the five forces.

__Describe your player's strategy__ Remember that strategy is not the same as tactics. Strategy is a question of how a player positions itself on a landscape to take advantage of the predominant forces. If you are sailing against the wind, then you must tack to get to shore; if you are sailing with the wind, then you can run full sail. Remember also that not all companies have coherent strategies; many strategies are stupid. Trying to run full sail against the win will almost certainly cost you time and effort and may destroy your ship.

__Evaluate how effective that strategy will be in gaining Gen-Y market share__

This part of your report involves a judgment call. I am not going to grade you on whether I agree with your call but rather on how well you state and explain it. Although predicting some future outcome is difficult (e.g. whether strategy x executed by company z can gain Gen-Y market share), a good analyst should be able to explain the framework for making such judgments. Be decisive and explain any qualifications or conditions that apply. You can use the basic stockbroker framework for making recommendations: buy, hold, or sell (though don't literally use those terms).

In a strategy report, you generally recommend one of three options:

◦ The company's strategy is sound. Clients should partner with this company and/or adopt it's market "solution." ◦ Some part of the strategy needs adjusting or market conditions need to evolve further before clients should partner or adopt. In this case you need to state clearly which forces or which parts of the strategy clients should monitor to decide whether to partner or adopt. ◦ "Forget about it" - there is no reason to believe this company can gain Gen-Y market share. Do not partner; do not adopt their solution.

Note - If your company is traded on the stock market, you can read that company's own assessment of their competitive landscape and strategy in the first section of the SEC 10-K report they are legally required to file each year. The 10-K report is the source document both for the glossy annual shareholder's report that companies issue and the analysis done by organizations like Standard and Poor's.

You can almost always find the raw 10-K report at your company's web site, usually by clicking through on a link at the bottom of the front page called "about us," then on a link usually called "investor relations" or "financial statements." That path will normally take you to a page where there is a direct link to the 10K report. You can also find the 10K report by searching the company on LexusNexus Academic. Much of a Standard and Poors analysis is a distillation of the 10-K report.