Porter's Five Forces Analysis: Know Your Place in Business Strategy - Essay Sample

Introduction

The American academic, Michael E. Porter, created a commonly used business strategy known as Porter's Five Forces Analysis in his 1991 article. Probably his most accredited work, the article "Know Your Place," is still widely used by business strategists. This piece offers strategic advice to corporate giants and small companies alike. Porter identifies four major actions that every company should undertake to assess the attractiveness of its industry and establish itself in the market. The four steps are analyzing the market, reshaping it, positioning the business strategically in the industry, and identifying the five fatal flaws.

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In the first section of the article, the author demystifies the idea that business strategy is only meant for big corporations. In contrast, Porter maintains that small entrepreneurial companies need business strategy more than the giant companies. He argues that small enterprises cannot rely on the market forces neither can they throw resources at their problems. Therefore, he urges them to view their competitive environment with clarity so that they stake out a position they can defend, given their resources. According to Porter, business strategy is about choosing how to position a company in a competitive business environment. In setting out to form a business strategy, Porter encourages companies to be informed by two critical questions. First, what is the structure of the industry and how is it likely to change in the future? Second, what is the company's relative position in the industry?

In the second part, Porter identifies the five forces of competition in every industry. The first force he mentions is the degree of rivalry among competitors in the market. An attractive industry is the one that has subdued competition. Additionally, a market is more attractive and profitable if competition is more focused on image. The threat of new entrants is the second force. Porter maintained that businesses would do better in an industry with barriers to entry. The threat of substitutes could also affect the competitiveness of a business. Suppliers also constrain profits through their bargaining power. This is the fourth force of competition. Finally, he identified the last force to be the bargaining power of buyers. In conclusion to this part, Porter advises companies to analyze their industry using these five forces.

The article then proceeds to advise companies on how they can reshape their industry. The author wrote that each business has the potential of influencing every one of the mentioned five forces depending on the way they choose to compete. In reading this section, my understanding is that Porter proposes for businesses to find a way around the five forces. For instance, he recommends having an online ordering system as a strategy of overcoming the bargaining power of customers. Companies can also raise barriers to entry by acquiring essential raw products. Porter illustrates how companies could achieve this by mentioning the American Airlines strategy. The company overcame price competition by reducing the bargaining power of its customers. Seemingly, this section of the article is addressed to big corporations.

Having advised big corporations of how they can establish themselves in the market through structural change, Porter turned to small entrepreneurial companies. He agrees that small companies are disadvantaged regarding resources making it impossible to change the structure of an industry. Therefore, he advises them to establish themselves strategically in the industry by choosing a position that is based on sustainable competitive advantage. The article identifies two primary varieties of competitive advantage including maintaining prices lower than those of competitors and product differentiation. Porter advises that a company that achieves a high level of product differentiation may be able to offer premium prices to translate to higher margins. He also identifies competitive scope as a crucial variable in strategic positioning. A company can either take a broad or narrow scope. Porter illustrates this concept of competitive scope using the car industry, where he identifies Toyota's scope as broad and Mercedes' scope as narrow.

In conclusion, Porter identifies the five fatal flaws which should be avoided by entrepreneurs in applying strategic thinking to their own competitive situations. The first common mistake entrepreneurs make is misreading industry attractiveness. Investors tend to think that the fastest growing industries as the most attractive. Instead of applying this thinking, investors should be informed by barriers of entry and fewer substitutes in evaluating the attractiveness of a market. A second mistake for companies is possessing no real competitive advantage. Most companies like imitating their competitors to have a sense of security. This strategy leaves a company with no competitive advantage. Another issue is the lack of sustainability of business strategies. Sometimes, it is difficult for small companies to sustain their competitive advantage because of their limited resources. Other organizations make the mistake of compromising a strategy to grow faster. Finally, it is common that companies' strategies are only known by management. Because the employees are not aware of the strategy, they cannot work towards its objectives. In conclusion, Porter states a well-executed business strategy is a powerful tool that it too far important to be left to the strategic planners of big corporations.

Article Review: A Playbook for Strategy: The Five Essential Questions at the Heart of Any Winning Strategy

In their article, Lafley and colleagues establish that strategy is a strange and scary idea for many business leaders. While well-executed strategies offer huge rewards, failure could have disastrous implications for the business. Leaders are also unwilling to implement strategies because of many unknown risks. The article "A Playbook for Strategy: The Five Essential Questions at the Heart of Any Winning Strategy" provides a solution for this problem whereby the authors have formed a simple framework to defining and creating a strategy. The structure is based on five-question including what is the company's winning aspiration? Where will the company play? How will it win? What capabilities does the company have? And what management systems are required? The authors maintain that these five questions apply to all organizations regardless of their type, size, or context.

In addressing the first question which seeks to identify a company's winning aspiration, the authors highlight that these aspirations are framed as mission statement and vision. The article cites the example of Procter & Gamble, which successfully incorporated its business strategy in its statement of purpose and mission statement. Winning aspirations are different depending on the nature of the business. Regardless, every organization should be able to conceptualize what it means to succeed in the market. For example, for a market research department, winning could mean being the service provider of choice for its internal customers. The authors maintain that if a business sets out to play rather than win, it does not invest its resources appropriately causing it to miss on the opportunity.

According to the article, after a business has identified its winning aspirations, it should seek to establish where it will play. This exercise involves recognizing the markets the firm will compete in, the customers they are after, the channels they will use to penetrate the market, and which product categories. Organizations can choose either to be narrow or broad in their where-to-play choices. Competition can be in different geographical locations (local, national, and regional) and demographic segments (determined by age and sex among others). The article urges business leaders to make careful considerations of all sets of possibilities when deciding on where-to-play. For instance, by offering an array of services to its community, a hospital would have a narrow geographic. However, if the same hospital were to specialize, say to provide cancer care, it would have a broader geographical catchment.

The article states that where a company chooses to play and how it wins are two tied questions. The question of where to play identifies a business's playing field while how to win defines the strategy or method by which the company will win in the designated market. Importantly, the approach chosen to win must be considered within the context of the market or where-to-play. The market and strategies employed in winning the market flow from and reinforce one another. Determining how to win necessitates an organization to evaluate the resources it has and how it can use these resources to create unique value. Additionally, the company has to identify how it can sustainably deliver products of value to the customers. Accordingly, the authors define competitive advantage as the specific way in which a firm leverages its strengths to create superior value for a customer resulting in excellent returns for the company. The decision to choose how to win involves finding sources of competitive advantage. Successful how-to-win choices are aligned to the specific organizational context making them hard to copy for competitors. Choosing ways to win involves matching a company's existing and potential advantages against its where-to-play choices.

In answering the question of what capabilities that must be in place for a firm to establish its strategy in the market, the authors propose a mapping of all activities that help the firm bring its where-to-play and how-to-win choices to life. This activity helps an organization identify the capabilities they need to build to deliver the chosen strategy. Broadly, the authors identify five crucial capabilities that must be possessed by all organizations regardless of their industry, nature, or size. They include a deep understanding of consumers, innovation, brand building, the ability to launch in the market, and the ability to expand. Each of the capabilities mentioned in the article is unique to every organization. Therefore, each firm should craft different strategies to comb the market, depending on the resources and capabilities it possesses.

The last question addresses the management systems that are required by a company in implementing its business strategy. The authors note that most organizations neglect this question which causes most business strategies to fail. No matter how good a strategy is, it will fail if a firm lacks a management system that supports it. To fully gain competitive advantage, the article argues that organizations need to have policies in place to assist as well as to measure the effectiveness of the strategy. In conclusion, the authors of the article demystify the complexity of the framework. They state that, despite that these five questions having to be asked at every level of an organization, their answers can be captured on a single page.

Bibliography

Lafley, A., Martin, R., and Riel, J., 2013. A playbook for strategy. Rotman Magazine, 9. http://www.obio.ca/s/aPlaybookForStrategy.pdf

Porter, M.E., 1991. Know Your Place: How to Assess the Attractiveness of your Industry and your Company's Position in it.