764_ftp

Rethinking and reinventing Michael Porter’s five forces modelTony GrundyCranfield School of Management, UK

� Michael Porter’s five competitive forces model has been a most influential model withinbusiness schools but has perhaps had less appeal to the practising manager outside ofan MBA and certain short business school courses. In this article it is argued that whilstthere are a number of reasons why the model has not achieved greater currency, mostimportantly it can be developed a lot further.

� The paper looks at a number of important opportunities for using Porter’s model in aneven 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 ofeach of the five forces; exploring key interdependencies, both between and within eachforce.

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. Porter’s 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 the very heart of the

management agenda

Strat. Change 15: 213–229 (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 fivecompetitive 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.Strategic Change, August 2006

214 Tony Grundy

Today, and well over 20 years since Porter’soriginal, major publication, there is still rela-tively little real awareness amongst main-stream managers, both at senior and middlelevels of Porter’s 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 90–95% awarenessand at least 50% active use. Whilst Porter waspropelled 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:

� Porter’s framework is relatively abstract andhighly analytical.

� Whilst Porter’s original frameworkexplained 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 simplifymicro 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 as‘logical incrementalism’ (Quinn, 1980) or as‘emergent strategy’ (Mintzberg, 1994)].

In this paper, it is argued that Porter’s 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 Porter’s 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 Porter’s framework,with very few attempts to develop Porter’smodel having been made. Whilst there are ref-erences to Porter’s model in many researchpapers, the principal contribution of thispaper is to expand Porter’s model into a farricher system of analysis, which managers canthen operationalize and subsequent changesin their practices can then be studied in futureresearch.

A critique of the model: value and limitations

Porter’s five competitive forces are depicted inFigure 1. Porter’s starting point was that hewanted to account for long-term variances inthe economic returns of one industry versusanother. His genius resided in distilling thecomplex 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 Porter’s model was thus that itappeared to offer the following attributes:

Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006DOI: 10.1002/jsc

� It simplified micro-economic theory intojust five major influences.

� It effectively and before its time applied‘systems 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 input–output 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 indetermining relative market attractiveness.

� It focused managers on the external envi-ronment for more than traditional ‘SWOT’analysis.

There are, however, several limitations toPorter’s 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 aboutdealing 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, to‘PEST’ factors, or the dynamics of growth ina particular market.

� It is couched in economic terminology, whichmay be perceived to be too much jargon froma practising manager’s perspective and indeed,it could be argued that it is over-branded.

Porter’s 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 Porter’s concept merely scratchesthe surface of its full potential.

Perhaps the very success of Porter’s origi-nal model led to it not being adequately

Porter’s five forces model 215


Substitutes

Suppliers Buyers

PotentialEntrants

Threat of substituteproducts or service

Threat ofnew entrant

Bargaining power

of suppliers

Bargaining power

of buyers

Source: Competitive Strategy, Porter

Rivalry amongexisting firms

IndustryCompetitors

Figure 1. These forces determine industry profitability.

216 Tony Grundy

challenged or developed further, and indeed itcould be claimed that this process is now welloverdue. The five competitive forces are inter-dependent with other strategic analysis tools,which deal with the external environment andwith each other, and this can be developedinto a more comprehensive and coherent‘system’. Suggestions for further analysisinclude:

1. The model can be prioritized within a forcefield analysis format.

2. The individual forces can be broken downat a micro level.

3. The framework can be transformed into amore dynamic model, both at the industrylevel and at a more micro, transactionallevel.

4. The five forces analysis needs to be applied,segment by segment, across the business.

The following subsections seek to developPorter’s model, both to improve its analyticalpower and to increase its range of applica-tions. This is illustrated in the context of a fast-changing market — the health club industry.

Interdependencies of the model

The influences on the five competitive forcesare examined first. Conventional strategy lit-erature highlights the need to think aboutfactors outside the industry. Indeed, PEST (orpolitical, economic, social and technologicalfactors) is possibly the second most widely-

known strategy technique after SWOT analy-sis. However, there is a profound gap betweenPEST and SWOT analysis, and this is only partlymet by Porter’s five forces. A linking techniqueis that of Grundy’s ‘growth drivers’ (Grundy,2004).

Figure 2 gives an example of growth driveranalysis, helping us to represent the forcesthat, directly or indirectly, cause or inhibitmarket growth over a particular time period.Space precludes an in-depth development ofthis model here, but this will be used in con-junction with the five competitive forces laterin the paper in the analysis of the health clubindustry. However, an important feature tonote here is that it is part of a system (seeFigure 3 below).

Figure 3 captures, in an ‘onion’ modelformat, the key domains that need to bethought through, within the overall competi-tive climate, beginning with:

� PEST factors� growth drivers� Porter’s five competitive forces� competitive position.

These layers of the onion are highly interde-pendent, which might be a very useful phe-nomenon for managers to learn about and toapply. For example, where the PEST factorsare generally hospitable, growth is encouragedand the full impact of the five competitiveforces may not be felt and may thus be latent.However, where the PEST factors become


Internettakes off

Expectationsbubble bursts

Self-fulfillingdisaster

Uncertainty –about the

future

growth drivers

growth brakesDot com

losses

Figure 2. Growth drivers: dot.com market for shares, 2000.

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 Porter’s 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 2002–3, as will be seen later.

Indeed, it may be helpful not to call it‘Porter’s 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, Porter’s five competi-tive forces are themselves highlyinterdependent with each other — againsomething only implicit in Porter’s and othertexts. Figure 4 now plots their main interde-pendencies.

Porter’s five competitive forces are thereforeboth highly interdependent with the othersubsystems in the external environment,rather than being relatively stand-alone. Thisfigure plots the interdependencies internal tothe five competitive forces:

Porter’s five competitiveforces are highlyinterdependent

� Between ‘bargaining power of buyers’ and‘entry barriers’: buyers may actively en-courage new entrants, thus reducing entrybarriers.

� Between ‘bargaining power of buyers’ and‘substitutes’: buyers may actively search for



Political factors

Economic factors

INDUSTRYLIFE

CYCLE

Technological factors

Socialfactors

GROWTH

COMPETITIVE

DRIVERS

PRESSURE

Customers

Company & Competitors

- Some Generic Systems

Figure 3. The ‘competitive climate’.

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 Porter’s five forcesneeds to be understood as a wider, interactingsystem as in ‘systems thinking’ rather than as aself-contained unit. Whilst Porter’s originalconcept explains some of these system inter-dependencies, these are underdeveloped andimplicit. Indeed, the conventional input–output 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.Porter’s 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 characteristicslike buyer power, supplier power, rivalry andsubstitutes — it is quite difficult to apply theabove scoring method. For instance, wherebuyer power is high, the model’s user isencouraged to think this is a bad thing,therefore the score is one tick, or plainlyunfavourable. In many instances, especially oninitial learning, the model’s scores can comeout incorrectly. Porter’s model, as it is cur-rently framed, thus presents an immediatebarrier to its assimilation. Furthermore, theabove 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 to illustrate its incidence or severity and its


ENTRYBARRIERS

BARGAINING POWER OF SUPPLIERS

RIVALRY BARGAINING POWER OF BUYERS

SUBSTITUTES

NewEntrants

encouraged

Search for

substitutes

Forwardintegrations

Backwardintegration

Figure 4. Porter’s five competitive forces: key internal interdependencies.

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 bargainingpower 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 theindustry’s overall attractiveness more effec-tively than by simply adding together the ticksas in Porter’s 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 thebuyers 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 keen to 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 substitutes

Low supplier power

Gentlemanly competition

Fragmentedcompetition

Low real entry barriers

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

ENTRYBARRIERS

SUPPLIER POWER

BARGAINING POWER OF BUYERS

SUBSTITUTES

RIVALRY

Figure 6. Porter’s five competitive forces: bargainingpower.

ENTRYBARRIERS

SUPPLIER POWER


SUBSTITUTES

RIVALRY

Figure 7. Porter’s five competitive forces: substitutes.

220 Tony Grundy

suppliers might seek to leap-frog existing competitors 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 6–8 give managersfar greater flexibility in their use of the modeland hopefully more insights. In short, thereare many interdependencies both external andinternal to Porter’s 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 examinethe 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 Porter’s 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 forceswork at a micro level even for individual busi-ness transactions. Figures 9–13 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.


SUPPLIER POWER


SUBSTITUTES

ENTRYBARRIERS

RIVALRY

Figure 8. Porter’s five competitive forces: entry barriers.

EMOTIONBARGAINING POWER OF BUYERS

DISCRETION

IMPORTANCE

URGENCY

Figure 9. Buyer power: micro forces.

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 satisfythe 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 whoreports 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. Forexample, 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 its‘how’? (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 Porter’s five forces, to bea highly attractive market. However, for thevast 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 ENTRY BARRIERS

PHYSICAL

IMFORMATION

ECONOMIC

Figure 10. Entry barriers: micro forces.

MIND-SET RIVALRY

SIMILARITY

Porter’s Micro Forces -Rivalry

COMMITMENT

NUMBER

Figure 11. Porter’s micro forces: rivalry.

222 Tony Grundy

are also interdependent as, for example, theexistence 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 customer’sability 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 verysmall 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 supplier’scapacity 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 theresource-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 thefragmentary 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 OR UNBUNDLING

SUBSTITUTES

OTHER TECHNOLOGIES

EMOTIONAL

DO IT YOURSELF

Figure 12. Porter’s micro forces: substitutes.

FORWARD INTEGRATION

SUPPLIER POWER

SIZE AND NUMBER

RESOURCE SCARCITY

UNIQUE KNOWLEDGE

Figure 13. Porter’s micro forces: supplier power.

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 offwith importance.

Competitive dynamics

Porter’s 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 changein 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 customer’s 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 cumulativelearning 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 andfuture’.



Favourable

Unfavourable

TIME – Industry cycle

Entry barriers

Bargaining ofbuyers

Figure 14. Macro-level competitive dynamics.

224 Tony Grundy

The significance of this concept is that:

� Managers should beware thinking that thestructural properties of Porter’s 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

Porter’s 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 thatPorter’s model must be used in a more dis-criminating and localized way to describethem. 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 ‘neutral’and 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

Bargainingpower

Figure 15. Micro-level competitive dynamics.

in the UK, 1995–2004. Previously, apart fromone or two deluxe models like the ‘Kirby’, thevast majority of models were of similar per-ceived use value and price. Following Dyson’sentry 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 2003–4, newentrants emerged and Hoover began to captureshare with light, cyclonic, cheap machinespriced at £30–£50 each. Here the overall com-petitive shape of the market has moved from amore pyramid shape to an eclipse. Pictures likeFigure 17 can help managers to explore andcreate competitive changes.

A final application of Porter’s five forces isat a micro level to departments, projects andto individual roles, for each one of Porter’s fiveforces may be very relevant to each one ofthese 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 Porter’s five forces on asegment-by-segment or on a mini strategybasis. This helps to make Porter’s frameworkfar more context-specific and applicable at thefirm level. Indeed, Porter’s model can beapplied right down to the project level and tothe level of an individual’s role where theremay be variable rivalry, substitutes, bargainingpower, etc. Indeed, in teaching Porter’s fiveforces these less obvious applications areoften found to be perceived of higher value bymanagers.

The above has explored more advancedways of applying Porter’s 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 the health club industry 1995–2004 (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

Basicfunerals

Deluxefunerals

Pre-needmarket

Overallattractiveness

Supplier Power

13 1114

Figure 16. Porter’s 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.

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 thepotential 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 industry‘churn’ as 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. Over1996–2001 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 andlittle 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 marketssaw 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 Porter’s five forces combined with‘from–to’ analysis (see Table 1).

Overall, the ‘from–to’ analysis represents anegative 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. Porter’s five forces: ‘from–to’ analysis

From To Because of

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

Rivalry Medium Very High Companies desperate to find health club capacity — producing discounting, etc.

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

could change againSuppliers Low — staff Low — staff Variable

High — sites Medium — sites

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 Topnotchwent 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 1996–8 of the future competitiveclimate for 2001–4 (Figure 3), then much ofthis financial pain might have been avoided.AsMatthew Harris, CEO of the original Topnotchand of its remaining, independent sites, todayreflects:

I hadn’t really heard about the five com-petitive forces to be honest. I had absorbeda lot of management theory from varioussources, especially the financial stuff but Ijust felt from everything I saw, heardabout and imagined, that we could onlywin through this growth. I first sawPorter’s five forces well after we had goneover the precipice. It didn’t seem veryhelpful at the time as I couldn’t see what Icould really do with it in that situationand it did seem quite theoretical.

Looking back on the experience andreflecting on the competitive situation aswe have now, I can see its now obvious rel-evance. Besides the obvious cost reductionwhich it implied we are now focusing onhow we can turn the buying power of thebuyers to our advantage in our marketingstrategy. I can certainly see how the forcesinterplay with each other and with the restof what is going on and even down to avery specific transaction like someonejoining 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 Porter’s five competitive 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.

Porter’s 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 Porter’s five forces might bedestined to fall into the same lifecycle phase



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 Porter’s fiveforces, this also offers a most promising areafor future research, especially to explore howmanagers respond to using more advancedand detailed approaches to Porter’s model ascontained here. Future research could, forexample, focus on questions such as:

� When using Porter’s five forces model, howdo managers’ cognitive perceptions andemotions interact with each other to shapetheir judgements?

� To what extent does introducing managersto Porter’s 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 Porter’s model, to what extent do theyconceptualize their competitive environ-ment in similar ways or not?

� How might managers perceive the rele-vance of Porter’s 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, including Be 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.

References

Avila EA. 2001. Competitive forces that drive engi-neer recruitment and retention. Leadership andManagement in Engineering 1: 17–23.

Chen JCH, Cheng PP, Chen Y-S. 2001. Decision cri-teria: a theoretical foundation of Pareto principleto Porter’s competitive forces. Journal ofOrganizational Computing and ElectronicCommerce 11(1): 1–14.

Covey S. 1989. The Seven Habits of Highly Effec-tive People. Simon and Schuster: London.

DeWit B, Meyer R. 1988. Strategy: Process,Content, Context. International Thomson:London.

Grant RM. 1991. The resource-based theory of competitive advantage: implications for strategyformulation. California Management Review33(3): 114–135.

Grundy AN. 1995. Breakthrough Strategies forGrowth. Pitman Publishing: London.

Grundy AN. 1997. Strategy mix and the industrymind-set. Journal of General Management22(4): 16–30.

Grundy AN. 2001. Competitive strategy and strategic agendas. Strategic Change 10(5):247–260.

Grundy AN. 2003. Mergers and Acquisitions.Capstone Press: Oxford.

Grundy AN. 2004. Rejuvenating strategic manage-ment — ‘The Strategic Option Grid’. StrategicChange 13: 111–123.

Grundy AN, Brown LR. 2002a. Be Your OwnStrategy Consultant — Demystifying StrategicThinking. International Thomson Publishing:London.

Grundy AN, Brown LR. 2002b. Strategic ProjectManagement. International Thomson Publish-ing: London.

Hamel E, Prahalad CK. 1994. Competing for theFuture. Harvard Business School Press: Boston,MA.

Johnson G, Scholes K. 1989. Exploring CorporateStrategy. Prentice Hall: Hemel Hempstead.

Lewin K. 1935. A Dynamic Theory of Personality.McGraw-Hill: New York.

Lynch R. 1997. Corporate Strategy. Pearson Edu-cation: Harlow.


Mahan JF, McGowan RA. 1998. Modelling industrypolitical dynamics. Business and Society 37(4):390–414.

Mintzberg H. 1994. The Rise and Fall of StrategicPlanning. Prentice Hall: Hemel Hempstead.

Mintzberg H, Quinn JB, Ghoshal S. 1995. The Strat-egy Process. Pearson Education: Harlow.

Passemard D, Kleiner BH. Competitive advantage inglobal industries. Management Research23(718): 111–118.

Pecotich A, Hattie J, Li P-L. 1999. Development ofindustries: a scale for the measurement of per-ceptions of industry structure. Marketing Letters10(3): 403.

Porter EM. 1980. Competitive Strategy. The FreePress/Macmillan: New York.

Porter EM. 1985. Competitive Advantage.The FreePress/Macmillan: New York.

Porter EM. 1990. Competitive Advantage ofNations. Macmillan: New York.

Quinn JB. 1980. Strategies for Change — LogicalIncrementalism. Richard D. Irwin: Illinois.

Senge P. 1990. The Fifth Discipline — The Art andPractice of the Learning Organisation. CenturyBusiness.

Thomson and Strickland. 1978. Strategic Manage-ment — Concepts and Cases. Irwin/McGraw-Hill: New York.

Thurlby B. 1998. Competitor forces are also subjectto change. Management Decision 36(1): 19–25.

Ward FW, Novak M. 1997. How rationality shapesbusiness ethics. Journal of Business Ethics16(12/13): 1381–1392.



764_ftp

Documents