by Lawrence (Laurie) Phillips

STRATEGIC

CHARACTERISATION

MATRIX

How to apply Porter’s Five Forces thinking to determine

which of the Five Strategic Objectives (Divest, Harvest,

Maintain, Grow, Enter) should be implemented by a

business with a...

The use of any information provided is at the sole

discretion of the user, no warranties and/or

guarantees whether expressed or implied given.

Users accepts all risks for their application of the

information provided and no responsibility is

accepted by the writer for the information contained

within and how it is applied.

Disclaimer

1. Porter’s Five Forces

2. Five Strategic Objectives

3. Strategic Characterisation Matrix (SCM)

4. SCM Tool – How to Download

5. References and Contact Details

Contents

A framework for industry analysis and

business strategy development formed by

Michael E. Porter of Harvard Business School

in 1979.

1. Porter’s Five Forces

What is Porter’s Five Forces

The five forces that are derived determine the

competitive intensity and therefore “attractiveness”

of a market.

Attractiveness in this context refers to the overall

industry profitability. An "unattractive" industry is

one in which the combination of these five forces

acts to drive down overall profitability. A very

unattractive industry would be one approaching

"pure competition", in which available profits for

all organisations are driven down to zero.

Three of Porter's five forces refer to competition

from external sources. The remainder are internal

threats.

The threat of entry of new competitors

Profitable markets that yield high returns will attract new organisations. This results in many new entrants, which

eventually will decrease profitability for all organisations in the industry. Unless the entry of new organisations can

be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).

The existence of barriers to entry (patents, rights, etc.)

The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new organisations

can enter and non-performing organisations can exit easily.

Economies of product differences

Brand equity

Switching costs or sunk costs

Capital requirements

Access to distribution

Customer loyalty to established brands

Absolute cost

Industry profitability; the more profitable the industry the more attractive it will be to new competitors

The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of

customers to switch to alternatives

Buyer propensity to substitute

Relative price performance of substitute

Buyer switching costs

Perceived level of product differentiation

Number of substitute products available in the market

Ease of substitution

Substandard product

Quality depreciation

The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the organisation under pressure, which also affects the customer's sensitivity to price changes.

Buyer concentration to organisation’s concentration ratio

Degree of dependency upon existing channels of distribution

Bargaining leverage, particularly in industries with high fixed costs

Buyer volume

Buyer switching costs relative to organisation’s switching costs

Buyer information availability

Ability to backward integrate

Availability of existing substitute products

Buyer price sensitivity

Differential advantage (uniqueness) of industry products

Recency, Frequency, Monetary (RFM) Analysis

The bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components,

labour, and services (such as expertise) to the organisation can be a source of power over them, when there are few

substitutes

Suppliers may refuse to work with the organisation, or charge excessively high prices for unique resources

Supplier switching costs relative to organisation’s switching costs

Degree of differentiation of inputs

Impact of inputs on cost or differentiation

Presence of substitute inputs

Strength of distribution channel

Supplier concentration to organisation’s concentration ratio

Employee solidarity (e.g. labour unions)

Supplier competition - ability to forward vertically integrate and cut out the BUYER

The intensity of competitive rivalry

For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.

Sustainable competitive advantage through innovation

Competition between online and offline companies

Level of advertising expense

Powerful competitive strategy

The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their

rivals.

Divest, Harvest, Maintain, Grow or Enter

2. Five Strategic Objectives

Divest

Divestment is a strategy that is considered when a

business is not making suitable profits or when

another organisations values the business higher

than the current organisation’s owner

It involves exiting the markets or market segments

that do not offer potential for profit growth, cutting

costs and shifting resources to more economic

activities

A business may be able to significantly increase

their value by divesting from products and

customers that do not produce profits for the

business

Image: Maggie Smith / FreeDigitalPhotos.net

Harvest

A harvesting strategy maximises the cash flow of

the business from its existing assets and is typically

an appropriate strategy when the net divestment

value of the business is below its optimal

restructured value

It is typically applied when the competitive

advantage of the business is in decline with

reducing sales volumes or where market conditions

are deteriorating

Harvesting strategies that increase operating

margin include: raising margins, focus on premium

niche markets and cutting variable and fixed costs

Harvesting strategies that reduce investment

include: reduction in inventory, tight control on

debtors, extending creditors and reducing fixed

assets

Image: dan / FreeDigitalPhotos.net

Maintain

In a maintain strategy it is not expected that the

market share of the business will erode or increase

over time

Key objectives of a maintenance strategy is to

avoid price competition as this will negatively

impact on the value of the business, maintain the

barriers to entry and keep a focus on innovation

The conditions in which a maintain strategy should

exist are:

Significant barriers to entry

Market is dominated by a small numbers of players

No decline in the market is expected

Business has a well established competitive position and is

earning healthy economic profits with marginal

investments able to earn a return that exceeds the current

cost of capital

Image: FreeDigitalPhotos.net

Grow

Grow strategic objectives are about the business

investing to earn a return that exceeds its cost of

capital

Growth opportunities therefore depend on the

business having a differential advantage

The market should also have a high degree of

attractiveness

Image: criminalatt / FreeDigitalPhotos.net

Enter

New products

New processes

New markets

New marketing strategies

An enter strategic objective should apply where

there is a combination of both high market

attractiveness and an advantaged differential

position

The business must have the ability to create a

sustainable differential advantage

Image: vichie81 / FreeDigitalPhotos.net

How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives should be implemented by the business

3. Strategic Characterisation Matrix

Strategic Characterisation Matrix

Uses Porter’s Five Forces plus other factors to

determine the overall Market Attractiveness:

Size of the market

Growth of the market

Competitive structure of the market (one of Porter’s Five

Forces)

Supplier power (one of Porter’s Five Forces)

Threat of substitutes (one of Porter’s Five Forces)

Buyer power (one of Porter’s Five Forces)

Threat of new entry (one of Porter’s Five Forces)

The cyclicality of the market

Market risks

Plus analyses the Differential Position of the

business:

Low cost

Differentiation

Market Attractiveness

• Porter’s Five Forces

• Size of the Market

• Growth of the Market

• The Cyclicality of the Market

• Market Risks

Differential Position

• Low Cost

• Differentiation

Strategic Objectives

• Divest

• Harvest

• Maintain

• Grow

• Enter

SCM Tool - Inputs

In a given market or market segment by rating all the relevant factors that influence Market Attractiveness and the

Differential Position of the business, guides us in determining the appropriate Strategic Objective/s to be

implemented

By analysing this over several time scales such as Current, Short and Long Term provides an additional guide to the

likely changes that could occur and the evolution of the chosen Strategic Objective/s

SCM Tool - Outputs

Provides a guide to which of the Five Strategic

Objectives could be implemented

Divest

Harvest

Maintain

Grow

Enter

Current

Short Term

Long Term

SCM Tool - Example

One of the business units that is operated by Company X is a supplier and installer of residential solar panels in

Australia. The Australia government provides financial subsidies to customers installing residential solar panels,

however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is

preparing to analysis the strategic objectives of this business unit for the next 5 years.

SCM Tool - Example

One of the business units that is operated by Company X is a supplier and installer of residential solar panels in

Australia. The Australia government provides financial subsidies to customers installing residential solar panels,

however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is

preparing to analysis the strategic objectives of this business unit for the next 5 years.

Enter Rating for each item and timescale

with:

1 = Unattractive to the business

7 = Attractive to the business

SCM Tool - Example

One of the business units that is operated by Company X is a supplier and installer of residential solar panels in

Australia. The Australia government provides financial subsidies to customers installing residential solar panels,

however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is

preparing to analysis the strategic objectives of this business unit for the next 5 years.

Enter Rating for each item and timescale

with:

1 = Unattractive to the business

7 = Attractive to the business

Enter Rating for each item and timescale with:

1 = Disadvantaged (Business unable to implement )

7 = Advantaged (Business able to implement)

SCM Tool - Example

One of the business units that is operated by Company X is a supplier and installer of residential solar panels in

Australia. The Australia government provides financial subsidies to customers installing residential solar panels,

however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is

preparing to analysis the strategic objectives of this business unit for the next 5 years.

SCM Tool automatically calculates Scores

SCM Tool - Example

The SCM tool automatically transposes the scores and plots the results onto three SCM charts for each of the chosen

time scales periods, indicating as a guide the best likely Strategic Objective/s

4. SCM Tool – How to Download

SCM Tool – How to Download

For a FREE copy of the SCM Tool in Microsoft Excel format, just go to www.businessmeccanica.blogspot.com and go

to the downloads section or go to http://businessmeccanica.blogspot.com/p/downloads.html

SCM Tool – Notes to Users

The SCM Tool has been developed as a guide only

Do not rely on the results, only use them to help guide you in determining the best Strategic Objectives for the business

Ensure that you have all the relevant facts and figures required prior to using the SCM tool, such as the size of the market, growth of the market, competitors etc.

The SCM Tools is a protected (no password required) Excel Worksheet

It can be unprotected so that you can analyse the scoring mechanisms which have been established

Adjust the scoring mechanisms to suit your individual requirements as required

The SCM Tool can be applied at the organisational, business unit or individual product/service level

Always use a professional marketing expert (such as a CPM) to analyse your results

The use of any information provided it is at the sole discretion of the user, no warranties and/or guarantees whether expressed or implied are given.

Users accepts all risks for their application of the information provided and no responsibility is accepted by the writer for the information contained within and how it is applied

References and Contact Details

http://en.wikipedia.org/wiki/Porter_five_forces_a

nalysis

http://hbr.org/2008/01/the-five-competitive-

forces-that-shape-strategy/ar/1

Marketing Management: A Strategic, Value-based

Approach. Whitwell/Lukas/Doyle, John Wiley

2003

Lawrence (Laurie) Phillips MBA-Mktg CPM AMAMI

MAIE

+61 400 767 087

lawrence.phillipsMBA@gmail.com

References Contact Details