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The Relevance of Porter's Five Forces in Today's Innovative and Changing Business Environment

Authors:
Author: Dr. Gerard H. Th. Bruijl
Director/Principal Consultant BizChange (NZ) Ltd
Date: 7th June 2018
The Relevance Of Porter’s Five Forces In Today’s
Innovative And Changing Business Environment
The Relevance Of Porter’s Five Forces In Today’s Innovative And Changing
Business Environment
governance issues in emerging markets
1
Introduction
Porter’s five forces framework (rivalry existing competitors, threat of new entrants,
power of suppliers and buyers, substitut products and services) is based on the
perception that an organizational strategy should encounter the opportunities and
threats in the organizations external setting. A competitive strategy should rest on an
understanding of industry structures and the way they change. Porter argues that
the aim of the strategist is to recognize and handle a competitive environment by
directly looking at competitors, or to contemplate a broader perspective that
competes against the organization (Porter, 1979). Arguably, technological
advancements and different ways of strategic thinking, such as shaping the future,
engaging with customers, and creating long-term value using innovative ways may
have shifted Porter’s five forces thinking from competing in an existing competitive
environment to seeking opportunities in new innovative markets. However, one may
wonder, if organizations are up to par for stepping out of their current competitive
market to become a pioneer in a new market environment. This paper outlines and
focuses on the relevance of Porter’s five forces today and its appropriateness when
managers are considering innovation and change. Additionally, there will be an
exploration of alternative strategies that have similarities with Porter’s five forces.
The Thinking Behind Porter’s Five Forces Framework
The five forces framework was coined by Harvard Business School Professor
Michael Porter and was published for the first time in the Harvard Business Review
in 1979. The five forces framework is an influential and straightforward tool for the
identification of certain powers in line with a particular business situation by using the
outside-in perspective (Johnson, Scholes, & Whittington, 2008). The framework
distinguishes five forces in the microenvironment that drive competition and
jeopardize an organization’s ability to make a profit. The origin of the Porter’s five
forces framework is based on the industrial economics or industrial organizational
(IO) approach. The IO approach presumes that the attraction of an industry in which
an organization operates is defined by the market structure due to the reason that a
market structure affects the behavior of market contributors (Raible, 2013; Slater &
Olson, 2002). The market structure, in turn, affects the strategic behavior of
organizations; for example, market success depends on the competitive strategy.
Subsequently, the organizational success is indirectly dependent on the market
structure. Mohapatra (2012) denotes that “individual forces and their collective
impact will change as the government policies and macroeconomic and
environmental conditions change” (p. 274). Moreover, the five forces framework may
be seen as something that can be used when completing an industry analysis. Even
after closer examination, it becomes obvious that the model allows an organization
to gain a deeper understanding of how profit is divided between the five forces in a
specific industry. Hence, it will enable the organization to get a better understanding
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of which industry players hold the most power and likely determine the rules of the
activities. Moreover, the framework allows organizations to obtain not only a glimpse
of the industry at a particular point in time, but a view of the dynamics of the industry
and potential changes in the future.
Aside from competition among the existing competitors, Porter recognizes four other
forces to be included in the five forces framework, which are (a) threat of potential
new entrants, (b) bargaining power of suppliers, (c) bargaining power of buyers, and
(d) the threat of substitute products or services. The interactions of these five forces
shape competition in an industry and are a continuous threat to the success of an
organization (Porter, 1979). The following provides a brief explanation of Porter’s five
forces.
Rivalry Among Existing Competitors
When rivalry among existing competitors is significant, profitability within the industry
suffers and organizations may introduce measures such as price discounting,
introducing new products, advertising campaigns and service improvements (Porter,
1985). However, the frequency of the previously stated will depend on the intensity
of the competition, and how the industry is affected by industry growth rate, storage
and fixed costs, the number of organizations competing against each other,
differentiation, exit barriers and switching cost between competitors (Hubbard &
Beamish, 2011).
Threat of New Entrants
Porter (1985) states that “new entrants to an industry bring new capacity, and the
desire to gain market share that puts pressure on prices, costs and the rate of
investment necessary to compete” (p. 8). However, the threat of entry will largely
depend on how high entry barriers are and how many organizations are in the
industry (Johnson et al., 2008). Furthermore, new entrants can disrupt established
players in a particular market, and directly affect the competitive advantages. When
the demand is not increasing or decreasing, an additional supply of goods or
services will decrease profit margins of the market participants. Porter (1985)
differentiates seven critical barriers to enter the market, (a) supply-side economies of
scale, (b) demand-side benefits of scale, (c) customer switching cost, (d) capital
requirements, (e) incumbency advantages independent of size, (f) unequal access to
distribution channels, and (g) restrictive government policy. An essential exercise for
organizations is to analyze barriers to entry and to anticipate possible retaliation
measures from competitors when considering entering a new industry. It is of utmost
importance for a new entrant is to overcome entry barriers without nullifying, through
heavy investment, the profitability of joining in the industry (Porter, 1985).
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Bargaining Power of Suppliers
This can have a detrimental effect on profitability in an industry as suppliers can
threaten organizations with increasing prices of products and services; when
organizations are unable to recover, the cost increases in its own prices. There are a
number of reasons that can be seen as indicators of high bargaining power of
suppliers. For instance, domination within an industry may be controlled by a few
organizations and is, therefore, more concentrated than the industry it sells to, or the
industry is not the most important customer of the supplier group (Porter, 1979). On
the other hand, the bargaining power of suppliers can be manipulated by the number
of suppliers, the size of the supplier, and the availability of substitute customers
(Slater & Olson, 2002).
Furthermore, many powerful suppliers do not depend predominantly on one industry
for its revenue as some may serve a number of other industries and will not hesitate
to extract maximum profit from each one (Porter, 1985). An influential factor to the
power of suppliers is the power of customers, who may drive prices downwards,
demand better quality, or enforce expanded services, which may well have a
negative effect on the profitability of an industry.
The Bargaining Power of Buyers
When there is a monopoly market situation, buyers have the greatest bargaining
power when they are large and are able to switch comfortably to alternative suppliers
that are few in numbers (Slater & Olson, 2002). Other relative buyer concentrations
are (a) competitiveness – many buyers and suppliers, (b) mutual dependence – few
buyers and suppliers, and (c) monopoly power – few suppliers and many buyers.
Furthermore, buyers compete with the industry by forcing prices down (Porter,
1980). When buyers are powerful, sellers may develop ways where buyers are
prepared to pay a premium price for some products. For instance, sellers need to
accept that there is an imbalance of power and that profitability will be reduced or
even to accept a rate of return that is close to the cost of capital. Furthermore, sellers
may find different ways for increasing the cost that buyers incur when switching from
one seller to another seller. However, this is difficult as most buyers will recognize
that they may not appreciate when they are locked in to a certain buyer. Although,
sellers may overcome this lock in by creating a buyer loyalty program that provides
more value than competitors provide, such as a just-in-time (JIT) delivery system or
increasing quality and services. On the other hand, when buyers have less power,
they are not concentrated, have fewer options, and are segmented (e.g., information
on price is difficult to find, possibility of price discrimination, price bundling).
Threat of Substitute Products and Services
Identifying substitutes is seeking for products or services that can fulfill the same
purpose as products of the industry of the considered industry. Factors that may
influence the threat of substitute products and services are (a) switching costs
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between substitute products or services and industry products, or (b) buyer’s
addiction to buy substitutes. (Hubbard & Beamish, 2011; Klemperer, 1995). For
instance, butter and margarine may be the same in the eyes of many but consumers
must pay a premium for butter, or a smartphone substituting a laptop as a smaller
device that provides the same or similar operations as a laptop. From an industry
and profitability perspective, the threat of substitutes needs to be low, contrary to
buyers who want substitutes to be high. In other words, substitute products and
services are less when (a) cross-price elasticity of demand (i.e., the responsiveness
of demand for one good to the change in the price of another good) is low, or (b)
switching costs are high. An overview of Porter’s five forces is shown in Figure 1,
including some of the features for each force.
FIGURE 1
Porter’s Five Forces
Source: Porter, 1985, p. 22
However, Porter’s five forces have their critics. According to Aktouf (2005) “Porter’s
five forces theory justifies and legitimizes three common trends fundamental to the
dominant financial capitalism, (a) domination by large organizations, (b) the
concentration of capital, and (c) excessive hierarchization centralization” (p. 92).
Furthermore, Porter offers no assistance to small actors in a particular industry, or to
organizations that want to draw more on their employee’s knowledge and field
experience in articulating their strategies (Aktouf, 2005). Earlier, Brandenburger
(2002) stated that “Porter’s five forces model is more realistic in that it focuses on the
reality of large organizations that control many industries, that is, on situations of
monopoly or oligopoly” (p. 58). Hence, it should be noted that the five forces indicate
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a normative perspective to adhere the principles of a successful strategy, and not a
descriptive perspective (Argyres & McGahan, 2002).
However, much of the critique may come from the notion that the framework
assumes a rather static market structure and a classic perfect market as well as the
lack of considering strategic alliances (Indiatsy et al., 2014: Recklies, 2015). Porter’s
five forces framework appears less effective where the zero-sum game approach––
where partaker's profit or loss equals the loss or profit of other partakers––is short-
term, ignoring the long-term benefits of a profitable collective serendipity situation
through relationships from suppliers and buyers (Indiatsy, 2015). Furthermore, too
much powerful competitive pressure to competitors may backfire or even ruin an
organization that may severely impact on the organization’s cost structure, and
cooperation factors with stakeholders (Simoes, 2013; Tower, 2015; Wang & Chang,
2009). As the five forces model is static in nature and portraying a snapshot it may
be quite a challenge towards (a) innovation, (b) rapidly changing market
environments, (c) trends, (d) technological advancements, or (e) changes in ethnic
structures of a population (Hill & Jones, 2007; Indiatsy, 2015).
Furthermore, there is also a reason to approach the five forces with caution as the
model might need adjustment for analyzing the competitive behavior of small and
medium-sized enterprises (SMEs). As most of the emphasis of Porter’s five forces
are based on large organizations, competitive behaviors concerning small
businesses differ from large organizations by their managerial, financial, and
organizational structure and their tenderness to environmental changes. Moreover,
the dynamics of small local markets differ significantly compared with mass markets
and influence overall small business competitive behaviors. In many cases, small
businesses build their competitiveness on “client intimacy” based on mutual trust,
indicating behaviors that are rational within a local market setting. However, even
small business owners and executives need to understand that they are competing
in the same industry as large organizations and need to find differing abilities
between their business and competitors in dealing with industry forces that affect
them. Therefore, it is critical for small businesses to identify capacities that are
superior to competitors and utilizing and understanding Porter’s five forces may well
be an effective tool to establish a competitive advantage.
Using The Five Forces When Considering Innovation And Change
Many scholar and practitioners consider Porter’s five forces model as a seminal and
robust tool for analyzing organizational competitiveness and balance of power within
a certain industry (Cunningham & Hamey, 2012). However, as the five forces model
was developed in 1979, many in today’s global business environment question if the
five forces are still relevant as the model has not changed its concept for more than
38 years. However, when moving around in various organizational activities, it
appears that strategic thinking is in the process of moving towards a direction of
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thinking that is different and more concentrated on today’s and future customers and
its hypercompetitive business environment. For instance, Fisk (2016) underpins five
priorities for strategic thinking that might put Porter’s competitiveness or advantage
thinking in an altered perspective.
Strategic Direction and Options
When concerning dynamic markets, developing and implementing a strategic
roadmap is essential for future growth, and in the creation of driving the best
opportunities to structure markets for the benefit of the organization. In other words,
it is important for the organization to know where and how to compete. How does not
point towards being different, but rather drives toward developing purpose, more
innovative attitudes and direction, business models and customer experiences,
programs and tactics (Fisk, 2016). Porter’s model alludes that markets are stable,
and finding a position is adequate to survive almost statically over time (Fisk, 2016).
Competitors are Inferior to Customers
There seems to be a noticeable power shift towards customers. There is a growing
search for deeper insights, analytical and intuitive, predictive and personal, to be
relevant in finding, engaging and growing with the best customers over time (Fisk,
2016). Building a positive customer experience (customer-centricity) is a critical
element towards customer recognition, loyalty and profits. For instance, many
consumers have adopted the Internet as a channel for information and evaluation of
alternatives as well as for positive and negative aspects before obligating to a
purchase (Jain, Ahuja, & Medury, 2013). Therefore, the content of a B2C website will
influence how successful the purchase decision process will be (Jain & Ahuja, 2014).
Further, the post-purchase process is correlated to post-adoption behavior that may
include repurchase, repeated usage or upgraded replacements, and formally or
informally assess the outcome of their purchase (Jain & Ahuja, 2014). On the other
hand, Porter scarcely mentions customers in relation to competition. Hence,
positioning is more about relevance than difference.
Markets and Competitors are Dynamic
Thinking is shifting towards connected and convergent markets where producers and
consumers can foresee each other (Mitry & Smith, 2009) or the thought that people
have a similar perception of various global brands. Consequently, based on the
previously stated, frontiers become less clear and competitors can not only
challenge an organization physically and virtually from anywhere in the world, but
also from other sectors. Likewise, an organization’s strategic opportunity might be to
realign across various sectors and geographic frontiers or to merge them.
Communication by using various media platforms will become paramount. Moreover,
competitiveness is critical, but it is more about outmaneuvering others, reconsidering
markets and business models, and reviewing solutions and experiences rather than
just being different, cheaper or better than others.
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Ecosystems Over Value Chains
The conventional linear model of suppliers in and distributors out seems to become
an activity of the past, or they just fade away. According to Keene and Williams
(2013), organizations who are not good enough in participating with changes in value
dimensions and using an ecosystem of partners in continuously delivering new value
will eventually become an “ultrafade” organization. Arguably, today’s business
environment shows signs of grasping opportunities as they come along or creating
opportunities and making use of capabilities offered within an ecosystem. The latter
will create a great customer experience. Developing different perspectives within one
organization will be a challenge, and it is far easier being inspired by outside
organizational activities. In addition, from an efficiency perspective, controlling entire
value chains will no longer be necessary, and with the increase in digitalization, the
transaction cost of cooperation with other factions may see a rapid decline.
According to Steenbergen (2017), an ecosystem is not created around a fixed chain
of processes, but it adopts a culture of grasping opportunities that arise when entities
with different backgrounds meet.
Large Organizations Versus Small Businesses
There may be an implied assumption that corporations are more successful and win
through scale, as they sell more products, sell to more customers, create more
revenue, share more, and have greater power. Arguably, this may not necessarily be
the case as many organizations seek to be large in order to generate cash to cover
the enormous capital cost of large factories and operations. Many of these
organization pursue the same markets with largely undifferentiated products and
services, and each additional product or service added equal profit. The previously
stated is predominantly old school thinking. Regardless of the size of the
organization, today’s successful business entities have a more focused vision and
innovative ideas and then implement them more profitably. Arguably, the latter may
be more effective when partners are involved who are typically laser-focused on
niches of highly relevant customers across the world chose to stay small, agile and
smart (Fisk, 2016).
However, surviving in today’s hypercompetitive market environment means
developing a competitive strategy to create long-term value for stakeholders and
developing different innovative ways to engage customers. Shaping an
organizational future is more than just positioning the organization to seek a
competitive advantage, as it is more about out-thinking and out-performing rival
organizations. In many ways, gaining a competitive advantage is still critical for any
type of organization and is typically temporary as competitors often seek ways to
duplicate the competitive advantage (Baltzan & Phillips, 2010). Nevertheless, despite
the changing market environment, industry structure can still be justified by
competitors, suppliers, buyers, new entrants and the threat of substitute products
and services regardless of whether it is a manufacturing plant or online shop.
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Innovation – Furthermore, innovation plays an important role for organizations to
gain a competitive advantage and should be nderstood as an influence that
motivates industry competition. More research now focuses solely on innovation and
change as a factor driving industry competition (Larry, Shamir, & Johnson, 2014).
Porter’s five forces framework was not specifically designed for “innovation” or
“change,” although there may be a preoccupation of an innovation and change
approach in the framework. For instance, when addressing “new market entrants,”
this force may well include organizations that were not traditionally in a market, or
organizations disrupting an existing market, or smaller businesses chipping away a
minor piece of the customer base (Phillips, 2010). Arguably, Porter may have
accounted for trends and technological advances and expected that legislative
measures could have an impact on organizations as a break for more innovative
activities. For instance, forces driving industry competition in the high-tech
environment such as the telecommunication industry have found that additional
forces are necessary (Dulčić, Gnjidić, & Alfirević, 2012). Downes (1997) denotes
three additional forces driving industry competition to complement Porter’s five
forces, namely (a) digitalization, (b) globalization and (c) deregulation. However,
empirical work from Larry et al. (2014) added an additional force called the level of
innovativeness. Understanding the level of innovativeness goes back to the concept
of increasingly shrinking product life cycles (Bayus, 1998) and in earlier years related
to internal factors aimed at obtaining a competitive advantage. Nowadays, the level
of innovativeness is a critical external factor when contemplating about the forces
driving industry competition. Over the years, organizations had to act quickly when
product life cycles were shrinking, meaning that organizations had to increase the
speed of innovation in order to come up with new products and services (Larry et al.,
2014). In conjunction with the previously stated scholars, it is also important how to
measure the level of innovativeness of a given industry. Jalles (2010) proposed two
proxies to measure innovation, namely (a) the number of patterns registered and (b)
the intellectual property (IP) index. The results would either indicate that a high
degree of IP would indicate higher income per capita, and that patterns would either
deter or encourage innovation depending on certain conditions (Jalles, 2010).
Furthermore, in today’s competitive market environment, product and design life
cycles are getting shorter (Cliffe, 2011) and may need to receive more attention as
part of the extended forces framework of competitiveness. Thus, Porter’s five forces
framework should not be considered completely outdated as numerous other
literature suggest alterations and adjustments to Porter’s five forces over three
distinct schools of thought (e.g., major, mediocre, and minor adjustments) (Larry et
al., 2014; Slater & Olsen, 2002).
Change The Porter’s five forces framework can hardly be justified as a change
management tool as it is not intended for that purpose. However, Porter’s five forces
framework utters an undertone that forces organizations to seek a new changing
strategic direction, which in turn helps organizations to answer a number of strategic
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and game-changing questions. For instance, (a) how do organizations position
themselves in finding a spot within an industry where they can command good
profits? (b) what is predominantly producing profitability within an industry? (c) what
most likely are the significant trends in changing the playing-field within an industry?
and (d) what are the constraints and what happens when they are relaxed?
To develop a comprehensive approach toward organizational change and
competitive advancement, an outside-in model may be used based on former
hypotheses, objective criteria rather than human beliefs, and to reduce and simplify
fundamentals (Cope, 2012). Subsequently, Porter’s five forces uses an outside-in
perspective that is applied as a tool to understand organizational strengths in a
market environment. Furthermore, as a driving force, Porter’s framework may result
in changes in organizational behaviors, industry structure, product portfolio,
competitive reaction, buyer and supplier behaviors. For instance, Lewin’s Force Field
tool or Kotter’s Eight-Stage Change Process can be used and integrated to map and
understand on what negative and positive forces are functioning in an organization to
withstand the aspects of change. To transform an organization towards a competitive
advantage requires a number of changes that consist of driving forces and restrained
forces as indicated by Kurt Lewin, or an association of eight steps as outlined by
Kotter in line with eight fundamental errors that destabilize transformation efforts,
which are (a) too much complacency, (b) not creating a guiding coalition, (c)
misjudging the power of vision, (d) miscommunicating a vision, (e) allowing obstacles
to block the vision, (f) failing the create short-term wins, (g) declaring victory too
soon, and (h) neglecting to anchor changes (Kotter, 1996). Answering the previously
stated questions and recognizing the fundamental errors will have a number of
internal and external change consequences that will lead to developing a change
process by unfreezing the current status quo, implementing the new change
process, and refreezing the implemented changes.
The Five Forces Model Versus Alternative Strategic Models
Arguably, Porter’s five forces may be considered one of the most well-known
strategic models as it considers an industrial economics-based approach to a
different mindset in forming an industry that is appealing or unappealing. On the
other hand, Porter’s model has been challenged not only on its current validity by
academics and others in the field of strategic planning, but by alternative strategic
models. Over the years, many additional strategic models have been developed by
scholars and practitioners to create win-win situations in national and international
markets and industry environments.
This section will address some of these strategies that may be comparable or have
some form of strategic synergy with Porter’s five forces model. For instance, the
three models randomly chosen are (a) resource-based view (RBV), (b) the delta
model, and (c) blue ocean strategy. It is essential to recognize that the proponents of
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competitive strategy hold the view that competition is the principal issue for
organizations to deal with and is seen as a major organizational challenge. As
Porter’s five forces pertains to an outside-in approach, other models may express a
more inside-out approach where organizational inner strength and abilities may
generate long-term sustainability. However, both previously mentioned approaches
may be different in its implementation but in today’s hyper-competitive environment
they may actually complement each other.
Resource-Based View
As Porter’s five forces model describes the organization’s strategy in relation to its
product and market positioning, the RBV approach insinuates that organizations
should position themselves strategically based on their value, uniqueness, inimitable
and non-substitutable resources and capabilities rather than the products and
services derived from those resources and capabilities (Asad, 2012). Resources and
capabilities in RBV strategy are deemed as a source from which the organization
derives several products for various markets. In other words, as an inside-out model,
RBV’s strategy is directed at leveraging resources and capabilities across many
markets and products instead of targeting specific products for precise markets.
Moreover, if resources are revealing characteristics of VRIO, an organization may
gain and maintain a competitive advantage. VRIO is a question framework
containing resource and capability questions about value, rarity, imitability, and
organization to ascertain competitiveness, as illustrated in Figure 2.
As Figure 2 shows, RBV represents a relationship between resource heterogeneity
and immobility, VRIO and sustained competitive advantage. The framework can be
applied in analyzing the potential of a wide range or organizational resources that
can function as a sustained competitive advantage. The analysis does not identify
only the theoretical situations that apply under a sustained competitive advantage
condition, but they also imply a number of precise empirical questions that need to
be attended to before the relationship between a specific organizational resource
and sustained competitive advantage can be assumed (Barney, 1991).
As Porter’s five forces model underlines actions by organizations by developing a
privileged market or industry position combatting competitive forces, RBV points
towards building a competitive advantage and seizing higher profits from
fundamental organizational-level resources and capabilities. RBV and Porter’s five
forces may appear to be different, but both models may complement each other
when integrated (Wernerfelt, 1984). Hence, as both models underscore different
dimensions of strategy, they do not include customers. Arguably, the latter may
cause confusion as Porter’s model elaborate about “buyers,” whose bargaining
power we should resist or reduce, but, in that respect, customers form a different
element of the rivalry. The RBV assists in evaluating the ability to utilize strengths
and responds to identified weaknesses while the position approach and industry
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structure assist an organization to recognize its competitive environment. Arguably,
to some extent Apple, Inc. and Tesla, Inc. may have some of the hallmarks of a
combination of Porter’s five forces and the RBV approach by having developed a
strong market position and utilizing organizational-level resources and capabilities to
enhance a competitive advantage. In sum, in today’s hypercompetitive business
environment, both Porter’s five forces model and the RBV could be important tools
for an organization when seeking a competitive advantage whereby one should not
discard the other, but integrate them and make them complementary.
FIGURE 2
Combined RBV and VRIO Framework
Source: Jurevicius, 2013, p.1
The Delta Model
This model may not be one of the most well-known models when developing a
market position or seeking a competitive advantage. However, its relevancy is
determined by the fact that by seeking a competitive advantage, it places the
customer at the center of management (Hax & Wilde, 2003). The Delta Model beliefs
that customers are the ultimate repository of any organizational activity and that
customers are at the core of strategy (Hax & Wilde, 2003; Lio, 2012).
However, many organizations seek some form of connection with customers, but
most are just on an arms-length basis and lack the customer knowledge needed in
bonding effectively with customers (Hoying, Jain, & Miller, 2008). In playing the
game competitively, the Delta Model emphasizes the importance of attracting,
satisfying and retaining customers. The Delta Model portrays three positions opening
the mindset to a new arrangement of strategic options, which are (a) best product,
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(b) total customer solution, and (c) system lock-in whereby each element represents
a different approach (Hax & Wilde, 2003), as can be explained as follows.
Best Product. A rather inward position is the best product, which is critical to attract,
satisfy and retain customers (Hax & Wilde, 2003). There are a number of strategic
driving forces in line with best products, which are (a) the creation of an efficient
supply chain to minimize infrastructure costs, (b) a proven internal capability for new
product development to ensure proper renewal of the current product line, and (c)
effectively securing the distribution channels to the target market segments (Hax &
Wilde, 2003).
Total Customer Solution. Total customer solution denotes resolutions entailing an
assortment of customized products and services that embody a unique value
proposition to individualized customers with the involvement of a number of partners
(Hax & Wilde, 2003). The model is less interested in developing a calamity structure
against competitors, but seeks a more cooperative solution concerning competitive
activities in conjunction with creating ways to bond with customers. In other words,
the relevance and importance of the customer solution approach is a combination of
satisfying the organization, customers, and key suppliers rather than the actual
supply chain where innovation in conducted in a joint effort (Hax & Wilde, 2003). In
addition, customer economics exceeds product economics as the model makes an
effort to assist the customer in enhancing their financial performance.
System Lock-in. At the top of the delta model, there is the system lock-in, which
indicates the total network with the scope on the complementor’s share as the
fundamental goal, and the system economics as the driving force (Hax & Wilde,
2003). In many respects, “know yourself” or “know your enemy” may be seen as
recognizable idioms in an organizational environment and related to how certain
events are viewed or implemented. From a different perspective is “know your
friends,” which, from an organizational viewpoint, requires a different type of handling
denoted as complementors and has seen an increase of interest (Yoffe & Kwak,
2006). Arguably, the application on supply chain management can be seen as the
forefront of complementor relations. However, distributors and suppliers should not
be seen as the only partners for potential organizational success as organizations
that independently offer complementary products or services directly to mutual
customers can play an equally critical role (Yoffe & Kwak, 2006). Organizations who
are successful in accomplishing this position will obtain a significant dominance in
the market as well as in creating a customer lock-in, and competitor lock-out
assurance. An advantage is that once an organization has achieved its lock-in
position, it creates a proverbial virtuous circle that is hard to break because of its
network effects. For instance, when looking at Microsoft or Intel, one may see its
financial growth and market dominance not only based on the best product or
customer attentiveness, but also on a range of individuals (e.g., application software
developers), not on the payroll, who are writing for the Windows-compatible
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operating systems (Hax & Wilde, 2003). However, not every organization may have
the capability to obtain a system lock-in position or to effectively lock-out competitors
as they might find it hard to develop a full network. Arguably, without a full network
that links complementors and achieves certain business stages, developing an
effective organizational strategy may not be possible. Thus, the delta model
advocates a total customer solution position and shifting away from a commoditized
product-centric approach as an alternative strategic tactic.
The basic options of the Delta Model are further illustrated in Figure 3 that are open
for a number of interpretations in the development of a strategic position. For
instance, low cost is for many organizations difficult to achieve, which needs to be
linked with a correct operational alignment and infrastructure. Offering a product
differentiation may enhance a competitive advantage as long as they show signs of
durability.
Consequently, the two previously adverse structural characteristics are for many
organizations a major way in how they position themselves in the market. However,
the push towards total a customer solution position entails a different mindset to
capture customers. For instance, a number of organizational actions can be
conducted simultaneously such as (a) redefining a customer engagement process by
segmenting customers into tiers reflecting separate priorities and initiating a
differentiated action to each tier, (b) integrating customers by using organizational
capabilities to conduct undertakings that can be done more effectively by the
organization than the customer (e.g., IT outsourcing), and (c) horizontal breathing,
expanding as many products and services to customers as possible (e.g., bank
providing a full range of financial, insurance, and investment services to customers)
(Hax & Wilde, 2003).
Ultimately, the difficult part is to get to the top of the triangle, the system lock-in. One
effective way may be the ownership development of the standards of the industry
that have been achieved by complementors such as Microsoft and Intel through
Wintel, which, after decades, is now slowly fading; or Linux running on ARM server
chips (Hax & Wilde, 2003; Metz, 2017). Some other alternative options to obtain a
system lock-in is seeking exclusiveness concerning distribution channels that
customers use, or dominant exchange developing a dominant position and unique
linkage between buyer and seller (e.g., eBay, Amazon, Apple, Google) (Hax & Wilde,
2003). Arguably, the delta model process may well have the capability to increment
the perceptions of the previously discussed RBV and Porter’s five forces framework
to be developed in one integrated strategy as none of these models appear to be
mutually exclusive.
The Relevance Of Porter’s Five Forces In Today’s Innovative And Changing
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governance issues in emerging markets
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FIGURE 3
The Delta Model Options for Strategic Positioning
Source: Hax & Wilde, 2003, p.7
Blue Ocean Strategy
The first mover approach model making competitors irrelevant rather than trying to
outdo them is the blue ocean strategy. When developing a strategy,!many
organizations may well have numerous internal discussions whether it is best to
pursue an innovation strategy or a competitive strategy. The proponents of the blue
ocean strategy are of the opinion that innovation is a key element in creating a new
market environment where competition can become quite irrelevant (Burke, 2010).
An important aspect of a blue ocean strategy is that demand is created in an
environment where the rules of the game are not set, and by not combatting one’s
main competitors. However, it seems that blue ocean strategy and Porter’s five
forces may not be that different from each other. In some respects, Porter’s five
forces framework does not direct organizations to move in a direction where the
competition is rampant. In other words, Porter’s five forces direct organizations to be
entrepreneurial and creative in finding new ways to escape and reduce competition
as much as possible and to proceed to industries where the five forces are least
vigorous (Kraaijenbrink, 2017).
Moreover, the cornerstone of the blue ocean strategy is “value innovation” that is
created in areas where the organization’s activities act favorably on its cost structure
and its value proposition to the buyers (Kim & Mauborgne, 2005). Kim and
Mauborgne (2017) denoted three key components of successfully shifting an
organization towards blue ocean. For instance, there is the adoption of the blue
The Relevance Of Porter’s Five Forces In Today’s Innovative And Changing
Business Environment
governance issues in emerging markets
15
ocean perspective, so that an organization can expand its horizon and shift its
understanding of where opportunities exist. Second, the organization needs practical
tools for its market creation with clear guidance on how to apply them to translate a
blue ocean perspective into a commercially captivating new offering that creates a
new market environment. Third, organizations must have a humanistic process that
stimulates and builds people’s confidence to own and drive the process for effective
execution (Kim & Mauborgne, 2017). However, a main risk factor for organizations to
take the blue ocean strategy too seriously is that they can become too motivated,
and they focus far beyond their competencies. By moving towards uncontested
markets, organizations may ignore their own past, strength, and path-dependent
abilities and underestimate their risk of failure (Kraaijenbrink, 2017).
However, the earlier message that Porter’s five forces and blue ocean strategy are
not that different from each other may need further consideration. Research
conducted by Burke, Stel, and Thurik (2010) indicates that both schools of thought
are neither right and wrong, in fact, that polarizing strategy into blue ocean and
competitive strategic options can be distorted (Burke, 2010). For instance, if
competitive strategy is correct, there should be a negative relationship developed
between organizations and profit levels in the long-term. According to Burke (2010),
in highly competitive markets, it takes about 15 years to lower profitability to very
basic levels, meaning that profits gained from innovation in existing markets are
higher than previously believed. In other words, organizations should look closely for
alternative innovative opportunities and besides fulfilling a competitive role,
entrepreneurs should bring innovation to the market which may result in market
expansion, drawing in more customer expenditure (Burke, 2010).
In essence, Burke’s (2010) findings offer partial support for the blue ocean strategy
as it is not its strongest role when it is linked specifically to the aspects of
competition. A major issue that organizations need to ask themselves in
implementing a blue ocean strategy is if they want to be the pioneer in the new
untapped market space. The latter is contrary to the “fast second approach,” a less
popular approach, where Markides and Geroski (2005) contend that organizations
should not become pioneers, but that organizations should approach newly created
markets in second position and colonize it. In other words, let other organizations
enter a market first, when the market is not yet expanding, then quickly enter the
market. However, it seems that neither blue ocean strategy or the fast second
approach are able to compellingly explain successful market domination (Buisson &
Silberzahn, 2010). For many pioneers every so often the followers cashed in on
these events. For example, Microsoft profited in terms of the computer interface and
iTunes in relation to digital music, as both organizations were initially followers who
were using an adaptive innovation approach in new markets (Burke, 2010; Buisson
& Silberzahn, 2010). In sum, organizations may consider blending the previously
stated approaches if a blue ocean pioneering strategy is not reachable. Moreover,
The Relevance Of Porter’s Five Forces In Today’s Innovative And Changing
Business Environment
governance issues in emerging markets
16
Burke (2010) states a number of key opportunities concerning existing markets that
“(a) innovation in existing markets could well be an effective strategy, (b) competition
is weaker in terms of eroding the benefits from that form of innovation, and (c)
innovation does not need to be radical, but more incremental, adaptive, restructuring,
and forward moving in the market” (par.10).
Conclusion
Porter’s five forces model has propelled strategic management for many years and
has become a focus point of texts on strategic management, business strategy and
examination materials in business schools globally. However, one may argue that in
today’s hypercompetitive market environment practicing managers are somewhat
apprehensive in seeking a full involvement and commitment in the five forces
process. Some of the possible reasons could be that (a) Porter’s framework is
somewhat abstract and highly analytical, (b) Porter’s original framework explains the
criteria for assessing each of the five competitive forces in the language of micro-
economic theory, rather than in terms of its practicalities, (c) Porter’s framework is
very prescriptive and somewhat rigid, leaving managers, who are generally hindered
from being playful, flexible and innovative in how to apply the framework, and (d) as
the framework does help to simplify micro economics, its visual structure is relatively
difficult to assimilate and its logic is somewhat implicit (Grundy, 2006; Ural, 2014).
Arguably, for many managers, analytical concepts need to be communicated in
simple terms to avoid rejection, otherwise there will be other more fluid strategic
management styles, such as “logical incrementalism” and “emergent strategy” that
may receive organizational preference as both schools of thought are still relevant in
developing a strategy (Moore, 2011).
However, this paper attempted to pair other strategic models such as the RBV, the
delta model, and the blue ocean strategy to Porter’s five forces to seek a more fluid
approach reflecting today’s competitive business and market environment. Arguably,
as a stand-alone model, Porter’s five forces could be further developed by (a)
combining and correlating it with tools as described in this paper, and (b) by further
examining other supplementary systemic interdependencies. In addition, Porter’s
framework also offers good potential in other practical applications, such as mergers,
alliances, and negotiating large contracts. However, as the combination of
innovation, technological advancement and customer bonding have become a real
importance for organizational survival, and Porter’s five forces could be a victim to
fall into the same lifecycle phase Porter’s five forces model of maturity and decline
as real businesses (Grundy, 2006). It is critical for organizations to acknowledge the
bargaining power of customers and to keep a close full watch on its costing
structures, to put their customers at the center of its strategy and to work on their
unique features and value propositions. From a change perspective, Kotter’s eight-
stage process of creating major change, or Lewin’s force field analysis could
The Relevance Of Porter’s Five Forces In Today’s Innovative And Changing
Business Environment
governance issues in emerging markets
17
contribute positively to ensure that the organization responds to the environment in
which it operates. Therefore, further reinvigorating Porter’s five forces for managers
with other concepts in a resourceful manner could clear the way for a broader
application that includes embodying unique value propositions to individual
customers. In today’s competitive and technological advanced business
environment, Porter’s five forces framework perception are still driving industry
competition, but other forces need to be included (see Figure 4) when thinking about
driving forces of industry. Managers and entrepreneurs need to re-think their
assumptions on the forces driving industry competition.
FIGURE 4
Porter’s Five Forces Readjusted to Industry Challenges
Source: Porter, 1985, p. 22
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The Asia Pacific region occupies a substantial share in the global paints market to the presence of numerous developing countries, including China, India, Vietnam and Bangladesh. According to Researcher, the Bangladesh paints and coatings market is expected to witness a moderate growth rate during the forecast period. Bangladesh is estimated to consume about 180,000 tones of paint annually. Due to the rapid urbanization in the country it leads to an increase in construction activities throughout the region. The paints & coatings industry plays an essential role for increasing the economic growth by protection enabled by protective coatings & paint manufacturers. This coating adds to the longevity of structures and assets by providing lesser expenses. Asian Paints Bangladesh is a customer-centric and technology driven organization. Currently it is holding the second largest paint company in Bangladesh and its market share is 18% whereas Berger Paints holds 48 % of the market share and the market leader in paint industry. Currently, Asian Paints Bangladesh offers segments (products) like Royale Play, Royale Luxury Silk Emulsion, Apex Ultima and Apcolite premium emulsion and Decora. They have also introduced SmartCare Damp Proof Silicon ceramic which has excellent waterproofing capabilities and doesn't require an undercoat which is truly a unique product and groundbreaking in Bangladesh's market. Asian Paints core competencies are corporate and brand image, their concept of mass customization, and technology orientation with the help of research and development (R & D). It has also focused on integrating Supply Chain Management (SCM) and Enterprise Resource Planning (ERP) solution from SAP for robust and effective performance of their employees. However, the paint industry's net margin is decreasing from last two years because of increasing of Covid-19 situation, remuneration, administration, technology etc. The prices of raw materials are high and scarcity of raw materials. Hence, it becomes challenging to set up a competitive price for attracting more customer by high-cost products offering and increasing more profit. Another major challenge is to is to create eco-friendly coatings at competitive prices. However, to gain more market share Asian Paints Bangladesh should give more effort on its marketing strategy by introducing heart-touching advertisement and other promotional schemes. In addition, it should concentrate on digital marketing specially by providing more-interactive, resourceful and user-friendly web page for the company.
... The Bargaining Power of Buyers refers to the power of buyers who can limit industry profitability by demanding price concessions, better payment terms, or additional features and services that increase industry member's cost. When there is a monopoly market situation, buyers have the greatest bargaining power when they are large and are able to switch comfortably to alternative suppliers that are few in numbers (Slater & Olson, 2002) [4]. When buyers are powerful, sellers may develop ways where buyers are prepared to pay a premium price for some products. ...
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... Strategi kompetitif harus bertumpu pada pemahaman tentang struktur industri dan cara mereka berubah Jurnal Ilmu Administrasi Bisnis, Vol. 11, No. 2, 2022e-ISSN 2746-1297 | 293 (Gerard & Bruijl, 2018). Porter berpendapat bahwa tujuan ahli strategi adalah untuk mengenali dan menangani lingkungan yang kompetitif dengan secara langsung melihat pesaing, atau untuk memikirkan perspektif secara lebih luas terkait persaingan organisasi (Porter, 1979). ...
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This study aims to determine the application of GSCM in the coffee industry and analyze the competition in it with the Porter's Five Forces analysis model in Two Heart Kopi Posong SMEs. In this study, the author uses a descriptive analytical method with a qualitative approach. Collecting data through observation, oral interviews, and documentation studies. Observations were made on the operational activities of coffee product processing to determine the process of implementing GSCM. The results of interviews and observations were used as primary data to determine the application of GSCM practices in Two Heart Kopi Posong SMEs. The results of the analysis are that the SMEs have carried out the four GSCM activities but the practice has not been carried out optimally. The motives that drive SMEs in implementing GSCM practices are based on the role of the government, personal environmental awareness, and increased efficiency. The practice of GSCM provides many strengths and opportunities that can be exploited by business to compete in the coffee industry, which is relatively easy for new competitors to enter. For further research, attention can be given to optimizing green manufacturing activities and implementing GSCM as a business competitive advantage strategy in facing competition. Penelitian ini bertujuan untuk mengetahui penerapan GSCM pada industri kopi dan menganalisis persaingan didalamnya dengan model analisis Porter’s Five Forces pada UMKM Two Heart Kopi Posong. penulis menggunakan metode deskriptif analitis dengan pendekatan kualitatif. Pengumpulan data melalui observasi, wawancara lisan, dan studi dokumentasi. Observasi dilakukan terhadap kegiatan operasional pengolahan produk kopi untuk mengetahui proses penerapan GSCM. Hasil wawancara dan observasi dalam penelitian ini digunakan sebagai data primer untuk mengetahui penerapan praktik GSCM di UMKM Two Heart Kopi Posong. Hasil analisis dari penelitian ini adalah UMKM Two Heart Kopi Posong telah menjalankan keempat aktivitas GSCM namun praktiknya belum dilakukan secara maksimal. Motif pendorong usaha dalam menerapkan praktik GSCM didasari oleh peran pemerintah, kesadaran lingkungan pribadi, dan peningkatan efisiensi. Praktik GSCM memberikan banyak kekuatan dan peluang yang bisa dimanfaatkan usaha untuk bersaing di tengah industri kopi yang tergolong mudah dimasuki pesaing baru. Kekuatan dari praktik GSCM dapat menjadi keunggulan kompetitif bagi usaha dalam menghadapi persaingan. Saran untuk penelitian selanjutnya, perhatian dapat diberikan kepada optimalisasi aktivitas green manufacturing dan penerapan GSCM sebagai strategi keunggulan kompetitif usaha dalam menghadapi persaingan. Saran untuk penelitian selanjutnya, perhatian dapat diberikan kepada optimalisasi aktivitas green manufacturing dan penerapan GSCM sebagai strategi keunggulan kompetitif usaha dalam menghadapi persaingan.
... The idea behind Porter's Five Forces Model, which includes "rivalry with existing competitors," "threat of new entrants," "power of suppliers and buyers," and "substitute products and services," is that an organizational strategy ought to address the opportunities and threats that are inherent in an organization's external environment (Bruijl, 2018). Michael E. Porter of Harvard Business School established the five forces model in 1979. ...
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Thesis
A l’ère de la quatrième révolution industrielle, les Petites et Moyennes Entreprises (PME) se livrent une concurrence féroce pour préserver leurs parts de marché, protéger les intérêts de leurs clients, tout en maintenant un niveau de rentabilité acceptable. Bien que disposant d’une structure allégée par rapport aux grandes entreprises, ce qui leur permet d’être plus flexibles et réactives aux demandes des clients, de nombreux dirigeants de PME ont des difficultés à structurer un plan stratégique cohérent et optimisé par manque de ressources humaines et financières, de temps, de méthodologie et / ou de savoir-faire. Trop souvent, ils ne sont pas préparés à faire face aux crises potentielles d'aujourd'hui : grèves, réserves de trésorerie insuffisantes, catastrophes naturelles, pandémie, etc. et préfèrent réagir aux changements en prenant des mesures à court terme. Pourtant, près de 51,000 entreprises font faillite chaque année dans notre pays, et pour environ 50% d’entre elles, la cause est une mauvaise gestion stratégique de l’entreprise. Dans ce contexte complexe, est-il possible de concevoir un outil ʺd’aide à la formalisation et à la communication de la stratégieʺ adapté aux PME industrielles? Deux hypothèses principales sont étudiées dans cette thèse à travers une revue de littérature multidisciplinaire, une analyse probabiliste et un retour d’expérience via deux enquêtes et trois études de cas. Plusieurs apports théoriques sur les fonctionnalités à intégrer au Tableau de Bord Prospectif (ou BSC) pour le rendre apte au monde des PME, sur la simplification d’une analyse des risques grâce à une simulation Monte Carlo, sur les caractéristiques fonctionnelles et visuelles d’un tableau de communication des risques sont proposés. Par ailleurs, l’essor de l'Industrie 4.0 comme nouvelle source de savoir peut permettre aux dirigeants de prendre des décisions plus rapidement, de façonner leur capacité à faire face aux changements de l’écosystème et de limiter les risques associés à cette prise de décision. Aussi, nos dernières contributions scientifiques porteront sur l’application des équations structurelles des moindres carrés pour valider l’adoption d’un tableau de communication des risques et d’une application web de formalisation et communication de la stratégie.
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Book
The authors do not have rights to distribute the full-text online so only the table of contents and front matter are provided here. If you are an instructor seeking a review copy or teaching supplements, please use this link to locate your Cengage representative: http://www.cengage.com/repfinder/ Brief Contents PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage 1 2 External Analysis: The Identification of Opportunities and Threats 43 PART TWO THE NATURE OF COMPETITIVE ADVANTAGE 3 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability 80 4 Building Competitive Advantage through Functional-Level Strategies 116 PART THREE STRATEGIES 5 Business-Level Strategy 153 6 Business-Level Strategy and the Industry Environment 178 7 Strategy and Technology 210 8 Strategy in the Global Environment 246 9 Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing 286 10 Corporate-Level Strategy: Related and Unrelated Diversification 318 PART FOUR IMPLEMENTING STRATEGY 11 Corporate Performance, Governance, and Business Ethics 359 12 Implementing Strategy through Organization 395 CASES
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Michael E. Porter is the Bishop William Lawrence University Professor at the Harvard Business School. A university professorship is the highest professional recognition that can be given to a Harvard faculty member. Professor Porter is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions. He is the author of 16 books and over 85 articles, and has served as an advisor on competitive strategy to many leading companies. Professor Porter has also served as a counselor to governments around the world on issues of economic development and national competitiveness. He was elected a Fellow of the Academy of Management in 1988 and the Royal Swedish Academy of Engineering Sciences in 1991. He also received the Charles Coolidge Parlin Award from the American Marketing Association in 1991. Professor Porter has been awarded honorary doctorates by eight universities around the world. His national honors include the Creu de St. Jordi (Cross of St. George) from Catalonia (Spain) and the Ruben Dario Order of Merit (the highest civilian honor awarded by the government of Nicaragua). In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, led by Professor Porter, to further his work. Professor Porter maintains a long-time interest in the esthetics and business of music and art, having worked on the problems of strategy with arts organizations and aspiring musicians. Professor Porter and his two daughters, Ilana (14) and Sonia (12), reside in Brookline, Massachusetts.
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