A means of providing corporations with an analysis of their competition and determining strategy, Porters five-forces model looks at the strength of five distinct competitive forces, which, when taken together, determine long-term profitability and competition. Porter's work has had a greater influence on business strategy than any other theory in the last half of the twentieth century, and his more recent work may have a similar impact on global competition.
The five-force model was developed in Porter's 1980 book (Competitive Strategy: Techniques for Analyzing Industries and Competitors). To Porter, the classic means of developing a strategy a formula for competition, goals, and policies to achieve those goals was antiquated and in need of revision. Porter was searching for a solution between the two schools of prevailing thought-the Harvard Business School's urging firms to adjust to a unique set of changing circumstances and that of the Boston Consulting Group, based on the experience curve, whereby the more a company knows about the existing market, the more its strategy can be directed to increase its share of the market.
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Porter applied microeconomic principles to business strategy and analyzed the strategic requirements of industrial sectors, not just specific companies. The five forces are competitive factors which determine industry competition and include: suppliers, rivalry within an industry, substitute products, customers or buyers, and new entrants.
Although the strength of each force can vary from industry to industry, the forces, when considered together, determine long-term profitability within the specific industrial sector. The strength of each force is a separate function of the industry structure, which Porter defines as "the underlying economic and technical characteristics of an industry." Collectively, the five forces affect prices, necessary investment for competitiveness, market share, potential profits, profit margins, and industry volume. The key to the success of an industry, and thus the key to the model, is analyzing the changing dynamics and continuous flux between and within the five forces. Porter's model depends on the concept of power within the relationships of the five forces.
CHANGES IN MACROENVIRONMENT:
An organization's macro environment consists of nonspecific aspects in the organization's surroundings that have the potential to affect the organization's strategies. When compared to a firm's task environment, the impact of macro environmental variables is less direct and the organization has a more limited impact on these elements of the environment. Macro environmental variables include socio-cultural, technological, political-legal, economic, and international variables. A firm considers these variables as part of its environmental scanning to better understand the threats and opportunities created by the variables and how strategic plans need to be adjusted so the firm can obtain and retain competitive advantage.The macro environment consists of forces that originate outside of an organization and generally cannot be altered by actions of the organization. In other words, a firm may be influenced by changes within this element of its environment, but cannot itself influence the environment.
The socio-cultural dimensions of the environment consist of customs, lifestyles, and values that characterize the society in which the firm operates. Socio-cultural components of the environment influence the ability of the firm to obtain resources, make its goods and services, and function within the society. Socio-cultural factors include anything within the context of society that has the potential to affect an organization. Population demographics, rising educational levels, norms and values, and attitudes toward social responsibility are examples of socio-cultural variables.
Changes in population demographics have many potential consequences for organizations. As the total population changes, the demand for products and services also changes. For instance, the decline in the birth-rate and improvement in health care have contributed to an increase in the average age of the population in the United States. Many firms that traditionally marketed their products toward youth are developing product lines that appeal to an older market. Clothing from Levi Strauss & Co. was traditionally popular among young adults. While its popularity in this market has waned, the firm has been able to develop a strong following in the adult market with its Dockers label.
Other firms are developing strategies that will allow them to capitalize on the aging population. Firms in the health-care industry and firms providing funeral services are expected to do well give the increasing age of the U.S. population. They are projected as a growth segment of U.S. industry simply because of the population demographics
RISING EDUCATIONAL LEVELS.
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Rising educational levels also have an impact on organizations. Higher educational levels allow people to earn higher incomes than would have been possible otherwise. The increase in income has created opportunities to purchase additional goods and services, and to raise the overall standard of living of a large segment of the population. The educational level has also led to increased expectations of workers, and has increased job mobility. Workers are less accepting of undesirable working conditions than were workers a generation ago. Better working conditions, stable employment, and opportunities for training and development are a few of the demands businesses confront more frequently as the result of a more educated workforce.
NORMS AND VALUES.
Norms (standard accepted forms of behaviour) and values (attitudes toward right and wrong), differ across time and between geographical areas. Lifestyles differ as well among different ethnic groups. As an example, the application in the United States of Japanese-influenced approaches to management has caused firms to revaluate the concept of quality. Customers have also come to expect increasing quality in products. Many firms have found it necessary to re-examine production and marketing strategies to respond to changes in consumer expectations.
Social responsibility is the expectation that a business or individual will strive to improve the welfare of society. From a business perspective, this translates into the public expecting businesses to take active steps to make society better by virtue of the business being in existence. Like norms and values, what is considered socially responsible behaviour changes over time. In the 1970s affirmative action was a high priority. During the early part of the twenty-first century prominent social issues were environmental quality (most prominently, recycling and waste reduction) and human rights, in addition to general social welfare. More than just philanthropy, social responsibility looks for active participation on the part of corporations to serve their communities.
The stakeholder approach to social responsibility demonstrates some of the complexities of incorporating socially responsible issues into a firm's strategies. Stakeholders are anyone with a stake in the organization's existence. Highly visible stakeholders are stockholders, employees, customers, and the local community. Decisions to be responsible and maximize the return to stockholders may require closing an unprofitable plant. However, employees and members of the local community could view this move as socially irresponsible since the move would not benefit the community.
Technology is another aspect of the environment a firm should consider in developing strategic plans. Changing technology may affect the demand for a firm's products and services, its production processes, and raw materials. Technological changes may create new opportunities for the firm, or threaten the survival of a product, firm, or industry. Technological innovation continues to move at an increasingly rapid rate.
Technology also changes production processes. The introduction of products based on new technology often requires new production techniques. New production technology may alter production processes. Robotics represents one of the most visible challenges to existing production methods. Robots may be used in positions considered hazardous for people or that require repetitive, detailed activities.
The consequences for other jobs currently occupied by people are not clear. When production was first automated, although some workers were displaced, new jobs were created to produce and maintain the automated equipment. The impact of robotics on jobs is in large part a function of the uses made of the technology and the willingness of workers to learn to use new technology.
In some industries, use of robots during the early 2000s increased production and efficiency but resulted in significant numbers of job losses. However, technological innovation can also result in increased job growth. For example, Ford Motor Company's $375-million technology update to its Norfolk assembly plant to build its 2004 F-150 resulted in the ability to build more models on its assembly line and consequently created about 270 new jobs, an 11 percent increase.
EVALUATING TECHNOLOGICAL CHANGES.
There is little doubt that technology represents both potential threats and potential opportunities for established products. Products with relatively complex or new technology are often introduced while the technology is being refined, making it hard for firms to assess their market potential. When ballpoint pens were first introduced, they leaked, skipped, and left large blotches of ink on the writing surface. Fountain pen manufacturers believed that the new technology was not a threat to existing products and did not attempt to produce ball-point pens until substantial market share had been lost.
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Another technology, the electric razor, has yet to totally replace the blade for shaving purposes. Perhaps the difference is that the manufacturers of blades have innovated by adding new features to retain customers. Manufacturers of fountain pens did not attempt to innovate until the ballpoint pen was well established.
It is quite difficult to predict the impact of a new technology on an existing product. Still, the need to monitor the environment for new technological developments is obvious. Attention must also be given to developments in industries that are not direct competitors, since new technology developed in one industry may impact companies and organizations in others.
Economic factors refer to the character and direction of the economic system within which the firm operates. Economic factors include the balance of payments, the state of the business cycle, the distribution of income within the population, and governmental monetary and fiscal policies. The impact of economic factors may also differ between industries.
BALANCE OF PAYMENTS.
The balance of payments of a country refers to the net difference in value of goods bought and sold by citizens of the country. To decrease the dollar value of goods imported into a country, it is common practice to construct barriers to entry for particular classes of products. Such practices reduce competition for firms whose products are protected by the trade barriers.
Mexico has limited the number of automobiles that can be imported. The purpose of this practice is to stimulate the domestic automobile market and to allow it to become large enough to create economies of scale and to create jobs for Mexican workers. A side effect of the import restriction, however, has been an increase in the price and a decrease in the quality of automobiles available to the public.
Another potential consequence of import restrictions is the possibility of reciprocal import restrictions. Partially in retaliation to import restriction on Japanese televisions and automobiles by the United States, the Japanese have limited imports of agricultural goods from the United States.
Lowering trade restrictions as a means of stimulating the economy of a country may meet with mixed results. The North American Free Trade Agreement (NAFTA) has opened the borders between the United States, Canada, and Mexico for the movement of many manufacturers. Government officials in the United States argue the results have been positive, but many local communities that have lost manufacturing plants question the wisdom of the agreement.
As discussed in an article by Susan Schmidt in World Trade magazine, issues that stemmed from regulatory agencies and national security measures were barriers to free trade during the early part of the twenty-first century, demonstrating that NAFTA alone could not clear the path for companies and countries to take advantage of free trade benefits.
Transfer payments (e.g., welfare, social security) within the United States change the distribution of income. Transfer payments provide money to individuals in the lower income brackets and enable them to purchase goods and services they otherwise could not afford. Such a redistribution of income may not be the practice in other economic systems.
PROBLEMS OF STRATEGIC PLANNING:
Rivalries naturally develop between companies competing in the same market. Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry. To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse competitors, high-stakes investment, and the high risk of industry exit. There are also market entry barriers.
PRESSURE FROM SUBSTITUTE PRODUCTS.
Substitute products are the natural result of industry competition, but they place a limit on profitability within the industry. A substitute product involves the search for a product that can do the same function as the product the industry already produces. Porter uses the example of security brokers, who increasingly face substitutes in the form of real estate, money-market funds, and insurance. Substitute products take on added importance as their availability increases.
BARGAINING POWER OF SUPPLIERS.
Suppliers have a great deal of influence over an industry as they affect price increases and product quality. A supplier group exerts even more power over an industry if it is dominated by a few companies, there are no substitute products, the industry is not an important consumer for the suppliers, their product is essential to the industry, the supplier differs forward integration potential of the supplier group
BARGAINING POWER OF BUYERS.
The buyer's power is significant in that buyers can force prices down, demand higher quality products or services, and, in essence, play competitors against one another, all resulting in potential loss of industry profits. Buyers exercise more power when they are large-volume buyers, the product is a significant aspect of the buyer's costs or purchases, the products are standard within an industry, there are few changing or switching costs, the buyers earn low profits, potential for backward integration of the buyer group exists, the product is not essential to the buyer's product, and the buyer has full disclosure about supply, demand, prices, and costs. The bargaining position of buyers changes with time and a companies (and industry's) competitive strategy.
Threats of new entrants into an industry depend largely on barriers to entry. Porter identifies six major barriers to entry:
Economies of scale, or decline in unit costs of the product, which force the entrant to enter on a large scale and risk a strong reaction from firms already in the industry, or accepting a disadvantage of costs if entering on a small scale. Product differentiation, or brand identification and customer loyalty. Capital requirements for entry; the investment of large capital, after all, presents a significant risk. Switching costs or the cost the buyer has to absorb to switch from one supplier to another.
Access to distribution channels entrants have to establish their distribution in a market with established distribution channels to secure a space for their product. Cost disadvantages independent of scale, whereby established companies already have product technology, access to raw materials, favourable sites, advantages in the form of government subsidies, and experience. New entrants can also expect a barrier in the form of government policy through federal and state regulations and licensing. New firms can expect retaliation from existing companies and also face changing barriers related to technology, strategic planning within the industry, and manpower and expertise problems. The entry deterring price or the existence of a prevailing price structure presents an additional challenge to a firm entering an established industry.
In summary, Porter's five-forces models concentrates on five structural industry features that comprise the competitive environment, and hence profitability, of an industry. Applying the model means, to be profitable, the firm has to find and establish itself in an industry so that the company can react to the forces of competition in a favourable manner. For Porter, Competitive Strategy is not a book for academics but a blueprint for practitioners-a tool for managers to analyze competition in an industry in order to anticipate and prepare for changes in the industry, new competitors and market shifts, and to enhance their firm's overall industry standing.
Throughout the relevant sections of Competitive Strategy, Porter uses numerous industry examples to illustrate his theory. Since those examples are now over twenty years old, changes in technology and other industrial shifts and trends have made them somewhat obsolete. Although immediate praise for the book and the five-force model was exhaustive, critiques of Porter have appeared in business literature. Porter's model does not, for example, consider nonmarket changes, such as events in the political arena that impact an industry. Furthermore, Porter's model has come under fire for what critics see as his under-evaluation of government regulation and antitrust violations. Overall, criticisms of the model find their nexus in the lack of consideration by Porter of rapidly changing industry dynamics. In virtually all instances, critics also present alternatives to Porter's model.
Yet, in a Fortune interview in early 1999, Porter responded to the challenges, saying he welcomed the "fertile intellectual debate" that stemmed from his work. He admitted he had ignored writing about strategy in recent years but emphasized his desire to re-enter the fray discussing his work and addressing questions about the model, its application, and the confusion about what really constitutes strategy.
METHODS OF RESOLUTION:
The 21ST century marks the beginning of the third period of development. Large group methods were once new and intoxicating because there was both promise and the hope that a magic bullet for change had been found. Now large group methods have become part of the world of change practice. Bunker and Alban (1997) is now referred to as a ââ‚¬Å“classicââ‚¬Â text and is used in many OD courses. There have long been methods for change that are used at the personal, the interpersonal, the group, and the intergroup level. Now there are methods for the system or the organizational level. These methods fill a special niche where nothing like them was previously available. They have been accepted and incorporated into change practice. Not only have these methods become part of the repertoire of Human Resource and OD practitioners, but there has been fall out into the general culture of some of the basic ideas.
The idea that stakeholders need to be involved in decision making is not a new one, but using the word, stakeholder, connotes involvement. That word appears more frequently in the press and in spoken language than it used to. Rotating leadership in small groups is more common as a practice. Professional facilitation is often reserved for times that are expected to be difficult. Round tables for discussions are how commonly accepted. In the early days of this work, one had to do battle with hotels to get smaller than banquet size tables. Now, most facilities know what is wanted and have them available. The idea of searching for ââ‚¬Å“common groundââ‚¬Â in situations of high divergence is common.
RECENT DEVELOPMENTS AND TRENDS
In this section, some of the current uses of these methods in different venues are presented. They were selected because they show the diversity of the uses of large group methods. The National Education Association (NEA) is using these methods to hold community conversations about controversial issues in public education across the United States. First, a national research group identified seven key issues currently being debated. Examples are funding, parental involvement, the purpose of education. All are issues where stakeholders hold widely divergent views. Communities that want to engage stakeholders in a conversation select the issue(s) with a planning committee of stakeholders that includes the school board, teachers and administrators, parents, students, other relevant stakeholders. The planning committee picks an issue that is relevant to their particular community.
These events are usually evening conferences that start with an informal meal. After dinner, there is a general introduction to the purpose and hoped for outcomes for the meeting. Then, participants go to assigned heterogeneous breakout groups. The groups are usually 15-20 people and are facilitated by a trained facilitator. The conversation starts with a short professional video presenting very credible but polarized views on the issue to be discussed. Rather than wait for the divergent views to emerge, the breakout group starts with the differences on the table. Participants then discuss the issues in a format that encourages each person to express their view and understand others. What participants tend to realize is that there is some truth on both sides.
The group then lists those things that they hold in common and those areas where there are differences. Each group comes up with some recommendations based on their common ground agreement. These are shared with the larger group at the end of the evening. These recommendations are transmitted to the school board or the planning committee, whichever is more appropriate. It is important to point out that the major purpose is to give people a better understanding of the issues that confront every school system. If there are also positive actions that emerge, that is an added plus. Another innovative use of these methods involved a modification of Future Search. In a community that was concerned about its youth, rather than having the adults conduct a future search with a few youth included, they decided to have the event run by young people. So, young people were selected and trained to lead the event and to facilitate it at the tables. The stakeholders included educators, social services, police, parents, hospitals, and housing. One third of the conference was youth of middle and high school age. They were selected from public, religious, private, and alternative schools in the city. Recommendations about the need for a teen centre, parenting classes in schools, better transportation were sent on to the city commission on youth for action.