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Rethinking and reinventing Michael Porter’s five forces model Tony Grundy Cranfield School of Management, UK

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

� The paper looks at a number of important opportunities for using Porter’s model in an even more practical way, including: mapping the competitive forces, which can vary sig- nificantly over market and competitive terrain and within the same industry; under- standing its dynamics; prioritizing the forces; doing macro analysis of the sub-drivers of each of the five forces; exploring key interdependencies, both between and within each force.

ested in taking his concepts to an even more macro level, particularly to the competitive advantage of countries, rather than to micro economics. Porter’s model, whilst it has done extremely well in occupying textbook space, does not seem to have captured the imagina- tion of other theorists. In contrast with the resource-based theory of competitive advan- tage, which has spawned a considerable liter- ature, it seems to have become, as it were, frozen in time.

The five competitive forces model propelled strategic

management to the very heart of the

management agenda

Strat. Change 15: 213–229 (2006) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/jsc.764 Strategic Change

* Correspondence to: Tony Grundy, Cranfield School of Management, Cranfield University, Cranfield, Bedford MK43 OAL, UK. E-mail: [email protected]

Introduction

When Michael Porter conceived the five com- petitive forces model, it propelled strategic management to the very heart of the manage- ment agenda.The framework became a centre- piece of texts on business strategy and strategic management, and essential examina- tion material on MBA and similar courses glob- ally. But what has become of his original five competitive forces? It would appear to be the case that not a great deal has occurred to develop this thinking since the early 1980s (except, perhaps, for Hamel and Prahalad, 1994). Porter appears to have been more inter-

214 Tony Grundy

Today, and well over 20 years since Porter’s original, major publication, there is still rela- tively little real awareness amongst main- stream managers, both at senior and middle levels of Porter’s original concept. If one were to take a sample based on attendees at strate- gic management courses at a particular busi- ness school, for example, it could be estimated that between 15% and 20% were familiar with these early Porter concepts and perhaps only 5% had actively used this at an explicit, ana- lytical level. Interestingly, if this is compared with the awareness level of basic SWOT analy- sis, a crude estimate is of 90–95% awareness and at least 50% active use. Whilst Porter was propelled to fame on the back of this and other intellectual advances, it seems an odd, if not disappointing, phenomenon that this orig- inal breakthrough has had somewhat little cur- rency amongst practising managers. Why is this the case? Some possible reasons for this are that:

� Porter’s framework is relatively abstract and highly analytical.

� Whilst Porter’s original framework explained the criteria for assessing each of the five competitive forces, he did so in the language of micro-economic theory, rather than in terms of its practicalities.

� His model was highly prescriptive and somewhat rigid, leaving managers, and indeed teachers in business schools, gener- ally inhibited from being playful, flexible and innovative in how they applied this powerful framework.

� Whilst the framework does help to simplify micro economics, its visual structure is rel- atively difficult to assimilate and its logic is somewhat implicit. Managers tend to like analytical concepts spelt out in very simple terms, otherwise they find it difficult to adapt to their default, fluid strategic man- agement style [sometimes characterized as ‘logical incrementalism’ (Quinn, 1980) or as ‘emergent strategy’ (Mintzberg, 1994)].

In this paper, it is argued that Porter’s five com- petitive forces model is a vitally important

concept and one that certainly merits the attention of all practising senior managers. It is also argued that to operationalize it more effectively requires significant further devel- opment. This is demonstrated with a practical example taken from the health club market, which has grown significantly in many coun- tries over the past 10 years, but has been heavily impacted by shifts in competitive pres- sure. However, it is first necessary to examine how Porter’s model could be developed further by studying the existing literature to see to what extent it has been developed, if at all.

The literature — has it moved on?

Academics do not seem to have been minded to explore and expand Porter’s framework, with very few attempts to develop Porter’s model having been made. Whilst there are ref- erences to Porter’s model in many research papers, the principal contribution of this paper is to expand Porter’s model into a far richer system of analysis, which managers can then operationalize and subsequent changes in their practices can then be studied in future research.

A critique of the model: value and limitations

Porter’s five competitive forces are depicted in Figure 1. Porter’s starting point was that he wanted to account for long-term variances in the economic returns of one industry versus another. His genius resided in distilling the complex micro-economic literature into five explanatory or causal variables to explain superior and inferior performance, through:

1. The bargaining power of the buyers. 2. Entry barriers. 3. Rivalry. 4. Substitutes. 5. The bargaining power of the suppliers.

The value of Porter’s model was thus that it appeared to offer the following attributes:

� It simplified micro-economic theory into just five major influences.

� It effectively and before its time applied ‘systems thinking’.

� It showed how ‘competitive rivalry’ — the central box of the model — is very much a function of the other four forces.

� It helped to predict the long-run rate of returns in a particular industry.

� It went beyond a more simplistic focus on relative market growth rates in determining industry attractiveness.

� It helped combine input–output analysis of a specific industry with industry boundaries via entry barriers and substitutes.

� It emphasized the importance of searching for imperfect markets, which offer more national opportunities for superior returns.

� It emphasized the importance of negotiat- ing power and bargaining arrangements in determining relative market attractiveness.

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

There are, however, several limitations to Porter’s framework, such as:

� It tends to over-stress macro analysis, i.e. at the industry level, as opposed to the analysis of more specific product-market segments at a micro level.

� It oversimplifies industry value chains: for example, invariably ‘buyers’ may need to be both segmented and also differentiated between channels, intermediate buyers and end consumers.

� It fails to link directly to possible manage- ment action: for example, where companies have apparently low influence over any of the five forces, how can they set about dealing with them?

� It tends to encourage the mind-set of an ‘industry’ as a specific entity with ongoing boundaries. This is perhaps less appropriate now where industry boundaries appear to be far more fluid.

� It appears to be self-contained, thus not being specifically related, for example, to ‘PEST’ factors, or the dynamics of growth in a particular market.

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

Porter’s model was thus a valuable and work- able concept but one that had some significant practical drawbacks, unless of course the model was developed further. This paper now argues that Porter’s concept merely scratches the surface of its full potential.

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

Porter’s five forces model 215

Substitutes

Suppliers Buyers

Potential Entrants

Threat of substitute products or service

Threat of new entrant

Bargaining power

of suppliers

Bargaining power

of buyers

Source: Competitive Strategy, Porter

Rivalry among existing firms

Industry Competitors

Figure 1. These forces determine industry profitability.

216 Tony Grundy

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

1. The model can be prioritized within a force field analysis format.

2. The individual forces can be broken down at a micro level.

3. The framework can be transformed into a more dynamic model, both at the industry level and at a more micro, transactional level.

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

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

Interdependencies of the model

The influences on the five competitive forces are examined first. Conventional strategy lit- erature highlights the need to think about factors outside the industry. Indeed, PEST (or political, economic, social and technological factors) is possibly the second most widely-

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

Figure 2 gives an example of growth driver analysis, helping us to represent the forces that, directly or indirectly, cause or inhibit market growth over a particular time period. Space precludes an in-depth development of this model here, but this will be used in con- junction with the five competitive forces later in the paper in the analysis of the health club industry. However, an important feature to note here is that it is part of a system (see Figure 3 below).

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

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

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

Internet takes off

Expectations bubble bursts

Self-fulfilling disaster

Uncertainty – about the

future

growth drivers

growth brakesDot com

losses

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

inhospitable, this will clearly dampen the growth drivers, and if the growth drivers within a particular market are themselves tightening, for example due to life-cycle effects, then this will put a disproportionate and adverse pressure on Porter’s five forces, particularly in the bargaining power of buyers, and also upon rivalry. Furthermore, a high- growth environment may encourage entrants and a low one will discourage these.The result can lead to a collapse in confidence and in prices unless there are lots of exits, for example, in the health club market in the UK in 2002–3, as will be seen later.

Indeed, it may be helpful not to call it ‘Porter’s five forces model’, particularly when introducing it to a team or wider organization. An alternative is to call it ‘competitive pres- sures’, which is less jargon-laden but includes the five forces more as a checklist. This rela- belling of the model has many attractions, especially as it may seem strange and foreign to everyday management discourse. This may mean that ‘early adopters’ will feel self-con- scious using it with their colleagues. As prob- ably most intellectual contact with the technique is typically via a management text, an MBA or on a public strategy programme rather than on an in-company event, individ-

ual managers may feel reluctant to use it with their more novice peers. Besides these exter- nal interdependencies, Porter’s five competi- tive forces are themselves highly interdependent with each other — again something only implicit in Porter’s and other texts. Figure 4 now plots their main interde- pendencies.

Porter’s five competitive forces are therefore both highly interdependent with the other subsystems in the external environment, rather than being relatively stand-alone. This figure plots the interdependencies internal to the five competitive forces:

Porter’s five competitive forces are highly interdependent

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

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

Porter’s five forces model 217

Political factors

Economic factors

INDUSTRY LIFE

CYCLE

Technological factors

Social factors

GROWTH

COMPETITIVE

DRIVERS

PRESSURE

Customers

Company & Competitors

- Some Generic Systems

Figure 3. The ‘competitive climate’.

218 Tony Grundy

substitutes, thereby encouraging them in a similar fashion.

� Between ‘entry barriers’ and ‘bargaining power of suppliers’: new entrants may seek to enter the market by backward integra- tion, either by acquiring suppliers or via alliances.

� Between ‘substitutes’ and ‘bargaining power of suppliers’: suppliers may seek to leap- frog over existing industry competitors by marketing and selling substitutes.

The refined model in Figure 4 thus illustrates the extent to which each of Porter’s five forces needs to be understood as a wider, interacting system as in ‘systems thinking’ rather than as a self-contained unit. Whilst Porter’s original concept explains some of these system inter- dependencies, these are underdeveloped and implicit. Indeed, the conventional input– output industry boundaries model, which appears to have been the starting point for the five forces, can be put to one side. Indeed, some new and quite interesting opportunities can be developed.

The five forces do need to be prioritized. Porter’s teaching methodology (as per his Harvard Business School video cases) involves ticking each force for whether it is favourable, neutral or unfavourable. The scores are:

√ √ √ Favourable √ √ Neutral √ Unfavourable

Unfortunately, because of the original compo- sition of the model, it is defined as being mainly about negative strategic characteristics like buyer power, supplier power, rivalry and substitutes — it is quite difficult to apply the above scoring method. For instance, where buyer power is high, the model’s user is encouraged to think this is a bad thing, therefore the score is one tick, or plainly unfavourable. In many instances, especially on initial learning, the model’s scores can come out incorrectly. Porter’s model, as it is cur- rently framed, thus presents an immediate barrier to its assimilation. Furthermore, the above scoring does not take into account the relative importance and weighting of each score. Whilst two-dimensional grids can do this trade-off, the approach is still a little cum- bersome. An alternative approach is to borrow from the vector format, originally applied in force field analysis, for enablers and con- straints of organizational change. Not only does this model easily separate out whether a force is favourable or unfavourable, but the length of the arrows can also be used to illustrate its incidence or severity and its

ENTRY BARRIERS

BARGAINING POWER OF SUPPLIERS

RIVALRY BARGAINING POWER OF BUYERS

SUBSTITUTES

New Entrants

encouraged

Search for

substitutes

Forward integrations

Backward integration

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

importance. Also, where a force can be split into sub-forces (discussed in the next subsec- tion) it can depict these sub-forces easily.

Figure 5 gives an example of this format within the funeral industry. Here the funeral business is depicted as being relatively attrac- tive, particularly through the low bargaining power of buyers and less threat of substitutes. Immediately, using this visual picture, one can challenge the judgements supporting these outputs. Most importantly, its overall visual balance gives immediate interpretation of the industry’s overall attractiveness more effec- tively than by simply adding together the ticks as in Porter’s approach. Figure 5 thus enables the user to choose which of the five forces is most important, both in isolation and also in terms of its effects on the system. The forces here are depicted as vector lines, whose

length depends on perceived importance and favourability.

How each force relates to the others can now be examined, as explored in Figure 6.The first permutation looks at the bargaining power of the buyers in the centre of the framework.

In Figure 6 the bargaining power of the buyers at the centre is increased by competi- tive rivalry, the availability of substitutes, low entry barriers and low supplier power. The bargaining power of the buyers is thus not a separate element to consider when using the five forces, but needs thinking through in rela- tion to the others.

In Figure 7, the threat of substitutes (at the centre) is now increased by buyers keen to shop around and by low rivalry amongst existing competitors. Entrants may choose to enter via offering substitutes and once again

Porter’s five forces model 219

Favourable

Unfavourable

Very Low Buying Power Psychological

entry barriers

Few substitutes

Low supplier power

Gentlemanly competition

Fragmented competition

Low real entry barriers

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

ENTRY BARRIERS

SUPPLIER POWER

BARGAINING POWER OF BUYERS

SUBSTITUTES

RIVALRY

Figure 6. Porter’s five competitive forces: bargaining power.

ENTRY BARRIERS

SUPPLIER POWER

BARGAINING POWER OF BUYERS

SUBSTITUTES

RIVALRY

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

220 Tony Grundy

suppliers might seek to leap-frog existing competitors via the route of substitutes.

In Figure 8, with entry barriers at the centre, buyers may reduce entry barriers or encourage substitutes by their search for better value. Rivalry will of course discourage entrants and supplier power may do the same. Besides being novel in structure (the five forces model is always presented in the stan- dard Porter format), Figures 6–8 give managers far greater flexibility in their use of the model and hopefully more insights. In short, there are many interdependencies both external and internal to Porter’s five competitive forces, and these are unlikely to be taught at the present time to practising managers, let alone used by them. This means that they are likely to strug- gle to get deep insights about the structure and dynamics of their external environment purely by using the conventional model and its associated analysis.

The next subsection attempts to examine the forces within forces. This is more helpful and easier to remember for managers than the relatively ad-hoc qualitative considerations in the conventional texts.

The micro competitive forces

Whilst Porter does give some narrative help for assessing the five forces, this is not presented in the very powerfully distilled and visual format of his original model. For example, for competitive rivalry, Porter asks us to think

about things like the relative concentration of rivals, such as how many are in the market- place and with what mass, together with the number of different strategic groups of similar competitors. By extracting from Porter’s text and by observation of the main considerations which managers actually make, a pilot frame- work can be developed to move the five forces down to another level. Additionally, Porter merely lists these considerations and managers appear often inclined to consider them as ‘addi- tive’. However, the next set of figures show how the effects may be ‘additional’ amplified by each set of micro forces. Each one of the five forces may therefore have some sub-ingre- dients, which are worthwhile exploring. The following models are potentially viable frame- works put forward for further experimentation and research to test their resilience and to learn from their application more generally. A particularly interesting application would be to use these to explore how the five forces work at a micro level even for individual busi- ness transactions. Figures 9–13 can be used either literally to think through each force visu- ally, or as a convenient way of thinking of their underlying drivers.

Taking the bargaining power of buyers (Figure 9) first, this appears to be a function of:

� Importance — in terms of value added. � Urgency — in terms of lead times to con-

sumption. � Discretion and emotion.

SUPPLIER POWER

BARGAINING POWER OF BUYERS

SUBSTITUTES

ENTRY BARRIERS

RIVALRY

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

EMOTION BARGAINING POWER OF BUYERS

DISCRETION

IMPORTANCE

URGENCY

Figure 9. Buyer power: micro forces.

The choice of these criteria is quite interest- ing. Importance and urgency we derive from prioritization. Urgency can be measured according to the lead times required to satisfy the need. Discretion is defined as being the extent to which customers have to fulfil a need or not. For example, in most European countries a funeral is perceived to be essential and non-discretionary. Finally, emotion is a very often neglected force in management, albeit one that is of relatively obvious signifi- cance to customers. Taking an everyday prac- tical example of this: in the case of a toothache, which comes on very suddenly, an individual might be advised by a dentist who reports that he believes the root is nearly dead and advises root canal treatment. This treat- ment is both urgent and important, and is also not discretionary. It is also highly emotional. Should you shop around for the cheapest price for a treatment? Probably not, indeed as a cus- tomer you would be very price-indifferent and may choose to pay some £300 for it to be fixed, even if this involved borrowing the money.

These micro forces are interdependent. For example, to some extent discretion may go down if the purchase is highly emotional.Also, importance may tend to reduce the degree of discretion. Turning now to theory and to the next set of micro forces or entry barriers, Figure 10 can be examined.

These entry barriers can be usefully broken down into the following ingredients:

� Physical: is it possible to get access to cus- tomers or to resources?

� Information: to what extent is it possible to acquire knowledge not only about the ‘what’ of the industry, but also about its ‘how’? (The latter being bound up in tacit competences.)

� Economic: what will it actually cost to enter the market?

� Psychological: is this a market where it is comfortable to be?

To illustrate the final point, the funeral busi- ness appears, using Porter’s five forces, to be a highly attractive market. However, for the vast majority it would not seem to be a psy- chologically attractive industry to enter.

In Figure 11 competitive rivalry is also a function of the following:

� Commitment to the market. � The number of players. � Their strategy and disposition. � Their similarity to or difference from one

another.

The number of competitors refers here to the sheer quantity of players in the market. The more similar they are, the more likely that competition will be head-on. Also, the more deeply committed they are, the more severe the rivalry will be. Finally, their mind-set will influence the manner of their competition with one another. Clearly, these micro forces

Porter’s five forces model 221

PSYCHOLOGICAL ENTRY BARRIERS

PHYSICAL

IMFORMATION

ECONOMIC

Figure 10. Entry barriers: micro forces.

MIND-SET RIVALRY

SIMILARITY

Porter’s Micro Forces -Rivalry

COMMITMENT

NUMBER

Figure 11. Porter’s micro forces: rivalry.

222 Tony Grundy

are also interdependent as, for example, the existence of a small or large number of rivals might shape their mind-set. Also, their com- mitment and more general mind-set are also clearly interlinked.

Turning next to the force of substitutes, Figure 12 displays its more micro-level forces. The figure reveals the following:

� Do it yourself — in-sourcing the activity, for example by making an expensive, sourced- out consultancy service an internal one.

� Other technologies — looking at other ways of achieving the same value, for example e- learning has substituted many technical training areas.

� Emotional — the extent to which the pur- chase is emotional or not.

� Bundling or unbundling — the customer’s ability to do something either as part of something else, or to take a packaged offer- ing and to capture value it by breaking up the value-added activity into its smaller components.

Again, the micro forces may be interdepen- dent and other technologies may facilitate bundling and unbundling.

The final analysis is Figure 13, which exam- ines supplier power. These four micro forces can be summarized as follows:

� Unique knowledge — if the supplier(s) has some unique capability this will obviously enhance their power.

� Size and number — where there are a very small number of very large suppliers this will obviously increase their power.

� Resource scarcity — where resources are scarce and preferably permanently, this again will help promote supplier power.

� Forward integration — the supplier’s capacity to integrate forward in the industry chain will improve their competitive power.

Clearly, aspects of this force and of the others too suggest linkages and overlaps with the resource-based theory of competitive advan- tage. Again, these micro forces are interde- pendent. For instance, where there are few suppliers and high resource scarcity, this will multiply supplier power.Also, where suppliers have unique knowledge, this might facilitate towards integration, perhaps through strategic alliances. Whilst there may be other ways of grouping the various sub-forces within the framework, these models do seem to be both plausible and practical, and go beyond the fragmentary and narrative approaches found in the literature. Also, it has been demon- strated here that each one contains some rich and insightful interdependencies. One princi- pal benefit is that they encourage managers to think in more depth about each force rather than at a superficial level. Secondly, they will help managers to understand how these sub- forces interact with each other.

For example, just as the interdependencies were drawn for Figure 4, the original five forces, the same could be done for these

BUNDLING OR UNBUNDLING

SUBSTITUTES

OTHER TECHNOLOGIES

EMOTIONAL

DO IT YOURSELF

Figure 12. Porter’s micro forces: substitutes.

FORWARD INTEGRATION

SUPPLIER POWER

SIZE AND NUMBER

RESOURCE SCARCITY

UNIQUE KNOWLEDGE

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

figures. For instance in Figure 9, the impor- tance of a purchase is linked with its emo- tional content, discretion is partly linked to urgency, and urgency needs to be traded off with importance.

Competitive dynamics

Porter’s five competitive forces is traditionally a very static model, which diminishes its use- fulness, but it can be given a more dynamic perspective and quite easily. Competitive dynamics can be explored at a macro and a micro level.At a macro level, these can be seen impacting dynamically over the industry cycle, for example for the bargaining power of the buyers and entry barriers (Figure 14). As an industry reaches maturity, entry barriers often increase (favourable) but the bargaining power of the buyers also increases (unfavourable). Each one of the five competi- tive forces can be plotted individually in a similar way.

The benefit of the model in Figure 14 is that it encourages managers to think about how industry structure is likely or liable to change in the future. It also helps them to reflect on why the industry has changed in recent times. Besides modelling competitive pressure over time, this can also be overlaid by, for example, growth drivers over time (high versus low). The competitive forces may also vary over time at the level of an individual business transaction (at a micro level). For instance,

where a large management consultancy gets involved with a blue-chip client, during the tendering stage the customer’s bargaining power might be high. However, once the con- sultants start to do work it often becomes increasingly difficult for the client to control variations and the total cost of further stages of work. Another typical example is that of going into a restaurant where bargaining power of the buyer diminishes in stages: (a) when they go into the restaurant, (b) when they sit down, (c) when they order and (d) when they have courses 1, 2 and 3. Of course it is possible to walk out or pay for the meal so far, but this is psychologically difficult, especially where the ‘buyer’ is a group of people.

The relevance of Figure 15 is that it allows managers to use the five forces at an everyday level and to track the impact of these forces, especially of bargaining power over a typical transaction lifecycle. Besides plotting these dynamics at both a macro and a micro level, it is also important to examine their underlying drivers. Not only are these a function of the industry lifecycle effects and of the cumulative learning of key players, but also of a particu- lar mind-set. ‘Mind-set’ is emphasized by at least some writers on strategy, yet primarily in the company-specific rather than industry context. The ‘industry mind-set’ has been defined as: ‘The perceptions, expectations and assumptions about the industry — now and future’.

Porter’s five forces model 223

Favourable

Unfavourable

TIME – Industry cycle

Entry barriers

Bargaining of buyers

Figure 14. Macro-level competitive dynamics.

224 Tony Grundy

The significance of this concept is that:

� Managers should beware thinking that the structural properties of Porter’s five forces are a ‘given’. In part, these forces are a reflec- tion of a softer mind-set of the industry. This mind-set is often shared between players within the industry and can be disrupted by players who can and will think differently.

� The strength and homogeneity of an indus- try mind-set will reduce the responsiveness of the industry to disruptive change and to facilitate rapid market share build-up by a new entrant. For example, in the UK Dyson Appliances built a dominant market share of the carpet cleaner market with a bagless model in just two and a half years. Its com- petitors were in a state of shock and denial for a further two years before they imitated the company. Dyson now sells its products in the USA.

� It helps us to link external analysis and Por- terian competitive strategy with the resource-based theory of competitive advan- tage of the firm, by highlighting how mind- set can help a company to transcend the competitive forces and by deploying differ- ent marketing and innovative skills.

� By studying the industry mind-set and by using the more advanced analysis tech- niques of competitive forces, which have been explored here, managers can achieve strategic breakthroughs.

Mapping competitive forces: horizontally and vertically

Porter’s Competitive Strategy (1980) focused principally on analysis at the industry level. However, this could be inappropriate, partic- ularly as the competitive landscape for a busi- ness might be of highly variable attractiveness. For example, consider the fees for a one-day strategy course, comparing rates from inde- pendent consultants to that of a business school, with daily rates ranging from £1000 to over £10,000 per day. When Porter posed the question ‘Why are some industries more attractive than others?’, it is necessary to answer with ‘It depends on which product/ market/sector you are talking about’. Industry structures are like a landscape and highly vari- able in their attractiveness, meaning that Porter’s model must be used in a more dis- criminating and localized way to describe them. This ‘attractiveness’ can be represented in two-dimensional space, horizontally across sectors and vertically, in terms of the extent to which it is focused on differentiation versus cost leadership. Simple matrices like Figure 16 might help managers in their thinking. Three ticks means ‘favourable’, whilst two ticks are ‘neutral’and one tick is ‘unfavourable’. Figure 16 illustrates this with the different sectors of the funerals industry.

Figure 17 now examines the competitive forces map within the carpet cleaning market

Favourable

TIME – Transaction cycle

Bargaining power

Figure 15. Micro-level competitive dynamics.

in the UK, 1995–2004. Previously, apart from one or two deluxe models like the ‘Kirby’, the vast majority of models were of similar per- ceived use value and price. Following Dyson’s entry with a bagless, cyclonic, modern- looking and premium-priced model, the com- petitive map of the industry was altered.

The majority of purchases became cyclonic and premium-priced, but they left a void at the bottom of the market, whereby 2003–4, new entrants emerged and Hoover began to capture share with light, cyclonic, cheap machines priced at £30–£50 each. Here the overall com- petitive shape of the market has moved from a more pyramid shape to an eclipse. Pictures like Figure 17 can help managers to explore and create competitive changes.

A final application of Porter’s five forces is at a micro level to departments, projects and to individual roles, for each one of Porter’s five forces may be very relevant to each one of these situations. For example, an individual may face rivals, might be substituted or have to try to fend off new entrants to his/her value- adding role.

In conclusion it is necessary to break down the analysis of Porter’s five forces on a segment-by-segment or on a mini strategy basis. This helps to make Porter’s framework far more context-specific and applicable at the firm level. Indeed, Porter’s model can be applied right down to the project level and to the level of an individual’s role where there may be variable rivalry, substitutes, bargaining power, etc. Indeed, in teaching Porter’s five forces these less obvious applications are often found to be perceived of higher value by managers.

The above has explored more advanced ways of applying Porter’s five forces at a more general level. This can now be applied more specifically using the health club industry in the UK as an example.

Competitive pressure in the health club industry 1995–2004 (a case study)

In 1995 the UK health club industry was at a turning point.The recession of the early 1990s

Porter’s five forces model 225

Substitutes

Rivalry

Entry barriers

Buyer Power

Basic funerals

Deluxe funerals

Pre-need market

Overall attractiveness

Supplier Power

13 1114

Figure 16. Porter’s five forces: segmentation.

Kirby

Dyson Dyson Look- alikes

Residual bagged machines

New, light machines

Premium Bagged

Differentiation

Vertical

Cost Leadership

HorizontalSegments Segments

Figure 17. Mapping the five competitive forces — the carpet cleaning market, 2004.

226 Tony Grundy

had inhibited growth but had also sustained a low competitive rivalry. However, key players in the industry had identified considerable latent growth as the rate of penetration of the potential market was low. These conditions triggered a wave of major expansion as the economy grew again through new site devel- opment. Also, existing players grew by acqui- sition, creating greater industry concentration, hopefully a positive factor. Many buyers were relatively new to the market, being either new- comers to a gym, or because of industry ‘churn’ as many people rapidly dropped out of the gym. This meant that many were unso- phisticated in their information available, making it easier for companies to charge rea- sonably high prices relative to the standard and value added of what they actually offered. Current margins were good, sites in the indus- try were available and reasonably cheap, and the industry mind-set was very positive. Over 1996–2001 there followed a major expansion in capacity with players chasing market share and neglecting the future set of five competi- tive forces which it was just about to encounter.

Just as Hamel and Prahalad extolled us to think about ‘future competitive position’ as well as ‘present competitive position’, so we should anticipate competitive dynamics (see Figure 15) by thinking about ‘future competi- tive forces’ and against the surrounding growth drivers and PEST factors (see Figure 3). One company that took advantage of this opportunity was Topnotch. In the 1990s Top- notch was a small chain of independent health

clubs with an appeal to the younger market segments and with a theme of excitement. Fundamentally, however, Topnotch was a lowest price operator with a lack of scale and little brand awareness — two of the critical success factors necessitated by the future five competitive forces which it was about to enter (after 2001).

In 2001, Topnotch floated its shares on the stock market and used these funds, after con- siderable transaction costs, to expand into a chain of over 20 clubs. For reasons of speed, many of these new sites were acquisitions of existing ones.

At the time of flotation, financial markets saw this market as ‘very attractive’ — seeing growth prospects but not perhaps inquiring into probable trends and discontinuities in both growth drivers and PEST factors. They therefore played a highly encouraging role in this expansion. The effect of 9/11 on the service economy and of economic slowdown generally had a particularly sudden and adverse effect on this industry, and especially on Topnotch. This can be analysed using an extended Porter’s five forces combined with ‘from–to’ analysis (see Table 1).

Overall, the ‘from–to’ analysis represents a negative shift in forces and one significant enough to cause a decline in margins. When combined with volumes being lower than expected and with over-enthusiastic expan- sion of many companies’ central costs, the effect was, predictably, profit warnings across the industry. By 2002, Topnotch, like many other chains, was in financial trouble. Yet

Table 1. Porter’s five forces: ‘from–to’ analysis

From To Because of

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

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

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

could change again Suppliers Low — staff Low — staff Variable

High — sites Medium — sites

instead of looking for further ways to adapt the industry mind-set, the reactive response of the industry generally was simply to reduce their largely unnecessary costs. In 2002 Topnotch went into administration, although a major part of it is still in operation today.

Clearly the above was a very painful learn- ing process for all of those involved, particu- larly investors and many staff, and also for the entrepreneurs who led this growth surge, into the teeth of the (future) five competitive forces. If an in-depth analysis had been per- formed as of 1996–8 of the future competitive climate for 2001–4 (Figure 3), then much of this financial pain might have been avoided.As Matthew Harris, CEO of the original Topnotch and of its remaining, independent sites, today reflects:

I hadn’t really heard about the five com- petitive forces to be honest. I had absorbed a lot of management theory from various sources, especially the financial stuff but I just felt from everything I saw, heard about and imagined, that we could only win through this growth. I first saw Porter’s five forces well after we had gone over the precipice. It didn’t seem very helpful at the time as I couldn’t see what I could really do with it in that situation and it did seem quite theoretical.

Looking back on the experience and reflecting on the competitive situation as we have now, I can see its now obvious rel- evance. Besides the obvious cost reduction which it implied we are now focusing on how we can turn the buying power of the buyers to our advantage in our marketing strategy. I can certainly see how the forces interplay with each other and with the rest of what is going on and even down to a very specific transaction like someone joining or leaving us.

In sum, the short case above has helped to bring alive some considerations of this paper, particularly of the interdependency of the forces both within each other, with PEST factors and growth drivers. It also illustrates

how operating managers, however senior, can fail to see the full potential of the technique.

Conclusions: possible ways forward

This paper has shown how Porter’s five competitive forces model could be much developed by:

� Combining it and interrelating it with other tools such as growth drivers and PEST factors.

� Examining other systemic interdependencies. � Prioritizing it with the competitive force

field type of analysis. � Examining the sub-forces at work. � Examining the dynamics and the impact of

the industry mind-set. � Segmenting markets to examine the varia-

tions within the competitive landscape.

Porter’s model thus offers significant potential for both further conceptual development and for practical application. Other areas, which are beyond the scope of this paper, are its application to:

1. Acquisition decision-making. 2. Alliances. 3. Account management, especially in under-

standing the industry structure, critical success factors, options and areas of possi- ble company value-added customers.

4. Negotiating large contracts. It would be of considerable help here both in decision- making and in deal-making.

Perhaps because the technique was born in economics and perhaps because it was so very successful initially, significant attempts to apply it across a range of practical manage- ment issues or to evolve it further appear to have failed to occur.

Unless we in the academic world are pre- pared to reinvigorate old concepts and in an imaginative way as proposed in this paper, techniques like Porter’s five forces might be destined to fall into the same lifecycle phase

Porter’s five forces model 227

228 Tony Grundy

of maturity and decline as real businesses.This would be a shame because the model, if applied properly and more subtly, will gener- ate very important insights for managers. Without significant rethinking and develop- ment they may become forgotten due to new management trends, which may turn out to be less powerful and far more superficial.

Besides applying new ideas to the teaching and practical application of Porter’s five forces, this also offers a most promising area for future research, especially to explore how managers respond to using more advanced and detailed approaches to Porter’s model as contained here. Future research could, for example, focus on questions such as:

� When using Porter’s five forces model, how do managers’ cognitive perceptions and emotions interact with each other to shape their judgements?

� To what extent does introducing managers to Porter’s five forces subsequently influ- ence their thinking, discussions, decisions and actions, and how if at all?

� What are the barriers, as perceived by managers, to using their model effectively and why do these exist?

� Where managers have not been made aware of Porter’s model, to what extent do they conceptualize their competitive environ- ment in similar ways or not?

� How might managers perceive the rele- vance of Porter’s five forces to the more micro project and individual role level?

Hopefully this paper will excite strategy academics to revisit its power and potential.

Biographical note

Tony Grundy is a Senior Lecturer in Strategic Management at Cranfield University School of Management and an active independent man- agement consultant. Tony is the author of 17 books, including Be Your Own Strategy Con- sultant published by Thomson Learning. Before joining Cranfield, his previous career spanned Ernst and Young, BP, ICI and KPMG.

Tony is on the editorial board of Strategic Change.

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