Global Leadership

Journal of Management Research Vol. 11, No. 3, December 2011, pp. 131-137

Ajit Prasad Professor of Strategy SP Jain Institute of Management & Research DN Road, Andheri (W), Mumbai 400058 (India)

The Impact of Non-Market forces on

Competitive Positioning Understanding Global Industry Attractiveness

through the Eyes of M. E. Porter

Ajit Prasad

Abstract

In 1980 Michael E Porter gave us the 5 forces model for analyzing industry attractiveness. These forces have their own individual determinants, but being behaviorally determined, they are obviously subject to the history and culture of the social fabric in which they operate. The paper looks at each of the forces and isolates non market influences like history, religion and culture that have influenced the competitive positioning of firms in specific markets. The instances discussed are obviously not completely exhaustive in their determination of the competitive positioning, but suggest a methodology that may be adopted for looking at the international attractiveness of foreign markets. It may thus be used to support and verify market entry decisions for MNCs.

Keywords: Competition, industry analysis, culture and religion

In 1980, Michel E Porter of the Harvard Business

School gave us his understanding of competitive

strategy based on the now famous 5 Forces Model

(5FM) . Between 1980 and now, the 5FM has

emerged as a unique tool in the analysis of the

environment. It has also been used effectively as a

tool to support decision making in strategic

choices1. It has been often criticized; it has more

often been applauded; but it has never been

ignored. In 1996, Mr. Andrew Grove, the then

CEO of Intel added to the model a 6th force: the

“Force of the Complementors” making the model

even more complete to take into account the role

of the government and the other environmental

factors.

In brief, Porter’s model tries to look at the

environment and the strategic positioning of the

firm in terms of the stability of the different forces

that the firm has to contend with. Primarily these

forces are: the bargaining powers of buyers and

suppliers, (which between them take care of the

input throughput output process); the threat of

new entrants; the threat of substitutes, and of

course the eternal “jockeying” for position among

the different players in the industry. These five

coupled with the “Role of Complementors2”,

which could be either positive or negative, gives the

complete model of the factors that determine the

competitive strategy of the firm.

Consider the very basic 5FM for the airline

industry. In the “jockeying for position” we have

airlines like British Airways, Lufthansa, and United,

each competing on its own differentiating factor.

The Buyers can be segmented into the business

travelers, vacationers etc. The Suppliers would be

inputs like air-traffic control, food, newspapers, oil

etc. The Substitutes, would be private jets and in

the extreme case even trains. The New Entrants

would be firms considering entering into the

132 Journal of Management Research

market; and the Complementors can be

government policy or even (regretfully) any

terrorist group that can shift the consumer

preference from airlines to trains, i.e. change the

balance of forces within the industry from outside.

The five forces model has been used very

effectively for defining market entry decisions.

From the producers point of view the most

favorable matrix of force intensity is one in which

all the elements are “low” is the one which is

favorable for market entry. On the other hand the

sanguineness of moving from a “low “to a “high”

market characteristics may be questioned.

An often ignored factor in the determining of the

force intensity has been the role of history and

culture. Since the determination of the force

intensity essentially tends to be an ordinal

exercise the role of behavioral characteristics

tend to be very strong. For example what would

explain why the buyers in Britain are much stronger

group that buyers in America. Or on the other

hand what would explain the inherent

competitiveness of the Japanese industry, or why

Bargaining Power of Suppliers

“Jockeying for

Position

Bargaining Power of Buyers

Threat of New Entrants

Threat of Substitutes Role of the

Complimentors

PORTER’S FIVE FORCES MODEL

Table 1: The impact of Non-market Forces on the Five Forces

The forces Decomposition Historical Validation

1. Bargaining Power of Buyers Size, cross elasticities of UK (1756), the rise of the demand, segmentation protestant ethics and the

Industrial Revolution

2. Bargaining Power of Suppliers Size, relative market share, USA, civil war 1861, north south criticality, inventory management divide, role of catholic Vs

protestants

3. Threat of new entrants Entrepreneurship, ability to South Korea (1960), the rise of cross- subsidize the Chaebols

4. Threat of substitutes Back to generics India (1930), Gandhian Economics, generic products etc

5. “Jockeying” for position Industry competitiveness Japan (1868), the Meji restoration and Matsukata’s boom and bust policy

6. Role of complementors Outside-the-industry influencers USSR (1991), Perestroika and Glasnost and the Role of McDonalds

is it that Indian supermarkets will never see 73

varieties of bread, so common in its western

counterparts, even if the income elasticities were

the same. The answer would lie steeped in history

and culture that has determined the intensity of the

forces.

Volume 11, Number 3 • December 2011 133

Consider the above table which lists the five forces

and their broad decomposition. The last column

also isolates historical instances3 which have tended

to influence the behavioral parameters that will

influence the intensity of the forcers.

Consider the following historical developments

that have shaped the culture of a nation and has

an impact on the intensity of different forces.

THE PROTESTANT ETHIC AND THE

RISE OF CAPITALISM

The work of Max Webber is fairly exhaustive on

this. The separation of the Church of England

from Rome, and the resultant rise of the protestant

ethic had a lasting impact on consumption pattern

in society. Weber clearly documents how the spirit

of Protestantism led to low consumption rates and

thus to high savings rates, which was basically

funneled to finance the industrial revolution. Not

only did capital movements have their own impact

on the nature of expenditure pattern, but also the

changing nature of consumption. The non-

ostentation style of the Protestants was

substantially different from the conspicuous

consumption that characterized the Church in

Rome. In Porter’s terminology, with the shift from

the catholic ethic to the protestant one, the

bargaining power of the buyer increased, and also

his ability to say no to a large number of

producers. This also explains in later centuries the

phenomenal success of standardized discount

stores like M&S and ASDA. The average British4

buyer today is very conscious of even penny

discounts, and has no problems shifting loyalty.

The bargaining power of buyers here in the British

society is probably higher than say in Germany or

France who have not gone through this transition.

THE MEJI RESTORATION

With Commander Perry’s gun boat diplomacy, the

restoration of the Meji, the role the then Finance

Minister, Matsukata is essential in understanding

the inherently competitive behavior of the Japanese

industry. What has been often forgotten is that

Matsukata’s inflationary boom-and-bust policy was

the key to weeding out inefficient firms. With a

farsightedness far beyond the conventional

knowledge of economics, Matsukata followed a

classic sine wave policy so far as fiscal policy was

concerned. Having introduced an inflationary

situation over a period of 5 years, wherein industry

would grow substantially because of the cheap

availability of credit, he would for the next cycle,

have a deflationary policy. This would lead to the

inefficient industry being closed down. This policy

followed over cycles spread over 30 years, ensured

that the inefficient firms were effectively “weeded”

out of the industry. It is this historical peculiarity

that explains why the “Jockeying for position”

tends to be higher in the Japanese industry than

else where, something which also explains the

generic strategy that Japanese firms tend to follow,

based mainly on cost leadership than on product

differentiation.

THE US CIVIL WAR 1861-65

The War split the country between the industrial

north and the agricultural south. The forefront

issue was the issue of slavery. The secession of the

south was not even considered because of the

hidden agenda of the need to protect the cheap

supply of not only labor but wage goods that

provided the stability for the industrial growth of

the north. The south not only provided the

essential raw materials, but because of their

relatively higher incomes (income distribution was

relatively skewed), following the low costs of

production (slavery!), also served as a good market

for the finished goods that were predominately

produced in the north. The economic basis of the

civil war has been well recognized, and perhaps

explains in substantial detail, the initial

competitiveness of the American firms in the area

of supply chain management, which unfortunately

they lost out to the Japanese in the post 60’s

primarily on account of lagging behind so far as

the innovation cycle was concerned. The federal

structure of the US constitution, a necessary

outcome of the civil war, can also explain to a large

degree the loss in competitiveness5. In Porters’

terminology, the bargaining power of suppliers will

134 Journal of Management Research

be historically and culturally determined by events

like the civil war.

GANDHIAN ECONOMICS

The Indian commodity and factor market has been

extremely influenced by the thoughts of Mahatma

Gandhi (affectionately christened as “the Father of

the Nation”). Gandhian economics attacked the

basics of consumer theory in that it questioned the

fundamental premise that more consumption does

not give more utility. In the spirit of Levitt’s

differentiation between the core (generic) product

and the peripheral product, Gandhi questioned the

basis of product differentiation, in that his

valuation of the utility of the peripheral product

was close to zero. For Gandhi the “core” product

was all in all important, which he demonstrated in

his personal life too. Examples abound from his

loin cloth dress, to his habit of writing with a

pencil stub, to his fasting to cutting down of more-

than-necessary calories. This has affected the

consumption habit of Indians (Generation X today

of course is not too affected by the Gandhian

philosophy) in terms of the Indians inevitable

quest for the substitute generic product, which will

alter the demand of the product. As an example we

can see the differences between force intensities of

substitutes between France and India so far as

Shampoos are concerned., In France this threat is

likely to be low. In India this threat is likely to be

high because of the prevalent use of generic

alternatives like “reetha” or “mud packs”. In some

cases even legislation can increase the threat of

substitutes. Medical legislation in the US which

prohibits doctors from prescribing brand names

actually increases the threat from generic

substitutes.

SOUTH KOREAN CHAEBOLS

The Korean chaebol is perhaps one of the unique

institutions of the world. Post partition, the major

source of growth in South Korea has been the

growth of the chaebol (the family owned business).

The top 3 (Hyundai, Samsung, LG) are well known

brands all over the world, representing among

them a high complex interrelated ownership

structure and of course highly diversified

conglomerates. This has been both a strength and

weakness of the Korean economy, fuelling high

growth on one hand, and as events of 1997 have

proven can also prove to be the Achilles’ heel of

the growth process. The existence of the chaebols

had contributed substantially to the growth of the

market and industry structure not only in Korea

but also in other countries where the group is

present in a significant manner. In Porterspeak, this

translates into, among other things, reducing the

threat of potential entrants. The balance of forces

in the Indian FMCG industry has been altered

substantially by the entry of LG, which was

hitherto only in the consumer durable industry.

With LG’s decision to enter into the product

categories of shampoos, toothpaste etc, the

existing players in the industry have been wary of

further capacity expansions, because of the

inherent strength of LG in its ability to cross

subsidize. This makes LG a formidable player not

only in existing markets but also in potential

markets that it may decide to enter into.

PERESTROIKA, GLASNOST AND

MCDONALDS

The influence of the external environment is

extremely important in defining industry balance

and attractiveness. This is explained by an example

no better than the Russian experience of reforms

(Perestroika) and openness (Glasnost). The

contributions of Gorbachov towards reforming

the Russian economy, given the disastrous

economic consequences of its ill-timed

expansionist policy in Afghanistan, were also

influenced by the impact of western culture. Two

events come to mind, the first the often quoted

advent of McDonalds in Moscow and the now

famous photographs of long overnight queues of

aspiring customers waiting on a cold winter night,

and the second, what I personally consider as

having been underplayed by history, the impact of

the Lennon-McCartney composition, “Back to the

USSR” in the sixties, which going by underground

sales would have made it one of the biggest hits

of its time. Both instances prove that the external

Volume 11, Number 3 • December 2011 135

environment plays a significant role in determining

the intensity of the forces that will define industry

attractiveness. The recent advent of rock stars in

India (Sting, Pink Floyd, Elton John etc) proves

that the Indian market is an attractive one for

western music. What often gets underplayed is the

role that satellite television (MTV, Channel V, etc)

has had in playing the role of the complementor.

Two additional points may be taken into

cognizance so far as the impact of culture on the

Five Forces Model is concerned. One is the

dimension of culture that be defined in the

Hofstede’s framework. If we look at the four

dimensions of power distance, gender issues, risk

averseness and individualism, and the now added

time orientation, it is clear that these factors will

also affect the intensity of the determining forces.

Table 2 attempts to list some of the dimensions

that need to be kept in mind.

Thus international markets that have a greater

proportion of women customers, or matriarchal

driven societies are likely to have a different balance

of forces than patriarchal societies. In India the

differences between the markets of Kerala and

Punjab come to mind immediately, as would in

Europe, the differences between the French and

German markets.

The second factor that also needs to be kept in

consideration is Porter’s own National Diamond

for determining international competitiveness. In

his 1990 treatise, he explores the determinants of

national competitiveness in terms of four factors,

demand conditions, role of supporting industries

and firm strategy, structure and rivalry. Each of

these will have their own impact on the balance of

the forces.

The National Diamond The 5F Equivalent

1 Demand Conditions Bargaining Power of the Buyers

2 Factor Conditions Bargaining Power of the Suppliers

3 Role of Supporting Role of the Comple- Industries mentors, Threat of

Substitutes

4 Firm Strategy, Structure Threat of New and Rivalry Entrants, Jockeying

for Position

Both Hofstede’s and Porter National Diamond

bring a common understanding to the 5 forces

model: that the behavioral element is important in

understanding industry attractiveness. The study of

the present is important; the study of the past

perhaps is more important. The understanding that

history gives us of the present can also influence

the strategies that we would follow in the future.

One may well remember Orwell’s reflection, “who

controls the present controls the past; who

controls the past controls the future.”

Table 2: Impact of Culture on the Five Forces Model

Hofstede’s Determinants Influencing

1. Power Distance Decision making, relationship between Consumer and Customer, role of MIS, game theory, designing organizational structures etc

2. Masculinity Compensation designs, impacts on social costs, litigations, sexual harassments, inefficiencies associated with preferential policies

3. Uncertainty Avoidance Impact on entrepreneurship, the equation between risk and return etc

4. Individualism Impact on buyer behavior, market segmentation, costs of communication; approach to cluster behavior

5. Time Orientation Cycle times, inventory management, supply chain logistics, width and depth of distribution channel etc.

136 Journal of Management Research

CONCLUSIONS

Constructing the five forces model even in the best

of times is not an easy thing to do. Not only does

it require a high degree of intellectual clarity and

precision, but because of the essentially ordinal

values of the force intensity, it also requires a good

grounding in behavioral sciences, particularly

history. Understanding the intensity of the

different forces requires an in-depth analysis of the

social fabric that surrounds the industrial

organization.

This appreciation of the social fabric is heightened

by the knowledge of history and the resulting

culture of the society and economy that the

researcher would be considering. Multinational

firms will find this approach invaluable in taking

decisions relating to market entry or even market

exit, something that the traditional models,

including Porter’s National Diamond itself may not

be able to afford a definitive view.

What we have suggested is an approach that may

sound pedantic. Before a five forces model is

constructed the researcher must delve into the

social history that will determine constituent

behavior. It is only by this process will the model

so constructed will be reasonably robust to stand

the test of researcher bias. This process will also

bring out the true “beauty” of the five forces

model in its use of intellectual rigor combined with

pragmatic understanding of the social context.

Our analysis is undoubtedly limited in that in the

true spirit of comparative statics we have looked

at individual events and their impact across the

different forces. A more thorough approach would

involve a possibly computable GE model to take

into account the simultaneity of the various factors

that will determine the intensity of the forces.

Nevertheless, in the true spirit of social science

research, the paper does attempt to offer a model

that can be followed in the further development of

industry attractiveness analysis.

NOTES

1. This is a use of the model that is often ignored. In the ideal situation the intensity of all the forces should be low. This

serves as a good guideline in establishing decision criterion in making strategic choices.

2. Grove has taken a rather narrow view of the “Complementors” in that he would like to “think of them as “fellow

travelers””. Possibly a broader view of the term is called for: firms that are outside the industry, but nevertheless have the

power to influence the balance of forces within the industry. Complementors thus can play both positive and negative

roles.

3. I would like to emphasize here that these are only singular examples and are neither representative nor exhaustive. In reality

there will be a large complex number of instances that will influence the behavioral characteristics. We are focusing on a

finite set of instances merely to establish a methodology.

4. George Mikas, How to be an Alien: When people say England, they sometimes mean Great Britain, sometimes the United

Kingdom, sometimes the British Isles, but never England.

5. In strict economic terms, a federal structure of the polity will lead to market segmentation, both in terms of the product

and the factor markets. Segmentation has inherent inefficiencies built in the system which can explain the loss of

competitiveness. It may be interesting to compare the strong federal structure of the US (and the now emerging federal

structure in India) with the absence of the federal structure in Britain and in Japan to explain differences in competitiveness.

This will of course have to be empirically tested.

SELECT BIBLIOGRAPHY

Appiah, K. A. and Gates, H. L. (1999), A Dictionary of Global Culture, Penguin.

Collins, Larry and Lapierre, Domonique (1978), Freedom at Midnight, Bell Books.

Encyclopedia Britannica (1994), Relevant Sections.

Holfstede, G. (1984), Culture’s Consequences, Sage.

Volume 11, Number 3 • December 2011 137

Lee, K. (1999), Corporate Governance and Growth in Korean Chaebols, SNU.

Leitzel, Jim (1995), Russian Economic Reform, Routledge.

Levitt, Theodore (1980), Marketing Success through Differentiation, Harvard Business Review.

Orwell, George (1977), 1984, Signet Classic, Penguin.

Porter, M. E. (1990), The Competitive Advantage of Nations, Harvard Business Review.

Porter, M. E. (1980), How Competitive Forces Shape Strategy, Harvard Business Review.

Rawls, J. (1973), A Theory of Justice, Oxford.

Spear, Percival, (1995), The Oxford History of India, Oxford.

Weber, Max (1992), The Protestant Ethic and the Sprit of Capitalism, Harper Collins.

Copyright of Journal of Management Research (09725814) is the property of South Asia Publications and its

content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's

express written permission. However, users may print, download, or email articles for individual use.