Competitive advantage - Porter’s five forces

Competitive advantage - Porter's five forces

Another useful assessment of the current situation uses a model, again developed by Michael Porter called Porter's five forces. The model looks at the market forces that each product has on it which in turn gives an indication of its competitive advantage.

1.  The first force is direct competition. Clearly the less competition the better. However, if there is no competition, you might want to ask why. Rather perversely, having competitors around can be quite re-assuring!

2.  The second question relates to new entrants. Even if there are no competitors today, how easy would it be for new competitors to set up and take a share of your market. Obviously, the more difficult the better. This is called the barrier to entry. High barriers to entry usually come about because a large upfront investment or specialist skills are needed.

3.  The third question relates to what are called substitutes. A substitute is not a direct competitor, but rather another product which competes for the same customer spend. A good example might be cinema's and restaurants. Clearly they are not direct competitors in that if you want to go out for dinner you will go to a restaurant and if you want to watch a movie you will go to the cinema. But they are substitute competitors because they are competing for the same entertainment spend.

4.  The fourth force is that wielded by suppliers. Do you have products that are dependent on a small number of suppliers? If so this will count as a strong force. Ideally you want lots of suppliers so that you can get competitive pricing and keep your costs low.

5.  Finally the fifth force is that created by customers. You want many customers to buy your products.

So to summarise, you will have a high competitive advantage if you have low levels of competition from direct competitors, new entrants or substitute competitors as well as a large number of possible suppliers and a large potential customer base.

Mission, vision and values

ow we move on to defining the future. I believe that the future situation should be defined at both a high level as well as at a more granular level (via quantified objectives). Mission, vision and values are a very common guide for expressing the future at the high level. I have added a fourth, competitive advantage.

1.  The mission defines what your organization is going to do, as in Mission Impossible e.g. 'your mission, should you choose to accept it, is to ....' The only difference, I guess, is that in business, you don't really have the choice as to whether you accept it or not.

2.  Vision is the high level view of what your organisation (or indeed the market) will look like in the future.

In researching the book FastTrack strategy, I came to recognize that many companies do not make a clear distinction between mission and vision. The semantics of these two are not important. What is important is that sufficient guidance is given first of all to create a strategic plan and secondly for employees to understand what needs to be done.

3.  Values are about the model behaviours and guiding beliefs of the organization. There should be evidence they exist. For example, it would not be credible to have a set of beliefs that talks about valuing employees, if the company has a reputation for laying people off.

4.  Competitive advantage - Going back to the principles of focus and the idea that you have to choose your specialisation, you need to be clear on what your organization does that really sets it apart. This area of expertise or excellence will be right at the heart of your competitive advantage. A similar concept was identified as 'driving force' by Tregoe and Zimmerman in their book 'Top Level Strategy.' 6 This is a really excellent (and short) book on the essence of strategy.

Finally, make a note of the key assumptions that your business strategy is founded on. They may include predictions about market changes, the effectiveness of technology or they could be statements that certain things will endure. Either way, when you review your strategy in the future and there is evidence that these assumptions no longer hold true, then the strategy should be reviewed.

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