Updating Porter’s Five Competitive Forces: The New Seven

Article by Herb Rubenstein

Introduction

Michael Porter has developed a useful framework for analyzing a company’s immediate and future competitive environment from the customers’ point of view. We combine these five forces with another element identified by author Tony Grundy in his book, Breakthrough Strategies for Growth: Delivering Sustainable Corporate Expansion. Together with our new tools, you will have the integrated elements you need to guide your organization in developing strong and stable sustainability strategies.

Porter’s Five Competitive Forces

Porter is known for his generic strategies (cost leadership, differentiation, and focus) which have guided many strategic planners for years.

His five competitive forces are as follows:

• Entrants of other companies, non-profits, and schools

• Substitutes – better, cheaper products, alternative products that reduce demand for your services, NPO’s agenda

• Buyer Power (i.e. of customers) – reduction of loyalty, increase in group purchasing, buyers becoming sellers to compete with buyers

• Supplier Power – when supplies of one or more elements in the supply chain diminish and the price goes up, or when a supplier has such a large share that it can dictate the terms of the deal

• Competitive Rivalry (between existing players) – which may result in price wars, mergers, acquisitions, etc.

Industry Mindset

The next competitive force we incorporate is what Grundy identified and explored – Industry Mindset. Industry mindset applies both in the for-profit and non-profit sectors. It refers to the perceptions, expectations and assumptions about the competitive environment, the level of financial returns and the factors critical for success in an industry. Industry mindset is, on one level, easy to discern by reading trade press and going to conferences.

For example, the industry mindset in the computer industry is that people expect the speed of personal computers to double every 18 months. This leads many people to replace computers every two years, or more often.

In the computer industry, there is a competitive mindset that if your organization is not gaining market share, it will die. This mindset clearly sets the stage for the goal of every computer technology organization to increase its market share. History has shown that the computer companies that aren’t increasing their market share are becoming targets for acquisition by those companies that are.

In the 1950’s and 1960’s, US cars were so badly made that they were replaced every 2–3 years as they fell apart. Now, improvements in the automobile industry are such that replacement within two years because of poor craftsmanship or design is rare, and car owners are holding on to their cars for much longer periods of time. In addition, with the improvement of automobile manufacturing, the industry and customer mindset pertaining to used cars and long-term leased cars has changed in a positive direction quite dramatically.

Scenario Planning & Visualization

The next competitive force comes both from outside of an organization as well as from within the organization. Although somewhat different that Porter’s five original forces, and even Grundy’s “industry mindset,” the ability of one company and the practice of all leading companies in a sector to perform scenario planning now makes this a force to be reckoned with and thus raises it to full consideration in this article.

Scenario planning and visualization are different tools, but we are combining them since they fit together so well. Scenario planning, as used extensively by Royal Dutch Shell and other major corporations (as well as every little league baseball coach and family gardener), is the simple to sophisticated use of “what if” questions. These questions allow you to develop a set of futuristic pictures and planned behaviors designed to achieve certain objectives.

The more “what if” questions one can ask, answer, and organize, the more sophisticated the analysis. Diagrams, flow charts, computer simulation, computerized mapping and the old pencil and paper can be used in scenario planning and can help your organization plan for differing versions of the expected future.

Scenario planning sets out several different comprehensive pictures of the future relevant to your organization and its strategic plan. It looks at the future like a video, taking one frame or time period individually, with each one building on the results of the previous. A story line moves the scenario through each time period.

Scenarios are greatly affected over time by key transitional events that are envisioned by the planner that combine to create a predicted future pattern of events. Since key transitional events are difficult to predict with any certainty, often an organization will construct three scenarios of the future (optimistic, neutral, and pessimistic) and then assess their probabilities.

The value of scenario planning is that it allows organizations to create strategic plans consistent with each of the potential scenarios. It also allows them to leverage some value out of their view or views of the future.

Scenarios have, in the past, been the result of brainstorming sessions. They usually involve one or two small teams working in parallel fashion. The teams identify first the key issues/drivers that are of most concern to the organization and its future. Then they take these key issues/drivers and plot how they may occur in the future.

The process is intricate, but not necessarily difficult since everyone has some view of how the future will look, based on their own form of scenario planning. In order for scenarios to benefit businesses, the scenario builders must take into account the interrelationships of many unpredictable factors. These include technology, government policies, personal attitudes, economic and political trends, and lifestyle changes. They must also consider changes in relative economic costs and personal values in areas that can affect an organization’s future economic viability of its products and services.

Computer technology could enable you to include inputs from large numbers of people from your organization to contribute to the scenarios that are developed about the future.

Visualization is the “seeing” of an event before it occurs. Jack Nicklaus said that he had never hit a golf shot without first visualizing exactly how and where he wanted the ball to go. That’s why he is such a slow player, especially on the green where he sees in his mind the ball roll along a line into the cup before he putts the ball.

One great composer, when asked if he had ever heard his greatest symphony played perfectly said, “Yes, when I composed it.” Walt Disney is given great credit for his visualization skills.

Visualization in business has been prompted by computer graphics and some argue that visual modes of thinking are now becoming more and more popular due to the influence of television and computers. The authors welcome the myriad of books touting visualization, “scientific visualization,” and environmental scanning. They suggest that “foresight” is the goal of strategic planning and strategic thinking.

Through rigorous scenario planning, putting things down on paper in novel, picturesque ways and through being willing to innovate with computers, 3-D graphics and data mining tools, the reader can go far along this recommended path to “seeing” the objectives of the organization and the best ways of getting there.

Conclusion

Your organization needs to analyze the Porter competitive forces along with industry mindset and the scenario planning and visualization state of the art in your sector so that your organization can plan strong, successful organizational, business, and growth strategies.