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The major lessons Michael Porter drives home in this reiteration of his “Five Forces” framework for competitive strategy comprise a new perspective on where rivalry springs from, how positioning and profits are impacted by industry structure and level of competition, and what all these imply for decisive action.
The conceptual breakthrough achieved by his “Competitive Strategy” book made a tremendous difference in 1983 and remains relevant today, in an era marked by economic disruption, industry consolidation and ever greater specialization into “micro-industries.” In one stroke, Porter swept aside the restrictive confines of the GE “red light/green light” model, the over-emphasis of the Boston Consulting Group framework on product line strategy, or the Ansoff size and growth matrix. The “Five Forces” framework also discouraged the fascination with “most admired” lists, experimentation with matrix organizations, and the rose-colored glasses of “high-touch” leadership. The need for hardnosed competition was never more apparent than when the Japanese encroached on, and bit off large chunks, of that quintessentially American industry: automobiles, SUV’s and trucks. Instead, Porter argues for everyone in the organization to step back from the “excruciating details” of, say, negotiating every day with suppliers to get a better deal and pondering the question of “…what is really important here?” with respect to the sustainability and growth of the business. Thus, the Five Forces provides an unrivalled framework for thinking through business strategy because Porter provides the budding leader the tools for understanding the trends, opportunities and challenges that face firms and indeed entire industries.
Perhaps the most instructive lesson in this update to his classic framework is the sidebar concerning industry definition. It is all too easy to define one’s industry too narrowly and hence, limit the scope of strategic analysis. Going by the Porter perspective, banking, transportation or software are not industries but industry sectors. Where savings and investment are concerned, banks must open their eyes wide and acknowledge that they compete for every customer dollar with cooperatives, credit unions, stockbrokerages, forex traders, precious commodities brokers, venture capital firms, capital goods that have reasonable prospects for satisfactory increases in resale value, and even investment real estate. Conversely, there is a lesson in market segmentation and distinct market channels to be learned from the point Porter makes about why car motor oil and truck motor oil are best analyzed as two distinct industries. The successful strategist is one who analyzes all related industries and understands how the structure in each requires formulating distinct business strategies.
Applying Porter’s injunction about the “…wholistic look at an industry and underlying the structural underlying drivers of profitability and income…” to the hothouse floriculture industry opens up new vistas: a) in growing to become the company globally, the bargaining power of Wal-Mart has increased exponentially at the same time that it offers new opportunities for convenience or impulse buys of cutflowers; b) a hothouse grower competes for the consumer dollar with other home and gardening furnishings, gift boxes of candy, even expenditures on Internet-based dating services; c) despite the present economic malaise, the sustained strength of the U.S. dollar provides some protection against cut flower imports from Mexico, the Andean countries, the Netherlands and even Israel; d) increasing concentration in the industry raises the bargaining power of bulb and seedling nurseries; and e) low barriers mean that rivals using reduced cost technology such as hydroponics, biomass heating and integrated pest management can crop up virtually anywhere in the nation (Jain, 2002).
At the end of the day, Porter reminds the reader that strategy is not just for boardrooms but for managers up and down the organization to make good choices and support each other in supporting “a common value proposition,” a mutually agreed path to “gaining a competitive edge”. As well, the framework is a springboard for managing alliances with the firm’s supply chain and for co-opting the value chain, both towards the same value proposition and mutually-satisfactory growth goals.
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