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Porter - Competitive Forces - Where are the profits?

Michael Porter has focused the thinking for a generation of business executives - be better than your competitors. His model for competitive forces, formally called the Elements of Industry Structure and informally the Five Forces, can be used to assess your current situation, likely responses by rivals, buyers and suppliers, and shifts in profitability. In his 1985 book Competitive Advantage, he suggests tactics to dominate rivals, buyers and suppliers and to fend off imitators. The next two pages provide an overview of the Five Forces Model, first the supply and distribution channels, and then the threats from imitators and substitutes.

The model is superb when used examine the "what ifs" as demand ebbs and flows. Though it does not help you predict the demand, you can examine the effect of momentum changes. What if I work with one or many suppliers? What if my buyers form buying groups? What if our product is becoming a commodity? What if our main competitor gains a cost advantage?

The model helps you assess your strategic flexibility versus your direct competitors' to respond under bargaining pressures from suppliers and buyers. Where are the best profit opportunities now and in a few years?

First, assess the number of rivals and their strengths or weaknesses compared to yours. Then, refine your assessment comparing your performance to theirs in the supply and buyer channels. These are core inputs to a SWOT assessment.

For larger firms, implementation of SAP or Oracle business suites now provide extraordinary, real time detail on costs, revenues and efficiencies in the supply and distribution channels. It is easier for large firms to to analyze product specific patterns.

Smaller firms with less sophisticated or integrated accounting, CRM or ERP software can identify trends, but have more difficulty getting to a product specific level.

On the next page, I complete the model with the risk of imitators and substitutes, the profit killers. Also please look at the Research Sources Chapter, where I show how to identify trends and in this chapter, look at others models than Porter's used to formulate strategy.

previous page Macro trends

Porter - new entrants and substitutes next page


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