The “Five Competitive Forces” model was developed by Dr. Michael E. Porter (Harvard) in 1980 and has become the classic tool for analyzing the industry structure in strategic processes. Porter identified five competitive forces that shape every industry and market.
The model is based on the insight that corporate strategy should meet the opportunities and threats in the organization’s external environment. Competitive strategy, in particular, should be based on understanding the industry structures and the way that they change.
Porter's five forces are:
· Threat of substitute products or services, e.g. Palm PDAs and Blackberries replaced by Smartphones
· Threat of new market entrants, competitors
· Bargaining Power of customers/buyers, e.g. haggling
· Bargaining Power of suppliers, e.g. raising commmodity prices
· Rivalry among existing competitors
I’ve not found much fault with the model except that the advent of the internet has made Porter's model even more dynamic and accelerated. For example, the customer has increased his bargaining power with the ability to compare products and prices online instantaneously and new competitors can easily sell worldwide.
I attended a course from Dr. Arnoldo Hax at MIT Sloan (a brilliant and engaging person) introducing a competing strategic model named the Delta Model. The Delta Model does not treat the customer as a competitive force but rather as the focus and reason for being. The goal is to attract, satisfy (delight), and keep the customer. The Model shows a wide range of potential strategies – all pointing to the use of technology to promoting bonding (with customers, partners, etc.).
The range of Delta Model potential strategies include:
· Low Cost – Southwest Airlines, Walmart. This is very difficult since you must have the correct infrastructure and operations to sustain it.
· Best Product – best technical features, superior in performance, etc.
· Redefining the customer experience – Amazon (both Amazon.com and via the Kindle), Starbucks, Apple iTunes, Singapore Airlines. This is an appreciable change in the customer value proposition.
· Customer integration – Facebook, Google is Dell, SAP are tied deep into many companies’ IT and manufacturing respectively.
· Dominant Exchange - Google, YouTube, Facebook, Wikipedia, iTunes are the defacto paths to browse, see videos, network socially, research, and sell/buy music respectively. Dominant exchange is achieved when a critical mass of collaborating users is reached and each new user makes the service even more useful (e.g. YouTube, Facebook).
· Horizontal Breadth – Fidelity, Amazon offer “one stop shopping” for financial products and very much all products respectively.
· System Lock-in - Intel, Microsoft very much own the microprocessor and operating systems in PCs. Apple owns the tablet market with Google Android moving in. System Lock is the strongest form of bonding and integration among complete industries around a product (e.g. all the software companies developing Windows specific solutions). It focuses in the entire system economics instead of product-centered economics. Success is due primarily to the complementors that create solutions based on your product.
Strategies based on Best Product or Low Cost are the most difficult to sustain. Dominant Exchange and System Lock-in strategies are the most sustainable because they involve the complementors and the whole system.
You can see the Delta Model strategies being used in companies today. Amazon is a dominant exhange in ecommerce and becoming the dominant exchange in e-reading with the Kindle. Apple is covering many of the strategies with arguably Best Product(s), Redefining the customer experience, Dominant Exchange, and System Lock-in. Google is arguably Best Product (browser and analytics), Dominant Exchange, customer integration (Analytics), and also moving into System Lock-in with their browser and Android. All of these companies are aggressively using technology to enable their strategies.
Which model is best?
I don’t think that one has to use one model exclusively of the other. For example, one has to recognize the bargaining power of the customer (Porter) and should therefore constantly watch its cost structure but an organization should never think of the customer as anything but the center of its strategy and also work on its differentiators and compelling value proposition. Hax is correct in saying that Porter’s model is very turbulent and always in a state of violent competition from all sides…but that is a true reflection of the market. The Delta Model provides a customer centric approach with a number of potential strategies and is proactive in approach (IMHO). Hax does have a point that you wouldn't constantly be looking over your shoulder at competition if you are looking forward focused on bonding with the customer and doing the right strategy.
It’s worthwhile to review your organization, market structure, and competitors against Porter’s and Hax’s strategic models.