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March 25,2021 Strategic Planning

Five Forces

Five Forces

Five Forces

Five Forces

In 1918 with a fleet of twelve Model T’s based in Chicago, the Hertz Rental Car company came to life. Coming to the market early, Hertz grew their company over the next hundred years into one of the three main players in the rental car industry. In a move to acquire greater market share they purchased the fourth largest rental car firm Dollar Thrifty in 2012. This made them the leader in the industry with 36% of the market share.

The next following years would prove that Hertz had a track record of making poor strategic decisions, highlighted by their over payment for Dollar Thrifty. This over payment forced them to save money and delay on refreshing the fleet models. Their brand shifted to one of being dated and out of style to customers

Already cash strapped, the decline in revenue magnified their issues. This came to light during the Covid-19 pandemic and subsequent quarantine. People quit traveling and vacationing leading to Hertz’s quick call for bankruptcy. The pandemic didn’t kill them, nor did it kill off numerous companies. These companies were already on their deathbed, the pandemic just sped up their execution date.

Porter’s Five Forces Analysis

Michael Porter’s career began as an engineer in the Army before getting his MBA and PhD from Harvard in Economics. Throughout his childhood he became fascinated with sports competition which led him to develop his five-forces model. He wanted to create a way to analyze competition to determine the intensity of the competition and the attractiveness of joining an industry.

Porter believes that the industry growth rate is the key variable for determining the intensity of industry rivalry. Competitive rivalry begins by looking at the industries intensity and opportunities. For example, in the soft drink industry there are the two main players of Coke and Pepsi. One company move will be mimicked by the other while squeezing out all other competition. As a leader look closely at what is changing your business and when to get a jump on competition. You want as many bits of useful information as possible to help you make a timely decision.

Next, you’ll need to determine the threat of new entrants. Does your industry have a low barrier of entry, can anyone jump in? If there is a reduced risk of entry, that attracts larger, established firms with lower risk profiles. Think of the t-shirt industry of buying on the web and having it drop shipped from China. A person can set that business up in a day.

Threat of Substitute Products

Then you’ll need to evaluate the threat of substitute products. Simply, can anyone replicate your product? Is your product made at a premium that someone could make cheaper? I always think of asking for the cereal Lucky Charms as a child and getting the store off brand Marshmallow Mateys.

Following, you will evaluate buying power. How much choice does your customer have, can they dictate prices? Think of a real estate market where there is an excess of housing. Buyers can pick and choose from a surplus of options driving prices down. The firm without cost advantage or differentiation must be selective about its buyers to ensure it achieves better than average returns.

Lastly, you’ll have to assess supplier power. No company is 100% vertically integrated, they have suppliers to help them run their business. These suppliers have other customers, some are your competition. They can limit your supplies or increase prices and throttle your business.

Applying the Model

Taking my own company to apply this model, I reemphasize that the true market gap exists for medium companies. Enterprise level companies will have a change management staff and will still use large consulting firms. Medium companies typically go with a boutique firm and boutique firms are not easy to find in the Boise regional area.

When I look at competitive positioning, I recognize that I cannot compete with large consulting firms on business with enterprises. However, I could supplement their services with my service option. Midsized change management consulting firms are not local to the Boise area and miss numerous opportunities. Lastly, boutique consulting firms are typically all based referrals. When looking at the competitive positioning, my firm can work across all three levels.

When looking at new entrants into the field of change management a few data points arise. With change management advances, many companies are doing it themselves. There has been an increase of the number of individual practitioners and boutique firms. Lastly, there are two regional firms based out of Seattle that have been attempting to make inroads into the Boise market.

Applying a Unique Model

Next, I needed to understand if there could be an instance of substitute products. I have a change management model that is highly unique, however I have published a book on how to apply it. That model will compete against proven, popular change management and it will compete against organizations applying no model at all. While there are a variety of models and understanding of my service, it is not easily replicated and carries a reduced risk of imitation.

When looking at buyer bargaining power, if they take change management seriously, they have limited purchasing power. There is a small availability of change management professionals and there is a high cost for value work. However, if the company is looking for a cheap fix and believe that they are in a high leveraged purchasing position, this is the best method to weed out potential buyers.

Lastly, when evaluating supplier bargaining power, this impact is minimized in a knowledge worker industry. Suppliers consist of marketing firms, association fees, and consulting matching services. These all focus on connecting potential clients with service providers. Most of these suppliers have proven to be ineffective in the market with heavy competition thus driving prices down and reducing supplier bargaining power.

Advantages in the Market

If you have the low-cost position, you control the market. You can sell to powerful, price sensitive buyers and still make a profit. This means that you will have economies of scale, high levels of efficiency, and a comfort with running on low margins.

When developing a purchasing strategy, you want to ensure that you will not be beholden to a supplier. You will need to spread purchases, avoid switching costs, qualify alternative sources, promote standardization. If necessary, threaten backwards integration to negotiate better terms with your suppliers.

Be cognizant of your customer selection process. Not all customers are the same, some take more effort than others for the same cost. If you sell across the spectrum of company sizes, roughly the same amount of effort will incur for sales to small businesses and enterprise businesses. However, the enterprise will provide significantly greater returns. By eliminating high-cost buyers from the consumer base your return on investment will gain an automatic boost.

Brutality of Methods

Once you find yourself in a position of power you can dictate terms and control the market to a certain extent. You must then watch your actions to ensure that you don’t disrupt the status quo and lose your position of power. For example, the British government maintained a stable relationship with the early American Colonies. However, they later passed such severe acts that forever forced Colonists to revolt. Thus, they changed the relationship between themselves and colonies permanently souring the relationship.

History points again to the conditions of Europe following World War I. The war concluded with the Treaty of Versailles which humiliated Germany demanding massive reparations and loss of extensive territories. This sent the German economy into a more severe crash, subsequent depression, rise of the Nazi party, and eventual World War II.

To attack a leader, you must have a competitive advantage, proximity in other activities, an impediment to retaliation. You don’t want to destroy your business rival, that will lead to a monopoly. Nor do you want to put them in a corner where they must fight like a cornered dog. You want to control them not unleash them. Learned from the past, the more brutal your methods, the more bitter your enemy.

References

How Competitive Forces Shape Strategy

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