Saturday, May 10, 2014

Porter’s Five Forces Model, Generic Strategies and the Saddle Curve

Most students of strategic planning are at least aware of Michael Porter’s five forces model of competitive advantage.  These forces – supplier power, customer power, threat of new entry, substitute products and industry rivalry – are an excellent way to understand the most powerful forces affecting a company’s competitive position and likelihood of profiting from a market.  In Simplified Strategic Planning, we examine the external variables which are most like to drive these forces for a company by researching the external data (such as the balance between number of customers and number of competitors in a segment, the threat of substitute products or services, and the economics of the supplier market).  Internally, a company’s strategy can be developed to adapt to, and sometimes, mold these forces as well, ideally by focusing on the use of a unique strategic competency that separates the company from competition and likely new entrants.
One great way to think about all of the five forces in your strategic planning is to think about the choices (outside of purchasing from your company) available to your customers and suppliers.  Anything that increases the choices available to customers decreases your power, and anything that decreases their choices increases your power.  

One of the key ideas we use in Simplified Strategic Planning starts with the basic question of how you can gain – or lose – market share to a competitor.  One of the most fundamental insights that affects market share is a behavior continuum we refer to as specialty and commodity behavior.  Michael Porter describes these behaviors in his “generic strategies”, but usually refers to them as “uniqueness as perceived by the customer” and “low cost position”.  As I state in the book “Simplified Strategic Planning:  A No-Nonsense Guide for Busy People Who Want Results”, both of the generic strategies that work for the specialty focused company are viable strategies for a profitable business – that is, the differentiation strategy (specialty/broad market) and part of what Porter calls the “focus” strategy (which he uses to cover both specialty and commodity/niche market).  I would contend that the commodity side of Porter’s “focus” strategy (what I call “alley shop”) is not viable – since it generally results in both low volume and low margins – and that is why we split the niche strategies into “segmentation” and “alley shop”.

saddle curve for strategic planningIn “Simplified Strategic Planning”, I noted the existence of the “Saddle Curve”, which is simply the tendency of companies to achieve higher profit on either end of the specialty/commodity continuum.  The basic idea behind this curve is that companies with a clear commodity or specialty strategy will be more profitable than those that flounder in between the two.  One of the reasons why the five forces exert such power on profitable strategies is that they tend to force companies away from the extremes of this curve and into the middle, where profit is minimized.  As an example, consider a situation where customers can choose substitute products.  The customers’ desire is inevitably to maximize value by getting better products, better service and lower prices.  Where the customer has less choice, the real-world trade-off between these can be forced into the customers’ decision-making processes (“Do I buy the expensive, better product or the cheaper, worse product?”).  Customers who have more choices can demand that these compromises not be made – which inevitable drives a company into the middle of the curve, where profit is lower.  The only force that usually does not show its main effect on the saddle curve is the power of suppliers.  When that force comes into play, the profit of the company is affected because profit can be the result of forcing suppliers to move towards the center of the curve.
Where do you see your company on this curve?  How do the five forces affect your position on the curve, and your strategies for positioning in your markets?  If you would like a straightforward, no-nonsense process for working these ideas into your strategic planning, consider attending our two-day simplified strategic planning seminar soon!

1 comment:

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