In article 4 we looked at the VRIO of competitive advantage with regards to the internal aspects of a SWOT. This week we will review the competitive forces with regards to the external aspects of a SWOT framework (see article 3).
Michael Porter1, as I stated in article one, is considered the ‘go to guru’ with his pinnacle work on the five forces that affect strategy and hence, competitive advantage. What I would like to cover this week are those five forces that follow on from the VRIO strengths and weaknesses (S&W), to the internal side of the SWOT. Once you have established the S&W’s your firm3 should look how these five forces externally as they will without any doubt aid or constrain your competitive advantage.
So what are the five forces?2 They are:
Market entry is defined as how high the barrier to entry for your firm is in a market. Market entry also works in two ways. There is the firm that is entering a market and there is the firm that is watching to see what competitors are entering into a market. In both situations a firm will be looking at how easy (a low entry barrier) or how difficult (a high entry barrier) is, to get into any given market or industry. As everything with regards to business has a cost, this therefore implies, how high or how low is a firms cost going to be to get into, or to keep a competitor out of, a given market. S&W from your VRIO should be an aid in deciding how high or low these barrier are. The competitive advantage example in article #4 referring to AMCL, demonstrates they have a cost advantage to market entry as they do not own fleets of trucks, but they do have resources with trucking companies though comparative or complementary advantage. Therefore their cost of entry is low to enter other logistics markets.
Substitution, similarly to market entry, substitutes are a variation on existing products or services that can be termed as disruptive technologies4. Examples are iTunes replacing the tradition barriers from the music industry, email to mail, online flight bookings circumventing travel agents and Netflix streaming video replacing Blockbuster rentals. Innovation will always be present so it’s wise for a firm to ensure it is constantly aware of technologies that may render a firms competitive advantage to be eroded or replaced. Remember eroding a firms competitive advantage equals a loss of revenue.
Buyer power, again this is a double edged sword. Buyer power is determined by how much leverage a firm has over its suppliers. Leveraging suppliers can be an advantage on price and quantity of products, or quality and accessibility of services. However if leveraged too hard suppliers may not engage with your firm, it’s all a matter of cost between your firm and the cost to the supplier. What are the costs to stay with a supplier or switch to another supplier? It may be too costly to change suppliers if your firms demand is a particular and or unusual product or service, verses an off the shelf product or service.
Supplier power, the flip side of the buyer power, and is determined again on what cost are acceptable. Suppliers are looking to gain as much profit as is possible, but do not want to loose buyers through excessive high pricing, again especially if the product or service is not unique. Pilots for example are fairly unique suppliers in the internationally regulated aviation industry. They are a strong supplier that can demand higher revenues to supply their services. Their competition are their own members in the industry. If your firm holds a dominant position in an industry such as AMCL does in logistics or Microsoft did in PC software, these suppliers can take [competitive] advantage of a market.
Rivalry with competitors again means looking at the costs to your firm. What innovative products and services are being launched in the marketplace that will harm your firm? How will you combat this? Alternatively, what can your firm deliver in new or improved products and services into the market and for your customers?
Cost are dependent on several competitive factors such as how agile or innovative your competitors are? If there are ‘sunk costs’, the expense a firm expends to stay in a market where they are specialized or where they have limited customers, rivalry with competitors can prove even more expensive. Especially where rivals want to dominate a market, or where the quality of services provided outperforms your firms service levels.
All the above are but a few examples and not a comprehensive itemised list. You cannot assess the five forces full impacts on your firms Opportunities and Threats without a full understanding of your Strengths and Weaknesses. What you may now become to realize after reading the above in conjunction with the previous four articles, is how dependent and impacting these Opportunities and Threats are on your firms understanding of their Strengths and Weaknesses.
1 Porter, M. (2008)’ Five forces that shape strategy’. Harvard Business Review’ January 2008. pp 78-93
2 Justin, J. (2014) ‘A guide to five forces framework’ eCornell University pp1
3 the term ‘firm’ can be applied to any individual, groups, department or any institution.
4 the term technology relates to any innovation that disrupts the status quo. Examples can be electronic, digital, service and even no technical or paper related.
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Author: Phil Wilton has worked in MNC’s as well as developing start-ups and business expansion for SME’s. He received his MBA in International Business, Strategy, Marketing and Emerging Markets from the University of Liverpool. He also completed Business Strategy – Achieving Competitive Advantage at Cornel University.
Feel free to contact Phil (SGG) for a free intro consultation on how SGG can help your firm. firstname.lastname@example.org
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