At the end of installment #1, we promised you we’d discuss what happens if you apply Porter’s famous “five forces” to the Maroons and the Grays. Shall we?
Insight from Porter’s “Five Forces”
In 1979, Harvard Business School Professor Michael Porter published his classic article “How competitive forces shape strategy,” introducing his “five forces” model. Here it is, schematically:
This is designed to help firms assess the critical dynamics of the marketplace they operate within. Unpacking it a bit, we have:
- At the center, competitive rivalry: This is the bread and butter of industry competition. Bud competes with Miller, Ford with Chevy, Coke with Pepsi, and so on. It may not be easy—it may be all but impossible, in some cases—but at least it’s more or less a known, understood quantity. Some of your firm’s rivals will be fierce and others gnats not even worth swatting away, but it’s a familiar playing field insofar as it goes.
- At noon, the threat of new entrants. Before Tesla, any global car manufacturer would have told you the threat of new entrants was somewhere between nonexistent and imaginary. Maybe not so fast. (It’s still pretty daunting to launch a globally integrated petroleum company, but then again, maybe the world has all it needs right about now.)
At the other extreme, new airlines seem to arise almost every day: Lease a bunch of planes parked in the Arizona desert, hire some furloughed flight crews, build a website, and you’re off and running. Come to think of it, the barriers to starting a new law firm are even lower; most of us could fund the startup costs with our Amex card.
- 3:00 o’clock: The bargaining power of your clients. How price-sensitive are they? (Or, what is their price-elasticity of demand?) Are they prepared to accept your “off the shelf” goods and services or do they expect customization? High-touch or self-serve? You get the idea.
- 6:00 o’clock: The threat of substitutes. Is there a substitute for car ownership? Increasingly, millennials seem to be saying there is, and if “transportation on demand” is actually the definition of the market, they might be on to something: A combination of Uber/Lyft, Zipcar, mass transit, and a preference for urban over suburban living could do it. On the other hand, there’s no tenable substitute for long-haul airline service.
- 9:00 o’clock: The bargaining power of your sources of supply. For law firms, the only supply chain component of any consequence—the only one that matters– is talent in the form of lawyers and business professionals. (Office space, email, and word processing are all available en masse as, essentially, commodities with by hypothesis no bargaining power.)
This is how Porter described the intersection of the five forces and corporate strategy:
Whatever the collective strength [of the five forces], the corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor. The collective strength of the forces may be painfully apparent to all the antagonists; but to cope with them, the strategist must delve below the surface and analyze the sources of each. For example, what makes the industry vulnerable to entry, What determines the bargaining power of suppliers?
Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action. They highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats. Understanding these sources also proves to be of help in considering areas for diversification.
So there’s your challenge.
Now, applying Porter’s model to the Maroons, what does it look like?