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Business Strategy: Are We At A
Crossroads?
Roy A. Ackerman, Ph.D., E.A.
Michael Porter (Harvard Professor, Tau Beta Pi honoree)
propounded the concept of using five competitive areas when
examining a business segment or industry: the threat of new
entrants; the buyer’s bargaining power; the threat of substitute
products or services; suppliers’ bargaining power; and the
competition among existing industry providers. Over the years, it
has been determined that Dr. Porter is right: His five forces
analysis applies to all industry participants, even as it affects
each of them differently.
When analyzing your business practices, it behooves your
to break your enterprise by discipline. (As an example, in our
case, this means tax analysis, computer systems, biotechnology
development, clinical trial management, and corporate management
services. Get the idea?) You can then position yourself defensively
(against competitive forces), attempt to influence those forces,
and, most importantly, anticipate shifts in the marketplace that
provides you with a strategic advantage when compared with your
competitors.
Dr. Porter observes that fundamental changes are more
likely to occur within mature professions, than with newer
technology entrants (such as nanotechnology). If you are not in a
breakthrough industry, you should search for:
- More intense competition for market share.
- More selling to experienced, repeat buyers.
- Competitive focus shifting toward price and
service.
- Cautious additions to capacity and
personnel. (This is harder to discern in the current downturn.)
- Reorientation of a firm’s production
processes, marketing and selling.
- International competition increases caused by
standardization and price pressure.
- Industry profits falling during the
transition to maturity, a change that may be either temporary or
permanent.
Every one of our enterprises reacts differently, based upon our
corporate goals, resources, ability (and willingness) to change, as
well as our perception/aversion towards risk.
THE FIVE COMPETITIVE
FORCES
Force 1: Threat of
Entry of New Competitors
One factor in this force is barriers to entry into
an industry. In our medical area, this would be FDA approval
requirements. In professional services (knowledge-based
businesses), the barrier is technical proficiency and expertise.
Another common barrier is the investment needed to enter the
industry. Are the barriers being lowered in your industry? Or
raised? (Think about the web design business- over the past decade,
the barriers have almost been erased, unless specific technology for
a web application is required. It’s why high school kids are
selling their services for $ 50.)
In our tax business, the heightened competition has
resulted in commodity pricing. Most clients have no clue what a
difference in knowledge, expertise, and creativity can be to their
bottom line- and their safety from challenges. In the latter case,
it comes about way too late. In the three former cases, they never
find out (unless they speak to us). This is the challenge we need
to address. What’s yours? That’s what you need to find out- now.
Force 2: Bargaining
Power of Customers
The prime component here is buyer price sensitivity.
Given the Great Recession, everyone is looking for ways to cut their
costs. But, when clients need highly specialized or complex
services or where competition is lower (such as the health care
industry and for getting clients out of IRS hot water) the client’s
determination to obtain lower costs is much weaker. And, as stated
above, another factor behind this force is repeat business.
In our client management services, we assume (hope, plan) that
repeat business does not exist. We need to help the firm manage its
way out of a crisis (or inflection point) and train the permanent
holder of the position for which we are providing temporary
services. (We do hope they recommend us to others, when we leave…
Hint, hint, hint...) One should recognize that repeat customers
sometime require lower prices (say, our tax business, or clinical
trial management- so we continually increase our expertise and
technology to maintain our pricing currency. Of course, constantly
changing regulations certainly help us buffer that storm, as well.)
Force 3: Threats of
Substitution (Services or Products)
This force considers alternative choices for your service
or product that are available to the marketplace. customers. In the
tax business, as an example, some clients consider the use of
“off-the-shelf” tax programs to be an alternative. Of course, these
programs have well known errors (and, that is no defense against
fines and penalties from the IRS), as well as being only as good as
the taxpayer’s knowledge of potential savings situations.
Force 4: Intensity of
Competition
This force considers how and why the current business
incumbents respond to the actions of competitors. For example, when
one airline lowers fares, the competitors almost immediately
follow. In intensively competitive industries, the segment is less
attractive for entry. But, using price is way too easy. Moreover,
when fees or prices are not generally advertised, the competition is
less impressed by it. And, the more important competitive forces
(from survival’s point of view) are innovation and quality. Think
GE, for example.
Some tax firms are changing their processes by
outsourcing their work overseas (to a country where English is
spoken and not still well understood by us). Our primary
observation is that the deliverables seem mechanical and demonstrate
less-than-sound professional judgment- kind of like the
“off-the-shelf” tax programs, at the pricing of a professional
service. (Now, there’s the worst of both worlds…)
Force 5: Supplier
Bargaining Power
For our professional services, the “suppliers” are our
professional employees who provide you the services. In the current
“Great Recession”, the salary push is very strong (really). If we
supplied standard tax services, then the need for salary and benefit
increases would be non-existent. However, with our full service
model, and with our corporate management services, we need
multi-disciplinary, creative, and quick, decisive individuals.
These are in high demand by the larger firms- as well as their
desire to create their own businesses. What is the situation in
your businesses?
SO, NOW WHAT?
Michael Porter states in his book Competitive
Strategy: Techniques for Analyzing Industries and Competitors
that we have three potential strategies to augment our performance
and position within our business segments.
Differentiation
The firms must differentiate its services and products as
unique from others. (Did we succeed here
J?)
Successful differentiation should mean higher margins and protection
from the other forces.
Focus
This means segmentation, the focus upon a particular
group of clients (such as law firms, physician offices, and biotech
firms), a particular type of service (like people who own companies
or run businesses, have capital gains in the tax arena) or a
particular geographic region. By narrowing your focus, the entity
becomes efficient and/or effective than its competitors.
Cost leadership
This concept requires your business process (or volume)
to yield lower unit costs, when compared with your competitors.
When we were running our dialysis manufacturing business, our
business concept involved small, regional production facilities,
with centralized marketing, quality assurance, and logistics
controls. The biggest cost item in our pricing was transportation-
by shipping locally, we kept our product costs extremely
competitive, even with our higher quality requirements and better
components.
In today’s markets, your enterprise must be proactive.
You will have to work (even) harder to provide your services and
products- without losing your focus on existing clients and referral
sources.
If you don’t have a specialized product or service, you
should consider specialization, moving away from more competitive
(generic) areas. A better tactic is to focus even harder on client
service—you should meet or exceed client/customer expectations to
earn their future business and recommendations. And, in all cases
(above and beyond focusing on selling and marketing), we should
continually examine our internal processes, insuring we work more
efficiently and effectively.
RC Kislev 5771 |
