This is another blog in my series on planning. Michael Porter’s books on Competitive Strategy are a business classics and really have some good models in helping to analyze your situation in your business environment. As Senge says, the ability to have good mental models is one of the key disciplines of a learning organization.
Porter’s model envisioned your company in the context of many factors influencing your situation. The first two are your customers and your suppliers. These two exercise significant influence how you set your strategy. We often forget how dependent we are on our suppliers. In the consulting business, much our supply for our services comes from the supply of people in our field and subcontractors. A change in the local economy can have a huge factor the availability of people in our field.
Another force on our business is our competitors and alternative suppliers. Competitors are obvious but what about alternative suppliers. For example in the software development business, an obvious alternatives is packaged software suppliers and outsourcers. In the telecom business, the Internet is becoming an obvious alternative for voice services. In the personal computer business, hand held devices are becoming an alternative. Another factor are new suppliers entering our market space. Somebody who supplies another product to our customer may decide to enter a product space. Porter suggest we consider the barriers to entry of the suppliers and alternate suppliers. One of the key barriers to entry is the cost of entry. Also another factor of a similar nature is the cost of exit. These factors are important in considering whether you want to get into a new product area.
In the consulting business, specialized expertise can create a barrier to entry to a potential competitor.
Another factor in the setting of competitive strategy is the environmental factors. In his initial book, I think Porter did not include these in his model but I think are very important to consider. These are factors which exist in your business space that you have little or no control over. These can included economic conditions, government rules and regulations, tax laws, environmental issues, and the business climate. In the telecom business, the regulatory environment is changing every day and reducing the barriers to entry. Tax law related to capital and operational cost are very complex and an important factor in investment decisions. The regulatory regimes of different jurisdiction are a key factor in the competitive environment.
An example of an alternative supplier in the last twenty years has been the oursourcer and particularly the offshore outsourcer. The cost of entry of these suppliers was very high initially. Now that these companies have establish the infrastructure they are a viable alternative to more conventional services. The outsourcing deal often includes services which are offered by more traditional suppliers of services.
These ideas help organizations consider their business environment and their competitive strategy.
I have always found Michael Porter’s model a great help in understanding a business and assisting in helping clients and our company set strategy. A good mental model can help one get our minds around a situation which is very complex. Things are never as simple as the models but they help promote discussion and analysis.