Porter’s Five Force Analysis

Goals indicate what a business unit wants to achieve; strategy is a game plan for getting there. Each business needs to design a strategy for achieving its goals, consisting of various strategies.

PORTER’S STRATEGIES

Michael Porter has proposed three general strategies that provide a good starting point for strategic thinking:

Overall Cost Leadership – Some business works hard to achieve the lowest product and distribution costs so that it can price its products lower than its competitors’ and win a large share of the market. For pursuing this strategy the firm must be good at engineering, purchasing, manufacturing and physical distribution. Such strategies give less stress on marketing and thus firm need less skill in marketing. But the general problem with this strategy is that other firms can easily compete with still lower cost and hurt the firm that rested its whole future on cost.

Differentiation - The business concentrates on achieving superior performance in an important customer benefit area valued by a large part of the market. The firm cultivates those strengths that will contribute to the intent differentiation. Thus, the firm seeking quality leadership, for example, must make product with the best components, put them together expertly , inspect them carefully and effectively communicate their quality.

Focus – Some business focuses on one or more narrow market segments. The firm gets to know this segment intimately and pursues either cost leadership on differentiation within the target segment.

According to Porter firm pursuing the same strategy directed to the same target market constitutes a strategic group. The firm theta carries out the strategy best, will make the most profit. Firms that do not pursue a clear strategy and try to be good on all strategic dimensions do the worst.

Many companies believe they can win by performing the same activities more effectively than their competitors; but competitors can quickly copy the operationally effective company using benchmarking and other tools, thus dimensioning the advantage of operational effectiveness.

Porter defines strategy as “the creation of a unique and valuable position involving a different set of activities.” A company can claim that it has a strategy when it “performs different activities from rivals or performs similar activities in different ways”.

PEST Analysis

PEST analysis is an analysis of the external macro-environment factors affecting the firms. The external macro-environment in which the firm operates can be expressed in terms of the following factors:

Political

Economic

Social-Cultural

Technological

Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. However, changes in the external environment can also create new opportunities and the letters sometimes are rearranged to construct the more optimistic term of STEP analysis.

It is a part of the external analysis when conducting a strategic analysis or doing market research and gives a certain overview of the different macro environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.

The environmental analysis should be continuous and feed all aspects of planning. The organization's marketing environment is made up of:

1. The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc.

2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc.

3. The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces.

Let’s look into the different macro-economic (PEST) factors in details

Political Factors

These relate to the degree and extent of the Government’s intervention in the economy. Some examples include:

1. Tax policy

2. Employment laws

3. Environmental regulations

4. Trade restrictions and tariffs

5. Political stability

You must consider issues such as:

1. How stable is the political environment?

2. Will government policy influence laws that regulate or tax your business?

3. What is the government's position on marketing ethics?

4. What is the government's policy on the economy?

5. Is the government involved in any trading agreements?

Economic Factors

These have major impacts on how businesses operate and make decisions. The following are examples of factors in the macro economy:

1. Economic growth

2. Interest rates

3. Exchange rates

4. Inflation rate

Economic factors also affect the purchasing power of the customers and the firm's cost of capital. For example, interest rates affect a firm's cost of capital and thus the earnings of the business.

Social-Cultural Factors

The social and cultural scenario of a country affects the business to a large extent. It is very important that such factors are considered. Some of the factors are:

1. What is the dominant religion?

2. What is the attitude toward foreign products and services?

3. How much leisure times consumers have?

4. What are the varied roles of men and women within society?

5. What is the mortality rate of the population? Are the older generations wealthy?

6. Do the population have a strong/weak opinion on green issues?

Companies may need to change various management strategies to adapt to these social trends (such as recruiting older workers). It is more important for companies engaged in international business.

Technological Factors

These can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Technology is vital for competitive advantage, and is a major driver of globalization. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

These include ecological and environmental aspects, such as

1. R&D activity,

2. Rate of technological change

The affect of these changes on the parties related to the business:

1. Does technology enhances the quality of the products and services of the goods and make them available at a cheaper rate?

2. Do the technologies offer consumers and businesses more innovative products and services such as moblie banking, new generation cell phones, etc?

3. How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc?

4. Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

PEST Variations

The model has recently been further extended to STEEPLE and STEEPLED, adding education and demographics factors.

More unnecessarily (and also confusingly) PEST is extended to seven or even more factors, by adding Ecological (or Environmental), Legal, and Industry Analysis, which produces the PESTELI model.

The original PEST has a wider acceptance, because all the other factors gets covered under these four major heads.

For example Ecological or Environmental factors can be positioned under any or all of the four main PEST headings, depending on their effect. Legal factors can be covered under the Political heading since they are usually politically motivated. Demographics usually are an aspect of the larger Social issue. Industry Analysis is effectively covered under the Economic heading. Ethical considerations would typically be included in the Social and/or Political areas, depending on the perspective and the effect. Thus we can often see these 'additional' factors as 'sub-items' or perspectives within the four main sections.

The simplicity of a four-part model is also somehow more strategically appealing and easier to convey.

Completing a PEST analysis is very simple, and is a good subject for workshop sessions and brainstorming meetings. It can be used for business and strategic planning, marketing planning, business and product development and research reports. PEST analysis is similar to SWOT analysis - it's simple, quick, and uses four key perspectives.

SWOT Analysis

SWOT analysis is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.
As per the Wikipedia definition of the term, SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective.

Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

Internal Analysis
The internal analysis is a comprehensive evaluation of the internal environment's potential strengths and weaknesses.
Strengths are the internal capabilities and resources of a firm that gives it a competitive edge. Whereas, weaknesses are the attributes of the company that cause hindrances in achieving the objectives. In some cases, a weakness may be the flip side of strength. Take the case in which a firm has an exclusive access to high grade natural resources. While this capacity may be considered a strength providing the company a competitive edge, it also may be a considered a weakness if the procurement of such raw materials incurs heavy cost and labour.

Factors should be evaluated across the organization in areas such as:
• Cost advantages from proprietary know-how
• Favorable access to distribution networks
• Company culture
• Company image
• Organizational structure
• Key staff
• Access to natural resources
• Position on the experience curve
• Operational efficiency
• Operational capacity
• Brand awareness
• Market share
• Financial resources
• Patents and trade secrets

External Analysis
An opportunity is the chance to introduce a new product or service that can generate superior returns. Opportunities can arise when changes occur in the external environment. Many of these changes can be perceived as threats to the market position of existing products and may necessitate a change in product specifications or the development of new products in order for the firm to remain competitive. Changes in the external environment may be related to:
• Customers
• Competitors
• Market trends
• Suppliers
• Partners
• Social changes
• New technology
• Economic environment
• Political and regulatory environment

The last four items in the above list are macro-environmental variables, and are addressed in a PEST analysis.

SWOT Analysis
A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed.

The SWOT Analysis Matrix
The SWOT analysis matrix is normally presented as a grid, comprising of four sections, one for each of the SWOT headings: Strengths, Weaknesses, Opportunities, and Threats (as is already shown in the above given figure). It is important to clearly identify the subject of a SWOT analysis, because a SWOT analysis is a perspective of one thing, be it a company, a product, a proposition, and idea, a method, or option, etc.

Here are some examples of what a SWOT analysis can be used to assess:
• a company (its position in the market, commercial viability, etc)
• a method of sales distribution
• a product or brand
• a business idea
• a strategic option, such as entering a new market or launching a new product
• a opportunity to make an acquisition
• a potential partnership
• changing a supplier
• outsourcing a service, activity or resource
• an investment opportunity

Be sure to describe the subject for the SWOT analysis clearly so that people contributing to the analysis, and those seeing the finished SWOT analysis, properly understand the purpose of the
SWOT assessment and implications.

Subject of SWOT analysis: (define the subject of the analysis here)

Strengths Advantages of proposition? Capabilities? Competitive advantages? Unique Selling Propositions? Resources, Assets, People? Experience, knowledge, data? Financial reserves, likely returns? Marketing - reach, distribution, awareness? Innovative aspects? Location and geographical? Price, value, quality? Accreditations, qualifications, certifications? Processes, systems, IT, communications? Cultural, attitudinal, behavioural? Management cover, succession?

Weaknesses Disadvantages of proposition? Gaps in capabilities? Lack of competitive strength? Reputation, presence and reach? Financials? Own known vulnerabilities? Timescales, deadlines and pressures? Cashflow, start-up cash-drain? Continuity, supply chain robustness? Effects on core activities, distraction? Reliability of data, plan predictability? Morale, commitment, leadership? Accreditations, etc? Processes and systems, etc? Management cover, succession?

Opportunities Market developments? Competitors' vulnerabilities? Industry or lifestyle trends? Technology development and innovation? Global influences? New markets, vertical, horizontal? Niche target markets? Geographical, export, import? New USP's? Tactics - surprise, major contracts, etc? Business and product development? Information and research? Partnerships, agencies, distribution? Volumes, production, economies? Seasonal, weather, fashion influences?

Threats Political effects? Legislative effects? Environmental effects? IT developments? Competitor intentions - various? Market demand? New technologies, services, ideas? Vital contracts and partners? Sustaining internal capabilities? Obstacles faced? Insurmountable weaknesses? Loss of key staff? Sustainable financial backing? Economy - home, abroad? Seasonality, weather effects?

SWOT Analysis is a simple but powerful framework for analyzing your company's Strengths and Weaknesses, and the Opportunities and Threats you face. This helps you to focus on your strengths, minimize threats, and take the greatest possible advantage of opportunities available to you.