How to apply Porter’s Five Forces thinking to determinewhich of the Five Strategic Objectives (Divest, Harvest,Maintain, G...
DisclaimerThe use of any information provided is at the solediscretion of the user, no warranties and/orguarantees whether...
Contents1.   Porter’s Five Forces2.   Five Strategic Objectives3.   Strategic Characterisation Matrix (SCM)4.   SCM Tool –...
1.    Porter’s Five Forces     A framework for industry analysis and     business strategy development formed by     Micha...
What is Porter’s Five Forces   The five forces that are derived determine the    competitive intensity and therefore “att...
The threat of entry of new competitors   Profitable markets that yield high returns will attract new organisations. This ...
The threat of substitute products or services   The existence of products outside of the realm of the common product boun...
The bargaining power of customers (buyers)   The bargaining power of customers is also described as the market of outputs...
The bargaining power of suppliers   The bargaining power of suppliers is also described as the market of inputs. Supplier...
The intensity of competitive rivalry   For most industries, the intensity of competitive rivalry is the major determinant...
2.    Five Strategic Objectives     Divest, Harvest, Maintain, Grow or Enter
Divest   Divestment is a strategy that is considered when a    business is not making suitable profits or when    another...
Harvest                                        A harvesting strategy maximises the cash flow of                          ...
Maintain   In a maintain strategy it is not expected that the    market share of the business will erode or increase    o...
Grow                                                Grow strategic objectives are about the business                     ...
Enter   New products   New processes   New markets   New marketing strategies   An enter strategic objective should a...
3.   Strategic Characterisation Matrix     How to apply Porter’s Five Forces thinking to     determine which of the Five S...
Strategic Characterisation Matrix   Uses Porter’s Five Forces plus other factors to    determine the overall Market Attra...
SCM Tool - Inputs   In a given market or market segment by rating all the relevant factors that influence Market Attracti...
SCM Tool - Outputs   Provides a guide to which of the Five Strategic    Objectives could be implemented        Divest   ...
SCM Tool - Example   One of the business units that is operated by Company X is a supplier and installer of residential s...
Enter Rating for each item and timescale                                                                               wit...
Enter Rating for each item and timescale                                                                                wi...
SCM Tool automatically calculates ScoresSCM Tool - Example   One of the business units that is operated by Company X is a...
SCM Tool - Example   The SCM tool automatically transposes the scores and plots the results onto three SCM charts for eac...
4.   SCM Tool – How to Download
SCM Tool – How to Download   For a FREE copy of the SCM Tool in Microsoft Excel format, just go to www.businessmeccanica....
SCM Tool – Notes to Users   The SCM Tool has been developed as a guide only   Do not rely on the results, only use them ...
References and Contact DetailsReferences                                              Contact Details   http://en.wikiped...
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Strategic Characterisation Matrix - How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives (Divest, Harvest, Maintain, Grow, Enter) should be implemented by a business.

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How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives (Divest, Harvest, Maintain, Grow, Enter) should be implemented by a business.

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Strategic Characterisation Matrix - How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives (Divest, Harvest, Maintain, Grow, Enter) should be implemented by a business.

  1. 1. How to apply Porter’s Five Forces thinking to determinewhich of the Five Strategic Objectives (Divest, Harvest,Maintain, Grow, Enter) should be implemented by abusiness with a... STRATEGIC CHARACTERISATION MATRIX by Lawrence (Laurie) Phillips
  2. 2. DisclaimerThe use of any information provided is at the solediscretion of the user, no warranties and/orguarantees whether expressed or implied given.Users accepts all risks for their application of theinformation provided and no responsibility isaccepted by the writer for the information containedwithin and how it is applied.
  3. 3. Contents1. Porter’s Five Forces2. Five Strategic Objectives3. Strategic Characterisation Matrix (SCM)4. SCM Tool – How to Download5. References and Contact Details
  4. 4. 1. Porter’s Five Forces A framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.
  5. 5. What is Porter’s Five Forces The five forces that are derived determine the competitive intensity and therefore “attractiveness” of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all organisations are driven down to zero. Three of Porters five forces refer to competition from external sources. The remainder are internal threats.
  6. 6. The threat of entry of new competitors Profitable markets that yield high returns will attract new organisations. This results in many new entrants, which eventually will decrease profitability for all organisations in the industry. Unless the entry of new organisations can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition). The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new organisations can enter and non-performing organisations can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors
  7. 7. The threat of substitute products or services The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution Substandard product Quality depreciation
  8. 8. The bargaining power of customers (buyers) The bargaining power of customers is also described as the market of outputs: the ability of customers to put the organisation under pressure, which also affects the customers sensitivity to price changes. Buyer concentration to organisation’s concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to organisation’s switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products Recency, Frequency, Monetary (RFM) Analysis
  9. 9. The bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labour, and services (such as expertise) to the organisation can be a source of power over them, when there are few substitutes Suppliers may refuse to work with the organisation, or charge excessively high prices for unique resources Supplier switching costs relative to organisation’s switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to organisation’s concentration ratio Employee solidarity (e.g. labour unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER
  10. 10. The intensity of competitive rivalry For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their rivals.
  11. 11. 2. Five Strategic Objectives Divest, Harvest, Maintain, Grow or Enter
  12. 12. Divest Divestment is a strategy that is considered when a business is not making suitable profits or when another organisations values the business higher than the current organisation’s owner It involves exiting the markets or market segments that do not offer potential for profit growth, cutting costs and shifting resources to more economic activities A business may be able to significantly increase their value by divesting from products and customers that do not produce profits for the business Image: Maggie Smith / FreeDigitalPhotos.net
  13. 13. Harvest  A harvesting strategy maximises the cash flow of the business from its existing assets and is typically an appropriate strategy when the net divestment value of the business is below its optimal restructured value  It is typically applied when the competitive advantage of the business is in decline with reducing sales volumes or where market conditions are deteriorating  Harvesting strategies that increase operating margin include: raising margins, focus on premium niche markets and cutting variable and fixed costs  Harvesting strategies that reduce investment include: reduction in inventory, tight control on debtors, extending creditors and reducing fixed assetsImage: dan / FreeDigitalPhotos.net
  14. 14. Maintain In a maintain strategy it is not expected that the market share of the business will erode or increase over time Key objectives of a maintenance strategy is to avoid price competition as this will negatively impact on the value of the business, maintain the barriers to entry and keep a focus on innovation The conditions in which a maintain strategy should exist are:  Significant barriers to entry  Market is dominated by a small numbers of players  No decline in the market is expected  Business has a well established competitive position and is earning healthy economic profits with marginal investments able to earn a return that exceeds the current cost of capital Image: FreeDigitalPhotos.net
  15. 15. Grow  Grow strategic objectives are about the business investing to earn a return that exceeds its cost of capital  Growth opportunities therefore depend on the business having a differential advantage  The market should also have a high degree of attractivenessImage: criminalatt / FreeDigitalPhotos.net
  16. 16. Enter New products New processes New markets New marketing strategies An enter strategic objective should apply where there is a combination of both high market attractiveness and an advantaged differential position The business must have the ability to create a sustainable differential advantage Image: vichie81 / FreeDigitalPhotos.net
  17. 17. 3. Strategic Characterisation Matrix How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives should be implemented by the business
  18. 18. Strategic Characterisation Matrix Uses Porter’s Five Forces plus other factors to determine the overall Market Attractiveness:  Size of the market  Growth of the market Market Attractiveness • Porter’s Five Forces  Competitive structure of the market (one of Porter’s Five • Size of the Market • Growth of the Market Forces) • The Cyclicality of the Market  Supplier power (one of Porter’s Five Forces) • Market Risks  Threat of substitutes (one of Porter’s Five Forces)  Buyer power (one of Porter’s Five Forces)  Threat of new entry (one of Porter’s Five Forces)  The cyclicality of the market  Market risks Plus analyses the Differential Position of the Strategic Objectives business: Differential Position • Divest • Harvest  Low cost • Low Cost • Maintain • Differentiation • Grow  Differentiation • Enter
  19. 19. SCM Tool - Inputs In a given market or market segment by rating all the relevant factors that influence Market Attractiveness and the Differential Position of the business, guides us in determining the appropriate Strategic Objective/s to be implemented By analysing this over several time scales such as Current, Short and Long Term provides an additional guide to the likely changes that could occur and the evolution of the chosen Strategic Objective/s
  20. 20. SCM Tool - Outputs Provides a guide to which of the Five Strategic Objectives could be implemented  Divest  Harvest  Maintain  Grow  Enter Current Short Term Long Term
  21. 21. SCM Tool - Example One of the business units that is operated by Company X is a supplier and installer of residential solar panels in Australia. The Australia government provides financial subsidies to customers installing residential solar panels, however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is preparing to analysis the strategic objectives of this business unit for the next 5 years.
  22. 22. Enter Rating for each item and timescale with: 1 = Unattractive to the businessSCM Tool - Example 7 = Attractive to the business One of the business units that is operated by Company X is a supplier and installer of residential solar panels in Australia. The Australia government provides financial subsidies to customers installing residential solar panels, however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is preparing to analysis the strategic objectives of this business unit for the next 5 years.
  23. 23. Enter Rating for each item and timescale with: 1 = Unattractive to the businessSCM Tool - Example 7 = Attractive to the business One of the business units that is operated by Company X is a supplier and installer of residential solar panels in Australia. The Australia government provides financial subsidies to customers installing residential solar panels, however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is preparing to analysis the strategic objectives of this business unit for the next 5 years. Enter Rating for each item and timescale with: 1 = Disadvantaged (Business unable to implement ) 7 = Advantaged (Business able to implement)
  24. 24. SCM Tool automatically calculates ScoresSCM Tool - Example One of the business units that is operated by Company X is a supplier and installer of residential solar panels in Australia. The Australia government provides financial subsidies to customers installing residential solar panels, however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is preparing to analysis the strategic objectives of this business unit for the next 5 years.
  25. 25. SCM Tool - Example The SCM tool automatically transposes the scores and plots the results onto three SCM charts for each of the chosen time scales periods, indicating as a guide the best likely Strategic Objective/s
  26. 26. 4. SCM Tool – How to Download
  27. 27. SCM Tool – How to Download For a FREE copy of the SCM Tool in Microsoft Excel format, just go to www.businessmeccanica.blogspot.com and go to the downloads section or go to http://businessmeccanica.blogspot.com/p/downloads.html
  28. 28. SCM Tool – Notes to Users The SCM Tool has been developed as a guide only Do not rely on the results, only use them to help guide you in determining the best Strategic Objectives for the business Ensure that you have all the relevant facts and figures required prior to using the SCM tool, such as the size of the market, growth of the market, competitors etc. The SCM Tools is a protected (no password required) Excel Worksheet It can be unprotected so that you can analyse the scoring mechanisms which have been established Adjust the scoring mechanisms to suit your individual requirements as required The SCM Tool can be applied at the organisational, business unit or individual product/service level Always use a professional marketing expert (such as a CPM) to analyse your results The use of any information provided it is at the sole discretion of the user, no warranties and/or guarantees whether expressed or implied are given. Users accepts all risks for their application of the information provided and no responsibility is accepted by the writer for the information contained within and how it is applied
  29. 29. References and Contact DetailsReferences Contact Details http://en.wikipedia.org/wiki/Porter_five_forces_a  Lawrence (Laurie) Phillips MBA-Mktg CPM AMAMI nalysis MAIE http://hbr.org/2008/01/the-five-competitive-  +61 400 767 087 forces-that-shape-strategy/ar/1  lawrence.phillipsMBA@gmail.com Marketing Management: A Strategic, Value-based Approach. Whitwell/Lukas/Doyle, John Wiley 2003
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