In this video, review the use of Porter's Five Forces in the strategic planning process.
- When it comes to competition in business, I say bring it on. Competition forces companies to think creatively and introduce products and services that customers may not even know they need. Can you imagine living without your iPhone or Android? Yet it was only a decade ago, in 2007, that these devices were first introduced. As an HR pro, you should support senior leadership's desire to outpace the competition. You can do this by establishing policies.
In particular, you want to promote an environment where employees can freely share and implement entrepreneurial ideas that financially benefit the organization. To do so, it's important for HR pros to understand the business environment from the standpoint of competition. A tool used to analyze competition in business is Porter's Five Forces Framework. The framework was developed by Michael Porter of Harvard University. He suggested that there are five forces that determine competitive intensity.
They are threat of entrants, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors. The threat of new entrants is an analysis of the impact that new companies who offer the same product or a service that you do have on the organization's revenue generation. As consumers get used to another option, new companies have the potential of reducing profits for your company.
It's also important to understand why new competitors may be discouraged. Porter identified six of those possible barriers to entry. They are economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, and cost disadvantages. Review the exercise file barriers to entry for a detailed explanation of the six potential barriers. There are also cost disadvantages that new entrants experience.
Established companies have already figured out how to reduct costs through government subsidies, inexpensive yet quality raw materials and more. The next of Porter's five forces, the threat of substitution, exists when another product or service that's similar to your own provides a reasonable, lesser price option for consumers. The third force, bargaining power of buyers, refers to an analysis of the impact consumers have on pricing and product, or service quality.
After all, consumers have the most power when they purchase in large volumes. Next, the bargaining power of suppliers happens when a suppliers is one of the few in the industry to produce a critical component needed to make a product. This can drive the organization's operating costs up. If there's also significant pressure by buyers to keep costs at a certain price point, these increased costs may not be able to be passed on to the consumer. The end result is a reduction in company profits.
Finally, rivalry among industry competitors was identified by Porter as a force affecting competition. It's normal for companies in the same industry to compete, however the intensity of competition changes depending on whether there is slow growth in the industry, lack of product differentiation, and certain price-cutting strategies present. There's always a people component to any analysis. Ideally, HR pros are part of the strategic planning team and process, contributing their knowledge of the workforce and how the combined capabilities of employees may help an organization transcend their competition.
- Modeling ethical standards
- Managing legal risks
- Finding and interviewing candidates
- Designing training and measuring its effectiveness
- Designing total rewards
- Promoting diversity and inclusion
- Employee engagement strategies
- Managing complaints and grievances
- Implementing workplace programs