Porter's Five Forces

Porter's Five Forces is a framework for the industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that 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 firms are driven down to zero.

Three of Porter's five forces refer to competition from external sources. The remainder are internal threats.

Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.

This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.

Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.

Ten Things You Need to Know About Knowledge Management

Ten Things You Need to Know About Knowledge Management

         With the growing importance of knowledge management, every professional, manager and policy maker needs a quick boost of knowledge about knowledge. While we cannot make you an instant expert, we can at least point you in the right direction and help you get started with the essentials. At the bottom of this page are details of related post to help you in your quest.

1. About Your Organizational Context

Unless you live in an isolated enclave, you will be aware that your external environment is subject to change and interdependence as never before. We are evolving into a networked and global knowledge economy where organizations are knowledge intensive, where technologies such as the Internet are changing the fundamentals of business, where value is in intangibles, and where the old rules no longer apply. See also Part A: An Interdependent World in Knowledge Networking.

2. About Communications

In simple terms - what people hear is not what they are told! Whether your focus is sharing knowledge, building trust in virtual teams, or developingknowledge leadership, communications is at the core. I once asked a Chief Knowledge Officer what were his three key ingredients for success. His response: "Communications, communications, communications". The keys to effective communications are to be a good listener, to choose the appropriate medium (e.g. face-to-face vs. email vs. telephone), to position your message in its wider context, to make your communication relevant (i.e. adapted to the recipient's knowledge and needs), and to express your thoughts clearly and concisely. There are checklists on communications in the toolkits in Knowledge Networking: Building the Collaborative Enterprise.

3. About Information and Knowledge

Knowledge is very complex. It comes in many forms and types (e.g. see Know-Who and Other Knowledge. The most common distinction is that between explicit and tacit knowledge. The former is codifiable and expressed in documents, databases and other tangible forms. The latter is that in people's heads and not easily codified. You can't therefore simply relabel information management as knowledge management or information systems as knowledge solutions - but suppliers do! When asked, most people say that over 70 per cent of their organization's vital knowledge is tacit. Yet, what do their knowledge programmes focus on - explicit knowledge or information!! A good knowledge management programme will give as much attention to thepractices for developing and sharing tacit knowledge (e.g. learning, knowledge communities, knowledge networking) as they do explicit knowledge or information.

4. About Inter-Organizational Networks

A significant source of business improvement and innovation in a knowledge-based enterprise is the knowledge that is created and developed across organizational boundaries, such as customer knowledge. For example, it is reckoned that over three quarters of organizational innovations are a result of collaboration or absorption of external knowledge. Knowledge Communities and Knowledge Networks should be nurtured, since they span organizational boundaries and help the flow of knowledge across hierarchical 'stove-pipes'. Focus on links and navigation - the organization's networkers are the unrecognized heros in many organizations. They should be recognized and rewarded. Complement human networks with a collaborative technology infrastructure, such as groupware or an intranet.

5. About Intellectual Capital

I believe Einstein is cited as saying "Not everything you count counts, and not everything that counts is counted". Too true!! Writer Tom Stewart says: "You can't see it; you can't touch it; yet it makes you rich. For this very reason you will find accountants and financial analysts fighting shy of trying to measure it. Yet intellectual capital measurement is something worth getting to grips with. The key things to know about intellectual capital are to categorize it e.g. into human, structural and customer capital, and to develop meaningful measures by which you can measure and manage it. SeeInsight: Measuring Intellectual Capital or for more depth read 'Measuring the Value of Knowledge'.

6. About Intangibles

Most companies are worth several times more in market terms (i.e. stock price x number of shares) that their balance sheets indicates. After allowing for market imperfections, or sentiment (such as with Internet stocks) the difference is essentially intellectual capital. In mid-1997 the average market to book value ratio for the Dow Jones industrials was over 5, and for companies hat are particularly knowledge-intensive e.g. biochemical companies, it is often 20x or more. Therefore, measuring and managing intellectual capital, including intellectual property such as patents, brands, copyrights and designs, is an important management task.

7. About Innovation and Creativity

These often get confused - see Creativity is Not Innovation. Being smart does not inevitably result in being the best. Being more creative does not automatically make you more innovation. Effective innovation requires the translation of creative ideas into improved processes, and/or commercially viable new products and services. Thus, creation is the starting point of the innovation process, the generation of new knowledge, that subsequently needs converting and encapsulating into usable or marketable forms. This requires the effective management of knowledge throughout the innovation process. See also the pages on knowledge innovation at the ENTOVATION web site.

8. About Human Resource Management

Most organizations do not know how many people they employ! Knowledge about your most critical resource is often inadequate. How good are your competency management systems? Do you have ready access to an expertise directory? The HRM function should provide is a vital 'soft' infrastructure for knowledge management, that includes reward and recognition systems, competence mapping and assistance with facilitating knowledge communities.

9. About Information and Communications Technologies

The success rate of introducing new information systems is not high. Introducing knowledge solutions, which are end-user oriented, less procedural in nature, add another layer of complexity. Despite the growing variety of KM tools and infrastructures (such as intranets) that are available, the critical success factors are 1) strong linkage to business needs; 2) People (human interface, individual styles and user characteristics) and 3) Processes e.g. seamless integration with ways of working and workflows. See 'The Impact of IT on Organizations' and Hybrid Managers.

10. About Knowledge Initiatives

There is no 'cook-book' approach. Every organization is different. Therefore an initiative needs be set against its organizational context, the business priorities, and the key people and influences. You will need to identify key hooks, such as related initiatives (e.g. quality, customer service, new product development), change of key personnel, new business opportunity or situation, significant shift in business performance, organization restructuring (e.g. merger, downsizing) - all opportunities for a new initiative. Those that succeed will selectively choose an appropriate lever. See also the article'Knowledge Management: Making It Work

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