Considering External Factors
Strategic thinkers are aware of various external forces that shape their industry. Translating this into effective management, strategic thinkers balance these factors and make decisions that take them into account.
Porter’s Five Forces
One tool used to assess external factors is Porter’s Five Forces model. Applying this model can help your organization or department respond positively to the forces of competition. One such force is the bargaining power of customers.
Customers typically use their buying power to demand expensive product specifications at low prices. They may also play competitors against each other to get what they want. Another force is the bargaining power of suppliers, especially if your industry is dominated by only a few suppliers, or if the product or material supplied is rare.
Then there’s the threat of new entrants. These are organizations that enter a market for the first time. They can increase competition, forcing prices and profits down.
Next is the threat of substitutes — this is highest when customers and end users can easily switch to buying alternative products instead of buying yours. Finally, there are competitors, which force organizations to work with lower profit margins or risk losing sales completely.
Mitigate the risks associated
To mitigate the risks associated with these forces, first determine the key players in each category. For example, who are your main suppliers, and which ones can significantly affect your costs?
Next, analyze each force in more depth. To further your knowledge of customers, you could ask “How price-sensitive are customers?” and “How important is the product to them?”
As a final step, devise appropriate strategies that take the external force into account. For example, an analysis of competitive forces can help a departmental manager set prices and devise competitive marketing campaigns.
Let’s examine how this all works together. The manager of a vegan restaurant wants to boost profitability so she can open a new branch. So she first considers its customers, and notes that they’re generally younger, health-conscious, and importantly for her, plentiful — a low threat factor.
Next she considers the restaurant’s fresh produce supplier. Despite being a large supplier, its prices are always above market level — few other suppliers are willing to fulfill her restaurant’s small orders. But after some negotiating, she manages to contract two farmers to reduce the restaurant’s reliance on a sole supplier.
The manager considers new entrants and rates this threat as high, given the low barriers for entering the restaurant business, including low capital costs. However, she feels her focus on establishing close relationships with both her customers and suppliers gives her the ability to react quickly if a new entrant offers lower prices or more menu options.
Then the manager analyzes substitutes and considers vegan products offered by supermarkets. To reduce this threat, she plans an advertising campaign that highlights how all her menu items are cooked fresh on the premises. Finally, examining her rivals, she identifies two other vegan restaurants in the area, and devises a loyalty card program to help retain customers.
Don’t overlook the external context. Porter’s model can help you understand external forces and turn them into opportunities for your organization.