Strategic analysis begins with a stated objective, such as “should we enter an industry with a new service offering?” Two popular planning tools include (1) Porter’s five forces analysis of the target industry structure and (2) a SWOT analysis to assess the organization’s strengths, weaknesses, opportunities, and threats in a market.
Porter’s Five Forces Analysis5
The five forces model is used at the industry level (e.g., airlines) to determine the competitive intensity and, therefore, attractiveness of a market. The five forces affect the ability of a firm to attract customers and make a profit. Figure 3.1 shows a model of the five forces with example issues to consider in each case. Consider Netflix as an example firm entering the video rental industry. Our discussion begins with the center block (Competitive Rivalry within Industry) upon which the external forces act.
Competitive Rivalry within Industry. Often this factor is the major determinant of industry competitiveness. Rivals might be aggressive price competitors or they might use nonprice strategies such as innovation, branding, or superior quality. Industry capacity relative to total customer demand is an important indicator of whether a new entrant will find customers. An exception was Southwest Airlines, which entered the Texas market offering low-cost fares and frequent departures that tapped a latent demand of business commuters who usually traveled by car. When Netflix entered the market offering DVDs exclusively by mail, its only rivals were rental stores such as Blockbuster.
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- Potential New Entrants. Profitable markets that yield high returns invite new competitors. For example, at one time Walmart challenged Netflix, but subsequently left the field because it was unable to overcome Netflix’s established brand.
- Threat of Substitutes. For services, substitutes often take the form of a product. For example, TurboTax software is a substitute for the services of a tax accountant. Netflix is faced with competition from cable companies that allow customers to download videos direct to their television using Tivoli.
- Bargaining Power of Suppliers. Suppliers of inputs can be a source of power over the firm because of product uniqueness or monopoly source. The most important suppliers to Netflix are the DVD distributors, but Netflix has considerable leverage because of volume purchases.
- Bargaining Power of Customers. Netflix customers might be able to exert price pressure and, thus, restrict high margins. In the travel industry the use of Priceline.com and Hotwire.com have shifted the information asymmetry to the advantage of the customer.
- However, Netflix uses information about customer purchases to recommend other movies with similar themes, thereby stimulating demand.
A SWOT analysis identifies an organization’s internal strength and weakness as well as threats and opportunities in the external environment. The aim of the analysis is to reveal competitive advantages, analyze prospects, prepare for problems, and allow for development of contingency plans. A SWOT analysis begins with a stated objective and concludes with a summary of strengths to be maintained, built upon, or leveraged; weaknesses to be remedied; opportunities to be prioritized, captured, or built upon; and threats to be countered, minimized, or managed. A SWOT analysis is subjective, and two people often arrive at different final versions, thus emphasizing the value of collaboration. Table 3.3 presents a sample of typical questions that might be asked in each of the four quadrants of a SWOT analysis.
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