Strategic Leadership

The Economist’s “World in 2013” suggested that as 2013 begins, the “denial phase will end.” Lucy Kellaway in the business section goes on to explain: “Throughout the financial crisis, companies have been pretending that their business model isn’t broken” and that now “a few may put in a call to McKinsey or BCG for slicker strategic thinking…” Whilst strategic management might be considered the internally focused execution of strategy; strategic leadership might be considered the externally focused analysis of strategy. So in 2013, which tools to use in order to devise a strategy to lead your business ahead of the competition? There are plenty to choose from but there is one venerable model that stands out as one of the best for strategic leadership: Porter’s five forces.

Here’s a summary of that “five forces” framework followed by further implications (“et alors”).

Strategic Leadership

In “Competitive Strategy” (Free Press, 1980) Porter defined the model for assessing a firm’s business profitability and its variance so management can find a strategic position to maintain and enhance that profitability. The stronger the forces are, the lower the likely profitability of the business. The five forces are:

Competitors

How strong are they in eroding your profits? They can compete by reducing the price, or increasing the quality of their offer.

Threat of new entrants

What is the potential for new entrants? There may be barriers-to-entry for others starting similar operations (e.g. high capital costs).

Threat of substitutes

With what can your customers replace your offer? There may be alternative products/services or your offer could be “commoditised”.

Bargaining power of customers

Can customers switch between suppliers?  Customers’ power may be increased due to concentrated numbers or a high quantity of alternative suppliers.

Bargaining power of suppliers

Can suppliers command high prices?  Suppliers’ power may be increased due to concentrated numbers or a high quantity of alternative buyers.

Et alors?

Whilst this model has its critics, it still endures as valid for 2013 as 1980 and is still one of the best starting points for the strategic position analysis of a business at any one time. The key is the external focus but any analysis has to be considered a “snap shot” of a dynamic environment. The analysis needs to be refreshed and reviewed on a regular basis and organisations that focus too much on strategic management without recourse to strategic leadership will be putting themselves at a disadvantage compared to their competitors. This risk is exacerbated in companies that are convinced that they are doing things not only the right way but the best way and fail to look outside...

Many commentators have suggested adding a “sixth” force which is usually referred to as regulation and/or government. This constructive criticism may be of particular importance in Europe. Whereas the five forces can be found anywhere, the government influence can appear to be more pronounced in Europe than in other regions on the world. It might be considered that Porter’s model is a “pure-play” capitalist model; whereas the “old world” is heavily impacted by the workings of the “state” or in a larger sense (and as referred to in France) the “system”. The power of this sixth force might go some way to explain the mediocre profitability of some European firms compared to their (say) American counterparts…