Strategic Feasibilities and StratLab, to provide a matrix approach to assist in the consolidation and illustration of Michael Porter’s ideas and frameworks, have constructed the Porter matrix. It encompasses the works of Michael Porter who is one of the best-known theorists on strategic planning.
The Porter Diagnostic matrix was developed to analyse and position products and services that fall within a business unit or organisation as well as their competitors.
This is done in relation to one another within the domain of the two major strategy formulations of Porter – assessing industry attractiveness and managing competitive advantage.
The state of competition in an industry depends on five basic competitive forces. The strength of these five forces determines the profitability of the industry and this in turn determines the attractiveness of the industry. Industry attractiveness forms the y-axis of the matrix.
The five competitive forces within an industry according to Porter are…
1. Threat of new entrants
2. Bargaining power of buyers / customers
3. Bargaining power of suppliers
4. Threat of substitute products or services
5. Rivalry among existing firms / intensity of competition
A high profit potential is produced when there is stable or low competitive intensity, the threat of substitute products entering the market is low, it is difficult to enter the market and the power of customers and suppliers is weak.
The x-axis represents competitive advantage and to Porter this comprises the strengths and weaknesses of the firm and the competitors because they determine the ability to initiate or react to strategic moves and to deal with the environmental and industry events that occur.
Several strategic dimensions were identified by Porter, which he determined were responsible for the differences between firms and competitors.
Porter describes three generic strategies that can be implemented to achieve above average performance in an industry – cost leadership, differentiation and focus.
A firm has a cost advantage or leadership if its cumulative cost of performing all value activities is lower than competitor costs. A firm’s relative cost position is a function of the composition of its value chain versus competitors and its relative position regarding the cost drivers of each activity.
An analysis of ones own and the competitors’ value chain is necessary. This is a view of the competitors’ internal functioning. This concept captures the idea that a firm is a series of functions (e.g. R&D, manufacturing, marketing, distribution etc.) and that each of these can be analysed to determine ones own and the competitors’ strengths and weaknesses.
In a differentiation strategy a firm seeks to be unique along some dimensions that are widely valued by buyers. It selects one or more attributes that buyers perceive as important and uniquely positions itself to meet those needs and it is rewarded for its uniqueness with a premium price.
A focused strategy chooses a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others.
The Porter Diagnostic Matrix provides an organised method for studying the significant characteristics of an industry for the purpose of building a strategy. The competitive advantage analysis looks at those factors that can be changed by the firm and gives a good insight into the strengths and weaknesses of the firm and its competitors
Many authors have criticised Porter’s work especially that his choice of Five Forces was arbitrary and there was not much research to back his theory.
Porter’s contribution to strategy is ongoing and he is a regular contributor to respected international publications and modern strategic thinking.