StellarPorter's Five Forces measures competitive intensity and attractiveness: competitive rivalry, threat of new entrants, threat of substitutes, buyer power, and supplier power. Each force affects pricing power and long-term profitability. Apply each force with concrete questions:
- Competitive rivalry: How many direct competitors? Are products differentiated? High
rivalry pushes down margins.
- Threat of new entrants: What are barriers to entry (capital, regulation, brand loyalty)?
Low barriers increase threat.
- Threat of substitutes: Can customers meet the same need elsewhere? High
substitution reduces pricing power.
- Buyer power: Can buyers demand lower prices? If few buyers control large share of
purchases, buyer power is high.
- Supplier power: Are suppliers concentrated? Can they raise input costs easily?
Applied example - local coffee shop industry (concise analysis): Competitive rivalry is high because many local and chain cafes exist; differentiation (menu, location, vibe) matters. Threat of new entrants is moderate-startup costs aren't huge, but securing a good location and building a brand is a barrier. Threat of substitutes is high (home coffee, convenience stores, office coffee). Buyer power is moderate; individual consumers are many small buyers, but corporate clients (large offices) could have higher power. Supplier power is moderate-specialty beans suppliers exist but alternatives are plentiful.
SWOT analysis looks inward and outward: Strengths and Weaknesses (internal), Opportunities and Threats (external). A structured SWOT helps turn analysis into strategy: exploit strengths, shore up weaknesses, pursue opportunities, and mitigate threats.
Applied SWOT example - small coffee shop: Strengths: strong local brand, high-quality beans, loyal customer base. Weaknesses: limited seating, no delivery system, thin margins. Opportunities: growing local demand for specialty drinks, partnership with food delivery platforms. Threats: major chains expanding nearby, volatile bean prices, economic downturn lowering discretionary spending.
From SWOT, management might pursue a focused strategy: enhance delivery (address weakness and opportunity), negotiate longer supplier contracts to limit price volatility (mitigate threat), and create loyalty programs to protect brand (exploit strength).
Common strategic mistakes and how to avoid them Many firms confuse activity with strategy - doing more doesn't equal doing the right things. Other frequent errors: focusing on vanity metrics, not aligning KPIs with strategy, skipping deliberative decision processes, and failing to update strategy when environments change. Avoid these by aligning every KPI and decision with an explicit strategic objective and revisiting assumptions regularly.
Progress Checks (use in-class or low-stakes quizzes)
- Multiple choice: Which KPI is a leading indicator?
A. Net profit margin
B. Customer acquisition cost
C. Inventory turnover
D. Cash on hand
Correct: C - Inventory turnover can indicate future cash flow and service levels;
others are often lagging. (Explanation: Net profit and cash are lagging; CAC can be leading or lagging depending on measurement window, but inventory turnover signals operational momentum.)
- Short answer: Explain how a high LTV affects marketing strategy.
Model answer: A high LTV:CAC ratio means each customer brings much more revenue than it costs to acquire them, which can justify higher marketing spend or investment to scale customer acquisition.
- Problem (PACED practice): A bakery can spend $40,000 to add catering services
(expected annual net gain $8,000) or $15,000 to launch online ordering (expected annual net gain $5,000). Compute ROI and payback for each and say which is better if the bakery prioritizes short payback. Work: Catering ROI = 8,000 ÷ 40,000 = 20% ; payback = 40,000 ÷ 8,000 = 5 years. Online ordering ROI = 5,000 ÷ 15,000 ≈ 33.3% ; payback = 15,000 ÷ 5,000 = 3 years. Short payback preference → online ordering.