Strategy Analysis of the Ideal

Strategy Analysis of the Ideal Industry Environment

In defining the optimal industry environment for an organization to attain exceptional profitability and have the greatest likelihood of long-term growth, a scalable and agile framework is needed to organize all industry, environmental, market, legal, and political factors. For purposes of this paper, Porter's Five Forces Model is used as a framework for comparing the many forces that impact an organization, and in turn, those forces that organizations exert on its external environment. In the final analysis of an optimal industry environment must take into account the interchange of both organizations that comprise it and the broader industry factors that contribute to optimal performance over time. Relying on Porters' Five Forces Model not only organizes the industry factors but also illustrates how they interact with one another, which in the context of this paper, is used to show an optimal industry for long-term profitability, competitive advantage, and the sustaining strength of barriers to entry.

Porters' Five Forces Model

The five forces that comprise Dr. Porter's model are industry competitors, pressure for substitute products, bargaining power of suppliers, bargaining power of buyers, and the influence of potential entrants. Figure 1 shows the Porter Five Forces Model graphically (Porter 1990). Each of these areas is now discussed in bullet form in the following series of sections.

Competitive Rivalry

The ideal industry would have only a few competitors, each with significantly large customer bases that generated a significant proportion of revenue through licensing and maintenance programs. These recurring revenue streams would be 80% or more of revenue.

The business models of Oracle, SAP, and Microsoft resemble this attribute of the optimal industry in that each of these companies have enterprise software businesses that have had the longevity, pricing, and maintenance models that yield these types of revenue streams. The growth of open source, highly praised for its egalitarian approach to distribution, is actually prized more for its potential to erode the maintenance streams of these larger software companies by large customers who are questioning the value of yearly maintenance fees for their software. In the ideal or optimum industry the barriers to erosion of these maintenance and revenue streams would be impenetrable.

In an optimal industry the reliance on quality alone as the differentiator, created specifically in the context of manufacturing processes and a perfectly synchronized supply chain make the attainment of perfect orders commonplace. The perfect synchronization on orders, visibility into customer demand and the ability to source exactly what is needed from which supplier for each individual customers' exact needs, is a common best practice in the industry. There are no errors on highly customized engineer-to-order products as result and production efficiency on these highly customized product lines are comparable or even more efficient than traditional build-to-stock product lines.

As a result of the high level of accuracy and performance relating to highly customized, engineer-to-order products that are precisely aligned with the unique needs of each customer, switching costs are astronomical and customer loyalty is at 100% across all product lines. Each customer now feels and gets treated, from the initial product order to the finished and often highly customized product, like the only customer for the company. Loyalty skyrockets and switching costs do too.

Buyer Power

As there is a very high level of loyalty within the customer base, the number of customers gained through churn is minimal, yet newly formed companies enter the industry as customers. These new customers of the optimal industry are looking for their own long-term competitive advantage through better alignment and direction of their own resources.

Differences between competitors are significant and aligned more on quality and customization of products than on price or aggressive discounting and the use of promotions. As a result, price elasticity is a permanent factor of the market and also signals the use of more effective means of differentiation, including the delivery of exceptional levels of service and greater levels of product customization expertise.

Supplier Power

In the optimal industry there are also an abundance of suppliers, each with highly differentiated and highly efficient supply chains of their own, all ensuring perfectly filled orders. The supply chain then is the greatest competitive differentiator of the industry from the manufacturing and fulfillment perspective.

The highly unique approach to service that is provided by suppliers also focuses on the use of advanced planning and scheduling (APS), Collaborative Planning and Forecasting (CPFR), and Vendor Managed Inventory (VMI) to attain the highest levels of performance possible. All of these techniques together lead the suppliers being perfectly aligned with the needs of the manufacturers, and further, to the customers.

The costs of switching suppliers are as a result high, yet with the high levels of supply chain visibility and use of advanced planning techniques, there is little need to.

Threat of New Market Entry

Within the optimal industry, new entry is possible only through the development of product or service innovations that propel the industry far above all others in terms of revenue and profit potential.

Barriers to entry exist at the low-end of the market and are organized to prevent those companies looking to play the role of industry consolidator through intensive merger & acquisition (M&a) activity. Instead the focus is on the development of new companies who deliver significant competitive advantage for the entire industry through their use of innovation and definition of best practices in customer service.