How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives (Divest, Harvest, Maintain, Grow, Enter) should be implemented by a business.

1. How to apply Porter’s Five Forces thinking to determine
which of the Five Strategic Objectives (Divest, Harvest,
Maintain, Grow, Enter) should be implemented by a
business with a...
STRATEGIC
CHARACTERISATION
MATRIX
by Lawrence (Laurie) Phillips

2. Disclaimer
The use of any information provided is at the sole
discretion of the user, no warranties and/or
guarantees whether expressed or implied given.
Users accepts all risks for their application of the
information provided and no responsibility is
accepted by the writer for the information contained
within and how it is applied.

3. Contents
1. Porter’s Five Forces
2. Five Strategic Objectives
3. Strategic Characterisation Matrix (SCM)
4. SCM Tool – How to Download
5. References and Contact Details

4. 1. Porter’s Five Forces
A framework for industry analysis and
business strategy development formed by
Michael E. Porter of Harvard Business School
in 1979.

5. What is Porter’s Five Forces
 The five forces that are derived determine the
competitive intensity and therefore “attractiveness”
of a market.
 Attractiveness in this context refers to the overall
industry profitability. An "unattractive" industry is
one in which the combination of these five forces
acts to drive down overall profitability. A very
unattractive industry would be one approaching
"pure competition", in which available profits for
all organisations are driven down to zero.
 Three of Porter's five forces refer to competition
from external sources. The remainder are internal
threats.

6. The threat of entry of new competitors
 Profitable markets that yield high returns will attract new organisations. This results in many new entrants, which
eventually will decrease profitability for all organisations in the industry. Unless the entry of new organisations can
be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
 The existence of barriers to entry (patents, rights, etc.)
 The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new organisations
can enter and non-performing organisations can exit easily.
 Economies of product differences
 Brand equity
 Switching costs or sunk costs
 Capital requirements
 Access to distribution
 Customer loyalty to established brands
 Absolute cost
 Industry profitability; the more profitable the industry the more attractive it will be to new competitors

7. The threat of substitute products or services
 The existence of products outside of the realm of the common product boundaries increases the propensity of
customers to switch to alternatives
 Buyer propensity to substitute
 Relative price performance of substitute
 Buyer switching costs
 Perceived level of product differentiation
 Number of substitute products available in the market
 Ease of substitution
 Substandard product
 Quality depreciation

8. The bargaining power of customers (buyers)
 The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the organisation under pressure, which also affects the customer's sensitivity to
price changes.
 Buyer concentration to organisation’s concentration ratio
 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer volume
 Buyer switching costs relative to organisation’s switching costs
 Buyer information availability
 Ability to backward integrate
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 Recency, Frequency, Monetary (RFM) Analysis

9. The bargaining power of suppliers
 The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components,
labour, and services (such as expertise) to the organisation can be a source of power over them, when there are few
substitutes
 Suppliers may refuse to work with the organisation, or charge excessively high prices for unique resources
 Supplier switching costs relative to organisation’s switching costs
 Degree of differentiation of inputs
 Impact of inputs on cost or differentiation
 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to organisation’s concentration ratio
 Employee solidarity (e.g. labour unions)
 Supplier competition - ability to forward vertically integrate and cut out the BUYER

10. The intensity of competitive rivalry
 For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
 Sustainable competitive advantage through innovation
 Competition between online and offline companies
 Level of advertising expense
 Powerful competitive strategy
 The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their
rivals.

11. 2. Five Strategic Objectives
Divest, Harvest, Maintain, Grow or Enter

12. Divest
 Divestment is a strategy that is considered when a
business is not making suitable profits or when
another organisations values the business higher
than the current organisation’s owner
 It involves exiting the markets or market segments
that do not offer potential for profit growth, cutting
costs and shifting resources to more economic
activities
 A business may be able to significantly increase
their value by divesting from products and
customers that do not produce profits for the
business
Image: Maggie Smith / FreeDigitalPhotos.net

13. Harvest
 A harvesting strategy maximises the cash flow of
the business from its existing assets and is typically
an appropriate strategy when the net divestment
value of the business is below its optimal
restructured value
 It is typically applied when the competitive
advantage of the business is in decline with
reducing sales volumes or where market conditions
are deteriorating
 Harvesting strategies that increase operating
margin include: raising margins, focus on premium
niche markets and cutting variable and fixed costs
 Harvesting strategies that reduce investment
include: reduction in inventory, tight control on
debtors, extending creditors and reducing fixed
assets
Image: dan / FreeDigitalPhotos.net

14. Maintain
 In a maintain strategy it is not expected that the
market share of the business will erode or increase
over time
 Key objectives of a maintenance strategy is to
avoid price competition as this will negatively
impact on the value of the business, maintain the
barriers to entry and keep a focus on innovation
 The conditions in which a maintain strategy should
exist are:
 Significant barriers to entry
 Market is dominated by a small numbers of players
 No decline in the market is expected
 Business has a well established competitive position and is
earning healthy economic profits with marginal
investments able to earn a return that exceeds the current
cost of capital
Image: FreeDigitalPhotos.net

15. Grow
 Grow strategic objectives are about the business
investing to earn a return that exceeds its cost of
capital
 Growth opportunities therefore depend on the
business having a differential advantage
 The market should also have a high degree of
attractiveness
Image: criminalatt / FreeDigitalPhotos.net

16. Enter
 New products
 New processes
 New markets
 New marketing strategies
 An enter strategic objective should apply where
there is a combination of both high market
attractiveness and an advantaged differential
position
 The business must have the ability to create a
sustainable differential advantage
Image: vichie81 / FreeDigitalPhotos.net

17. 3. Strategic Characterisation Matrix
How to apply Porter’s Five Forces thinking to
determine which of the Five Strategic
Objectives should be implemented by the
business

18. Strategic Characterisation Matrix
 Uses Porter’s Five Forces plus other factors to
determine the overall Market Attractiveness:
 Size of the market
 Growth of the market Market Attractiveness
• Porter’s Five Forces
 Competitive structure of the market (one of Porter’s Five • Size of the Market
• Growth of the Market
Forces) • The Cyclicality of the
Market
 Supplier power (one of Porter’s Five Forces) • Market Risks
 Threat of substitutes (one of Porter’s Five Forces)
 Buyer power (one of Porter’s Five Forces)
 Threat of new entry (one of Porter’s Five Forces)
 The cyclicality of the market
 Market risks
 Plus analyses the Differential Position of the
Strategic Objectives
business: Differential Position • Divest
• Harvest
 Low cost • Low Cost
• Maintain
• Differentiation
• Grow
 Differentiation • Enter

19. SCM Tool - Inputs
 In a given market or market segment by rating all the relevant factors that influence Market Attractiveness and the
Differential Position of the business, guides us in determining the appropriate Strategic Objective/s to be
implemented
 By analysing this over several time scales such as Current, Short and Long Term provides an additional guide to the
likely changes that could occur and the evolution of the chosen Strategic Objective/s

20. SCM Tool - Outputs
 Provides a guide to which of the Five Strategic
Objectives could be implemented
 Divest
 Harvest
 Maintain
 Grow
 Enter
 Current
 Short Term
 Long Term

21. SCM Tool - Example
 One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.

22. Enter Rating for each item and timescale
with:
1 = Unattractive to the business
SCM Tool - Example 7 = Attractive to the business
 One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.

23. Enter Rating for each item and timescale
with:
1 = Unattractive to the business
SCM Tool - Example 7 = Attractive to the business
 One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.
Enter Rating for each item and timescale with:
1 = Disadvantaged (Business unable to implement )
7 = Advantaged (Business able to implement)

24. SCM Tool automatically calculates Scores
SCM Tool - Example
 One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.

25. SCM Tool - Example
 The SCM tool automatically transposes the scores and plots the results onto three SCM charts for each of the chosen
time scales periods, indicating as a guide the best likely Strategic Objective/s

26. 4. SCM Tool – How to Download

27. SCM Tool – How to Download
 For a FREE copy of the SCM Tool in Microsoft Excel format, just go to www.businessmeccanica.blogspot.com and go
to the downloads section or go to http://businessmeccanica.blogspot.com/p/downloads.html

28. SCM Tool – Notes to Users
 The SCM Tool has been developed as a guide only
 Do not rely on the results, only use them to help guide you in determining the best Strategic
Objectives for the business
 Ensure that you have all the relevant facts and figures required prior to using the SCM tool, such as
the size of the market, growth of the market, competitors etc.
 The SCM Tools is a protected (no password required) Excel Worksheet
 It can be unprotected so that you can analyse the scoring mechanisms which have been established
 Adjust the scoring mechanisms to suit your individual requirements as required
 The SCM Tool can be applied at the organisational, business unit or individual product/service level
 Always use a professional marketing expert (such as a CPM) to analyse your results
 The use of any information provided it is at the sole discretion of the user, no warranties and/or
guarantees whether expressed or implied are given.
 Users accepts all risks for their application of the information provided and no responsibility is
accepted by the writer for the information contained within and how it is applied

29. References and Contact Details
References Contact Details
 http://en.wikipedia.org/wiki/Porter_five_forces_a  Lawrence (Laurie) Phillips MBA-Mktg CPM AMAMI
nalysis MAIE
 http://hbr.org/2008/01/the-five-competitive-  +61 400 767 087
forces-that-shape-strategy/ar/1  lawrence.phillipsMBA@gmail.com
 Marketing Management: A Strategic, Value-based
Approach. Whitwell/Lukas/Doyle, John Wiley
2003