Michael Porter's Five Forces

Wall Street Journal Article Summary

The article, What is Strategy?, was written in 2010 by Alan Murray. The author explains Michael Porter’s five competitive forces and how they affect your product or service’s strategic positioning in today’s competitive market. Consequently, knowing how to employ these five forces advantageously is critical to marketing a profitable product or service. Five forces analysis can help businesses to comprehend the variables affecting a ventures chance for success. In turn, this determines whether or not to increase capacity in an industry and to design competitive strategies. This can be done by recognizing barriers to entry, threats of substitution, the bargaining power of buyers, the bargaining power of suppliers,

Cost leadership is a low cost, competitive strategy that aims at the broad mass market and requires “aggressive construction of efficient scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on (Hunger, Wheelen, 2011). Some examples of companies that utilize overall cost leadership are: McDonald’s, Wal-Mart, and Aldi grocery stores. Wal-Mart uses everyday low prices to attract customers, McDonald’s utilizes basic fast food meals at low prices and Aldi grocery stores employ a division of labor strategy and fewer managers to keep labor costs low, thus allowing them to sell their products for less. These businesses are located in close proximity to large population centers, sell the most popular products at all of their locations, and apply standardized pricing throughout their franchises. The application of an overall cost leadership strategy by McDonald’s, Wal-Mart, and Aldi grocery stores results in above average returns on investment (Hunger, Wheelen,

Cost focus is a low cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others (Hunger, Wheelen, 2011). Some examples of companies that have employed a cost focus strategy are Checkers restaurants, Redbox video rental, and Mercedes Benz. These companies avoid head to head competition with larger firms such as McDonald’s, Blockbuster, or General Motors. By valuing a narrow focus that enables them to better serve their narrow strategic markets, these companies have been able to target their customers more effectively than their competitors. Checkers utilizes buildings that are cheaper to construct, Red Box video rental uses vending machines inside large box stores such as Wal-Mart, and Mercedes Benz utilizes cutting edge manufacturing technology, styling, and safety features to appeal to its customers. However, these companies have had to compromise between profitability and market share. Serving the specialized needs of a niche market lacks the economy of scale necessary to create large profit