Why do some businesses fail even though they have competent people and a great business plan? Porter suggests that the key to success in business is to be in the right industry. There are 5 forces that determine whether or not a certain industry is favorable:

Threat of New Entrants: Some industries are harder to enter than others. The Pharmaceutical industry, with all of its risks and high-price patents, is almost impossible for new firms to get in on the huge profit margins. A pizza shop has a very low barrier to entry - almost anyone with an oven and some pepperoni can start one.

Some industries can create barriers to entry by having customers dedicated to their brand... example: Fizzy, syrupy water. Despite the fact that it takes a small capital investment, the big soft drink manufacturers have squeezed out potential competitors with huge marketing campaigns.

Bargaining Power of Suppliers: Suppliers with low bargaining power are good for business. For example, in the coffee industry, the growers have very low bargaining power. They are poor, fiercly competitive and usually rely heavily on their buyers. A lb. of Green coffee costs the same today as it did in the late 60's (although the fair trade coffee movement is changing that).

A strong supplier would be Intel. What would happen if Dell stopped selling "Intel Inside"? Computer buyers would take their money somewhere else. Dell is in a very weak position and this is one reason why the computer assembly business has its pitfalls.

Bargaining Power of Buyers: Buyers with weak bargaining power are favorable. If you sell super-computers and you have very few customers, those customers wield a lot of power. Sometimes losing one sale can make or break the business. Another factor that affects buyer power is differentiation. Commodities like oats or pulp for paper have strong buyers because it makes no difference which supplier they choose.

Threat of Substitute Products: A substitute product for butter is margarine. A substitute for sugar is aspartame. This is a product that is not quite the same, but the customer can get the same value from it. When butter prices soar, people can simply choose margarine, so the butter producers are not free to set their prices wherever they want. If there was a good alternative to gasoline, would the prices would fluctuate so much? When electric or solar cars become popular, gas prices will stabilize.

Intensity of Rivalry among Competitors:It is pretty obvious that it is unwise to enter an industry that is already hugely competitive. As a North American firm, is it smart to enter the running shoe manufacturing industry when you know that there are already many developing countries who can drive down their costs by paying their workers 26c an hour? Of course not.

This analysis explains why so many companies fail, even though the people that run them are smart and competent. A firm in the right industry, with the right core competencies is poised for success.

NB: Michael Porter has his Ph.D. in Industrial Economics. This analysis is based on a report he published in the Harvard Business Review called "How Competitive Forces Shape Strategy" circa 1979. Itshaped the way many people see business today. Today Porter owns a very successful consulting business and occasionally teaches at Harvard.

Elsewhere in this node, indestructible expertly explains Porter's Five Forces model, so I won't rehash that here. Instead, to demonstrate the usefulness/significance of a Porter Model (as it is commonly called), I'll provide an example of how an analysis of those five simple factors can be used to strategically evaluate a company.

In the spirit of noding one's homework, I submit the following short essay, an exercise for one of my MBA strategy classes, which uses the Porter Model to evaluate the computer chip maker Intel. Please note that all factual information is based on information on a 2001 article* in Fortune magazine, as was required by the assignment.

Strategic Analysis of Intel Corp.

The Fortune article* on Intel provides a great deal of useful information that lends itself quite nicely to a Five-Forces analysis, and so that is where we will begin. Using Porter's framework to determine the impact of current competitors, potential entrants, buyers, suppliers, and potential substitutes, one would expect to see a model similar to the following:

  • Current Competitors: Intel has many Strategic Business Units, but only two were discussed in detail within the text—Microprocessor manufacturing and Chipset manufacturing. From the perspective of the Microprocessor SBU, only one true competitor remains: Advanced Micro Devices. Having vanquished all other microprocessor developers such as Cyrix and NexGen, Intel's only real competition comes from the developers of the Athlon, Thunderbird, and Sledgehammer CPUs.

    Designed for high-end processing and placed in direct competition with Intel's Pentium III and Pentium IV CPUs, AMD's new processors pose a significant threat to Intel in many different ways. First, AMD has successfully stolen market share from Intel over the last few years (albeit mostly due to shabby management on Intel's part). Second, AMD has succeeded in proving itself as a true PC platform alternative; until its pre-Pentium-IV Athlon became the first CPU to pass the 1.0 GHz mark, many failed to consider AMD as a true contender for the high-end workstation and server market. But beating Intel to 1.0 Gigahertz had an incredible affect on the industry, encouraging many manufacturers to start carrying AMD-powered machines, thus opening a great deal more of the market originally dominated by Intel.

    But AMD's luck was short-lived. Intel immediately fired back, reclaiming the "fastest processor" title with a later iteration of its Pentium line, and using mafia-like (and ethically questionable) marketing tactics to encourage computer manufacturers to stop carrying AMD processors. The manufacturers capitulated, and eventually almost all of the major computer brands were again Intel-only.

    Intel's aggressive comeback against AMD has not been without its costs, however. By slashing margins to entice computer manufacturers into exclusive contracts, the firm regained much of its lost market share at the cost of profits. However, a price war between a gigantic company like Intel and a relatively tiny company like AMD shouldn't last long. Intel certainly has deep enough pockets to keep the squeeze on AMD for some time.

    The outlook for the Chipset SBU is somewhat similar. With only one real competitor—VIA Technologies, a critical partner with AMD who manufacturers Athlon-compatible chipsets—Intel once again finds itself in the position of Goliath vs. David. Although not mentioned in the text, VIA's motherboards and chipsets are considered by most to be far inferior to those developed by Intel. In fact, the requirement that one use a VIA motherboard (rather than one developed by Intel) with an Athlon processor has caused many users to shy away from AMD altogether. Often, bugs arise from faulty VIA chipsets and motherboards, and the "AMD Architecture" gets the blame, despite AMD's lack of responsibility. Still, without AMD there would probably be no VIA—and without VIA, AMD would have to develop and manufacture its own chipset—something it probably cannot afford to do. Thus the fate of these two companies is hopelessly intertwined; when attacks by Intel weaken one company, in reality, they weaken both.

  • Potential Entrants: None, nor should we expect to see any soon. The capital expenditures required to develop and manufacture microprocessors and chipsets is enormous—an insurmountable entry barrier for almost any company that would like to join the fray. Companies wishing to enter this industry need only to look at one of Intel's multi-billion-dollar chip fabrication plants before s/he will undoubtedly find some other industry to invade.

  • Buyers: Buyers include end-user home computer builders and small "PC-Clone" shops that build customized machines in most cities. But large computer manufacturers such as Dell, Gateway, and Hewlett-Packard account for the vast majority of chipset and microprocessor purchases. Buyer power in this industry has fluctuated from time to time, but for the most part, the "Intel Inside" logo has been considered by most manufacturers to be too important to forgo. Until the Athlon made a serious challenge to Intel's prime markets, buyers simply had nowhere else to turn for microprocessors. Until the Athlon, buyers had to choose between pricey-but-respected Intel chips or chips by AMD, considered by most to be inferior to their Intel counterparts.

    Buyer power increased sharply when this new option arrived—manufacturers actually had more than one company from which to buy CPUs! However, buyer power has markedly diminished since that time due to exclusive contracts and pressure from Intel to keep AMD out of their machines.

  • Suppliers: Intel's suppliers are not mentioned in the text, but it is safe to assume that the company's suppliers have the same lack of selling power as other commodity brokers in the tech industry. Intel's raw materials—silicon, semiconductors, and the like—can be purchased from a litany of manufacturers, thus affording the firm a great deal of buyer power in selecting with whom to do business.

  • Potential Substitutes: While other companies do manufacture competing server/workstation platforms (such as Sun Microsystems and Digital Electronics, before the latter was purchased by Compaq), these companies only compete in a limited number of arenas. The most powerful Windows/Intel server is far less powerful than most Sun Microsystems machines, but they are also far less expensive. One might argue that comparing Intel/Windows machines to Sun/UNIX machines is much like comparing a nail file to a hacksaw—the analogy is simply inappropriate. Regardless, while Intel's customers (such as Dell and Compaq) might compete on a limited basis with companies like Sun, Intel's only fear of substitution comes from AMD...and the occasional abacus.

With that being said, one might hope to identify some of Intel's core competencies and competitive advantages. Certainly, Intel's position as the "gold standard" for PC architectures must be counted among the company's competitive advantages. When Intel decided to switch from "socket" to "slot" processors, the industry (including AMD) followed suit. When the new "slot" architecture was found to be unwieldy, Intel switched back to sockets—and the industry followed once again. By serving basically as "the R&D for the entire computing industry," Intel is able to steer trends and technologies in ways that best benefit the itself.

Intel's leadership position in the PC architecture theatre is very much a de facto competitive advantage—the result of its long-term market dominance and market position, but not necessarily a result of superior strategy. One competitive advantage that has come about due to corporate strategy would be Intel's superior marketing and public relations machine, which is surely to be counted among its core competencies. By manipulating the public into believing it has a monopoly on CPUs (as discussed in the text), and simultaneously protecting itself from antitrust litigation by claiming that it is indeed not a monopoly at all, Intel has secured for itself the best of both worlds. Customers and investors alike trust Intel because of its product's stature and importance, yet trustbusters are kept at bay by the existence of tiny firms like VIA and AMD.

Intel's marketing clout is also impressive when it comes to merchandising. By initiating price wars with its poorer competitor, it successfully drives AMD out of certain markets. By charging a premium for Pentiums, it encourages a premium image, while still outselling and outpacing the Athlon. Meanwhile, Intel's marketers are hard at work behind the scenes, concocting exclusive deals with computer manufacturers, effectively cutting AMD out of the majority of the market.

But not all of Intel's power comes as a result of sinister marketing tactics. Intel has been, and continues to be, an incredible innovator in microprocessor and chipset technology. Leveraging its deep pockets, huge research staff, and decades of experience, Intel's manufacturing superiority is clearly both a distinct core competency and a competitive advantage few could ever hope to match. Intel is by far the largest microprocessor manufacturer, cutting costs via economies of scale and technological advances while producing increasingly higher quality products at the same time. Although it has rested comfortably as the market leader for some years, the company is anything but sluggish; it continues to innovate (especially with the occasional competitive prod from AMD) and develop faster and faster products for a new millennium.

Broadening our scope to view Intel as a whole, we see a company with many strengths, its fair share of weaknesses, and a recipe for continued growth (notwithstanding any gigantic future blunders). Intel's distinctive competencies and competitive advantages give it a tremendous amount of leverage in its industry, but its image is marred by years of hubris. No one ever expected AMD to outpace Intel—even with a single processor—a critical assumption that, when proved false, was followed by almost an entire year of Intel playing "catch up" with the Athlon. Intel's decades-long market dominance often leaves it believing that it can make dramatic changes in the industry and expect everyone to simply follow lockstep behind the firm (as with the case of the Rambus memory fiasco). Intel's greatest threat is not AMD, it is itself; the company's inability to take its competitors seriously (always viewing them as a risk) is the greatest weakness Intel faces.

In all, however, Intel is in excellent position to pull itself up from its recent strategic snafus. Barring any major catastrophes that allow AMD to vault back up into the spotlight, one would expect the smaller firm to slowly fade back into its former role as the low-cost provider of medium-quality processors. In the meantime, if evaluated solely by this article (and not by the multitude of other articles that suggest the company is in dire need of retrenchment in certain areas), Intel appears to be a company well poised for growth.

* Brent Schlender, "Intel unleashes its inner Attila." Fortune (15 Oct 2001).

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