Strategic Business Analysis Models: Porter’s Five Forces, BCG Matrix, and More

Posted on Jan 12, 2025 in Business Administration and Management (BAM)

Porter’s Five Forces (Competitive Analysis)

1. Intensity of Competition

  • Numerous and balanced competitors
  • Industry’s growth rate: Will it grow in the future?
  • Exit barriers:
    • Medium: Heavy industry with high investments.
    • High: High cost structure = high intensity.
  • Product differentiation:
    • Medium: Brand awareness (low).
    • High: High differentiation: seats, mobility, etc. (high).

2. Threat of Entry

  • Reaction of established competitors:
    • High intensity: Big companies can react and play aggressively.
    • Medium intensity: Big companies react but can’t play aggressively.
    • Low intensity: Nothing, small companies.
  • Network effects: Do customers feel special to be part of the company community?
  • Product differentiation: Renfe (high), Mercedes (low) (loyalty to brand).
  • Capital needs: Renfe (high, intensive capital consumption), Mercedes (low, intensive capital).
  • Switching costs for consumers: Mercedes (low, premium brands, high residual value), Renfe (high).
  • Economies of scale: Heavy industry depends on economies of scale or high investment is required (high intensity).

3. Bargaining Power of Suppliers

  • Real threat of forward integration: Low (suppliers don’t have knowledge, investment capacity, and power).
  • Substitute products (by suppliers): No real threat.
  • Concentrated suppliers: No concentrated/important suppliers.

4. Bargaining Power of Clients

  • Concentrated customers:
    • Renfe: Low because it has a monopoly.
    • Mercedes: Highly demanding customers on quality.
  • Non-differentiated products: Same product differentiation.
  • Low switching costs:
    • Renfe: Large, investment committed (high).
    • Mercedes: Premium brands, high residual value (low).
  • Backward integration:
    • Mercedes: No power to integrate, easily replaced (low).
    • Renfe: Medium, they don’t have the expertise.

5. Threat of Substitutes

Example, Mercedes:

  • Direct substitute products (electric cars): High (electric cars).
  • Direct substitute product: Low (luxury brands and generalists are not real competitors).
  • Indirect substitute products: High (new mobility apps, carsharing, ride-hailing services, new concept of luxury).

Industry Life Cycle

1. Identify the Stage

  • Emergence (low rivalry): High differentiation. Innovation is key.
  • Growth (low and increasing rivalry): High growth and weak buyers, but low entry barriers. Growth ability is key.
  • Shakeout: Slower growth and some exits. Management and financial strength are also key.
  • Maturity (stronger buyers): Low growth and standard products, but higher entry barriers. Market share and costs are key.
  • Decline (extreme rivalry): Typically, many exits and price competition. Cost and commitment are key.

2. Explain the Strategy for that Stage

BCG Matrix (Growth Share Matrix Model)

1. Question Marks (e.g., Apple TV)

  • You should double the stakes, do segmentation, or leave.
  • High-growth business segment.
  • Low profitability and loss-making cash flow.
  • The company must acquire a competitive position.
  • Risk of becoming break-even.

2. Dogs (e.g., Tablets)

  • If the profit is greater than 0, you should hold without investing. If the profit is less than 0, you should sell, abandon, or let it die.
  • Business segment with weak growth.
  • Business with low interest.
  • Low or negative profitability.
  • Danger zone for the company.

3. Stars (e.g., iPhone)

  • You should maintain the dominant position or wait for the business to age and become a cash cow.
  • High-growth, self-financing segment.
  • High profitability.
  • Precarious financial balance in the face of market share changes.

4. Cash Cows (e.g., Mac)

  • You should make them profitable or do rigorous management, gain profitability, and reinvest.
  • Business segment with weak growth, mature.
  • Dominant companies.
  • Profitable activities.
  • Free up cash flow for reinvestment.

Strategy Clock (Competitive Strategy)

1. Low Price, Low Added Value (e.g., Ryanair, Ouigo)

  • Keeping prices low is the only way to survive.
  • Inferior quality products, but prices are attractive enough.
  • Cross your fingers that no competitor undercuts you.

2. Low Price (e.g., Ryanair, Ouigo)

  • Usually producing large quantities.
  • The consumer values the product (some product differentiation at a low cost).
  • Low margins, essential to optimize costs.

3. Hybrid Strategies (e.g., IKEA, Netflix)

  • High perceived value at a low cost.
  • Effective if consistent over time.
  • Useful to enter markets and build position, aggressively win market share, and build volume and sales (benefiting from mass production/consumption).

4. Differentiation (e.g., Apple)

  • The maximum level of perceived value.
  • Product quality and branding are crucial.

5. Focused Differentiation (e.g., Louis Vuitton)

  • Maximum price.
  • Targeted to specific segments.
  • Only the finest brands can sustain it in the long term.

6. Risky High Margins

  • Average perceived value, but charging high prices.
  • Only useful when exploiting market shortages.

7-8. Monopoly Pricing

  • Consumers have no other choice.
  • Monopolies don’t last (new products and government regulations).

Innovation Management

Effects of:

1. Innovation

Radical innovation. New cycle in a mature industry.

2. Train Industry

Will become obsolete as we know it.

3. New Industry

  • Intensity of competition: Will increase with new substitute products.
  • Barriers to entry: High, capital requirements, know-how, and heavy investment in infrastructure.
  • Negotiation of clients: Early adopters are ready to pay higher prices.
  • Negotiation of suppliers: High due to technological innovation.

PESTEL Analysis

1. Political Dimension

Government stability and general policies of public administrations.

2. Economic Dimension

Nature and direction of the economic system where the company operates.

3. Demographic Dimension

Common variables gathered in demographic research include age, sex, income level, race, employment, location, homeownership, and level of education.

4. Socio-cultural Dimension

Beliefs, values, attitudes, and lifestyles of the people who form part of the society in which the company is a part.

5. Technological Dimension

The scientific and technological framework that characterizes the situation of the system.

6. Ecological Dimension

Great relevance in recent times, it refers to the environmental policy of the administrative authorities.

7. Legal Dimension

Integrates the administrative, legal, and regulatory factors within which the company must operate.