How Are the Five Forces That Shape Strategy Going To Shape Your Supply Chain This Year?

The Feature for the January Issue of the Harvard Business Review is The Five Competitive Forces That Shape Strategy by Michael E. Porter where he reaffirms and updates his classic 1979 paper that revolutionized the field of strategy.

The five Porter forces that shape Industry Competition are:

  • Threat of New Entrants
  • Bargaining Power of Buyers
  • Rivalry Among Existing Competitors
  • Threat of Substitute Products or Services
  • Bargaining Power of Suppliers

Given that the general prediction for this year tends to be recession, what does this mean for your supply chain this year. If a recession does happen, then, regardless of the industry you’re in, we’re likely looking at the following:

  • few new entrants (due to lack of $$’s)
  • more bargaining power of buyers, as they are buying less, due to less consumer demand
  • increased rivalry with less business to go around
  • a great threat of substitute products or services as competitors try to innovate lower cost products to win a dwindling share of business
  • less bargaining power of suppliers overall

So what is this likely to mean for your supply chain?

  • the players are going to be roughly the same
    there’ll still be players new to you, but not many new to the industry
  • with the exception of commodities based on raw materials in short supply, or that require a large amount of energy to make, you should have more bargaining power
  • with suppliers fighting for business, if they’re smart, they should be more open to collaboration and your performance management initiatives
  • this might finally be the year they are willing to work with you on innovation efforts
  • except for the energy marketplace and suppliers who supply raw materials in tight supply, you should hold the upper hand in negotiations

But does this mean that things are going to be better over all? According to Porter, if the forces are intense, then almost no company earns an attractive return on investment. If the forces are benign, then many companies are profitable. The industry structure sets the profitability in the medium and long run (but not necessarily the short run because a myriad of factors can affect industry profitability in the short run – including weather and the business cycle).

If you’re in an industry where forces are already intense, they are going to get a lot more intense due to lack of consumer demand. This means that even though you’re going to have a lot more bargaining power with many of your suppliers, you’re competition is going to be in the same position. Thus, even though your supply chain costs (with the noted exception of energy or raw materials in tight supply) are probably going to finally start going down a little, your revenues are going to drop too and profitability as a company may be even harder to achieve. If the forces are benign, they are going to be less so. This will increase competition, but the winners will have an opportunity to do very well both in their supply chain and in the marketplace as those with lower prices and innovative offerings will be much more attractive as consumers become even more cost, and value, conscious.

However, it’s likely that this is also the year where the short-term forces of sustainability, compliance, and sustained cost reduction come into serious play. This means that you’ll have to green-up and tech-up in your supply chain. You’ll need technology to insure compliance in product design and global trade, you’ll need technology to make sure you are complying with all of the voluntary security initiatives to prevent your products from getting trapped indefinitely in customs, and you’ll need technology to make sure you are making the decisions that squeeze the most value out of your supply chain.

Then there are the other possibilities I alluded to in my series on What Will Be The Top 10 Supply Chain Stories of 2008? (Part III).

So … innovative sourcing, procurement, and global trade vendors – start your engines!