porters 5 forces in digital strategy

Episode 78: Applying Porter’s 5 Forces To Digital Strategy

Too often, when we think of our work in digital marketing, we consider it purely through the lens of the technology we are working with. In doing so, we forget the strategic frameworks that have been applied in planning for decades. How relevant are these frameworks to the work of the digital strategist, and how do they apply? To answer that question, let’s look at one of the most interesting, Porter’s 5 Forces.

Michael Porter is a professor at Harvard Business School and a founder of the consulting firm the Monitor Group, now part of Deloitte. He developed his 5 Forces analysis as a reaction to the then popular SWOT analysis which he found too ad hoc. This analytical framework looks at the forces that affect a company’s ability to serve its customers and make a profit. The idea is that if there is a change in any of these forces, the company needs to re-assess the marketplace and how it responds to it.

The 5 Forces that Porter identified are the threat of substitutes, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers and industry rivalry.  What are each of these forces, and how important are they in digital strategy?

Let’s start with the first one, the threat of substitutes. A substitute in this case is a product or offering that may be of a different type of category but can be used instead of an existing product. For example, a smartphone can be considered a substitute for much of the functionality of the PC. Indeed, this is exactly what happened to decimate the PC industry where it was displaced by smartphones and tablets.

Elements to consider in the threat of substitutes includes the cost, availability and difficulty of switching, the perception of quality degradation in switching and the level of differentiation with a product to encourage switching.

The second force is the threat of new entrants. This is an obvious one. Essentially, what is the likelihood of new competitors entering the market to offer a variation of the same product? When an industry has a high level of profitability, the threat of new entrants is also high, and their impact is to drive down profit levels. Points to consider in analyzing this force are the barriers to entry, brand equity, product differentiation, industry profitability and economies of scale.

The third force is the bargaining power of buyers. Essentially, this is about the ability of customers to put the business under pressure. Points to consider include the presence of bargaining leverage, customer price sensitivity and the availability of information to customers.

The fourth force is the bargaining power of suppliers. Think about this in terms of monopoly behaviour; if there is only one provider of a given product or service, it gets to set pricing as well as the rules of engagement. This represents a significant threat to an enterprise that is dependent on them.

The fifth and final force is industry rivalry. This speaks to the level of advertising spend in the industry, the ability to consider competitors within a given strategy and the creation of a competitive advantage through innovation.

Now as we think about our role as strategists, how applicable are these forces in digital marketing, and how do we think about them?

Let’s think about industry rivalry first. In this case, we need to consider not only those that have traditionally been our competitors, but also those firms that our audience think are competitors. The implication here is to think more broadly than our narrow idea of what our brand represents, and to think of the different ways that people interpret it. So for example, conduct keyword research to identify how your customers discover your services, and then look at who shows up for a wide variety of those searches.

Understanding competitor advertising spend is more difficult in digital media. Media platforms are cagey and unreliable with this type of information, but look for independent third party tools to gain a degree of information. Again, many of these tools look at rate card costs, which few advertisers are paying, but they at least provide a benchmark.

The bargaining power of suppliers is an interesting force in digital media given the near monopoly situation we have faced for years with Google. This is very much a challenge that most businesses have had to face, and this has led to widespread resentment industry-wide. That said, I think things are changing. The shift to mobile and the emergence of attribution technologies and platforms has weakened our reliance on the single supplier. So the way the strategist thinks about this force in digital marketing is to consider a longer term multi-touch strategy as opposed to focusing purely on last touch ROI.

The threat of substitutes and of new entrants are interesting considerations in developing strategy. The first forces us to think more broadly about the function and benefit our brand is delivering and how that may be delivered by competitors we hadn’t even considered previously. The latter forces us to actively consider the differentiation and value of our offering. In effect, it asks us to consider the complete user journey and every touchpoint over the long term rather than purely looking at things through a direct response lens.

Finally, the bargaining power of buyers reminds us that customers are extremely empowered in the digital age, and this is largely a result of the availability of information as well as the accessibility to alternatives. This reminds us to focus our energies on being the source of much of this information. Consider this as an argument to engage in content marketing to help influence this over time.

With all that in mind, it’s clear that this decades old framework remains valid in the digital age. By using it, we are able to make the case to think, act and invest strategically for long term value and growth.

Next week on octopus, we will continue to explore the role of the digital strategist. Please be sure to comment below. I’d love to hear from you. Please subscribe for alerts about new episodes and content. Thank you for listening to octopus. I’m Nasser Sahlool.

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