Strategic Thinking (Part 2—Porter’s “5s”)
In the last issue of Word on the Street, we talked about getting our heads around strategic thinking. Most of the decisions architects and engineers make tend to deal with their particular areas of expertise, but that kind of thinking doesn’t take care of the concerns of the firm—namely:
- Sustainability: The sustainable use of a firm’s resources (be they human or capital)
- Serviceability: Consistently producing significant value and a superb experience for a firm’s clients
- Survivability: Making enough money to pay for today and invest in tomorrow
Taking care of those issues requires strategic thinking. We drew the line between tactical and strategic thinking, gave examples, and discussed the importance of distinguishing between the two. This week, we’ll cover the five definitions of strategy and the five forces of competition, both of which set the table for strategy development.
Those of you who took a business class or two in college might remember Michael Porter. Porter is an academic, well-known for his theories on economics, business strategy, and social causes. He is credited with developing the “Five Forces” model, which is widely used in various industries to help develop strategy. His work applies nicely to the AE industry, starting with his five definitions of “strategy.”
THE FIVE “P’s”
The word “strategic” modifies many other words and actions to give them a sense of importance.
We hear about a “strategic move” or a major “strategic undertaking”. But quite often, the debate on what to do and how it is done occurs because of the different meanings attributed to strategy. Porter provides the following five definitions of strategy (the 5 “P’s”), as follows:
Definition #1: Strategy as a Plan
- A consciously intended course of action.
- It could take the form of a set of guidelines or a written report that leaders and managers use to guide their decisions.
- Some organizations go through a formal process and arrive at a document that will guide their actions for years to come.
- As a plan, strategy provides information about what was intended.
Definition #2: Strategy as a Pattern
- An after-the-fact view of strategy.
- When you observe an organization over time, patterns are seen in streams of action.
- You may see a consistency that suggests a direction.
- When that pattern, which is a “realized” strategy, was not originally intended, it is called “emergent”.
- As a pattern, strategy looks at actions and behaviors, where intentions may have to adjust to a changing environment.
Definition #3: Strategy as a Position
- Leaders see their firms as occupying a space within an environment.
- That space is often defined in terms of market share.
- AE firms serve markets, which are groups of service buyers with common wants and needs (e.g., higher ed, healthcare, commercial/retail, infrastructure-related agencies, Federal government, etc.), and there can be further segmentation within those market sectors (Federal government/military, etc.).
- Firms set revenue and profit targets for services provided to those markets.
- As a position, the focus is on the competitive environment and how firms attempt to achieve competitive advantages.
Definition #4: Strategy as a Perspective
- Perspective is how a firm sees itself and expresses a way of doing things.
- It is the organization’s way of perceiving the world.
- In many AE firms, it’s about connectedness and relationships—with both internal and external project/client teams.
- As a perspective, strategy looks at how people share values and collaborate to produce the work of a firm.
Definition #5: Strategy as a Ploy
- A short-term maneuver intended to outwit or preempt competitive strategic moves.
- Recruiting key leaders out of a regional firm ahead of a national competitor’s acquisition of that same firm.
Tying the 5 “P’s” Together
These multiple definitions enable us to view strategy not only from the important competitive perspective but also to better understand how people in a firm help to shape the process. In some ways the definitions may be interchangeable, but they also complement each other– thus, they are not mutually exclusive.
As a diagnostics tool, if you find contradictions in the different P’s when applied to your own organization, it may signal confusion regarding your firm’s sense of direction and how it is trying to achieve its goals.
FORCES AFFECTING COMPETITIVE STRATEGY
An industry is defined as the group of competitors that produce similar services that satisfy the same, basic client need, and leaders must understand the nature of competition within their industry so they can identify opportunities and threats facing their companies. The AE industry is no exception. From this analysis, AE firm leaders judge the potential in the industry for above-median profitability and ultimately determine the best strategy for their firms to pursue to either offset or leverage competitive forces. The model for analyzing an industry, including the AE industry, consists of five forces of competition:
Force #1: Industry Competition
When companies in the AE industry compete, they often use tactics such as price competition, marketing campaigns, and political contributions. The intensity of the competition depends on factors such as:
- Number of competitors
- Rate of industry growth
- Life cycle stage of the industry
- Available pool of expertise
- Diversity of rivals
Force #2: New Entrants
New entrants or companies that are not currently part of the competitive group may be looking for an opportunity to enter the industry—does PE ring a bell? How much of a threat they pose depends on the barriers to entry present and the reaction from existing competitors. Barriers to entry include economies of scale, service differentiation, capital requirements, political landscape, and specialized expertise.
Force #3: Bargaining Power of Clients
Clients affect an industry by being able to force down prices, bargain for more services, or play competitors off of one another. Given the AE industry is a mature one, commoditization is often a threat to industry firms. Buyers of AE services are generally price-sensitive and demand market-specific expertise. Hence, it is in those two areas where AE industry rivals tend to compete most.
Force #4: Bargaining Power of Vendors
Vendors can apply pressure to industry firms by raising their prices, lowering their quality, or reducing the availability of their products. The bargaining power of vendors affects the competitive environment and profit potential of industry firms.
Force #5: Threat of Substitute Services
Substitute services are those provided by competitors in a different industry but come close to satisfying the same consumer need. The threat of substitutes exists because their existence places a ceiling on prices the industry can charge, and further commoditize what the industry produces. When prices get too high, clients will switch to the substitute, unless the industry upgrades or differentiates its services, thus making the substitute less appealing.
Tying the 5 Forces Together
In scanning the AE industry, firm leaders assess each force as high, medium, or low in terms of its strength, and judges the potential for above-normal profitability. While a high force is a threat because it is likely to reduce profits, a low force is an opportunity because it may allow the company to increase market share, raise prices, and earn higher profits. Thus, studying each force points leaders to actions it can take to influence the effect of the industry’s forces on the company.
Next week, we’ll cover the various facets of developing strategy. In the meantime, for more information on strategic planning, call Mark Goodale at 508.254.3914 or send an email to [email protected].