Porter’s ‘five forces’ model

9.5 Porter’s ‘five forces’ model

In Competitive Strategy: Techniques for Analysing Industries and Competitors 7 , Porter sets out what has become known as the ‘five forces model’. In the first instance, he posed five key questions. These were:

1 How can I reduce the bargaining power of my customers?

2 How can I reduce the bargaining power of my suppliers?

3 How can I reduce substitutes for my product or services?

4 How can I limit rivalry in my industry?

5 How can I prevent new entrants from coming into my industry? This rather hard yet objectively rational approach to business management

became encapsulated in the five forces framework (Figure 9.2), where a more general model is presented as:

1 Buyer power (bargaining capability)

2 Supplier power (bargaining capability)

3 The threat of new entrants (to the market)

Potential entrants

Threat of entrants

Bargaining Bargaining power

power

Threat of substitutes

Substitutes

Figure 9.2 Porter’s five forces model.

Managing in the Media

4 The threat of substitution (of products and services)

5 The nature of rivalry (between existing firms). As with the SWOT and PEST analyses, it is a useful tool to analyse the

business environment. To see how this may inform our assessment, let’s examine just one of these forces, the threat of new entrants, in more detail from a media company perspective. The threat of a new entrant to an industry will be determined by what Porter labels as the barriers to entry, of which there are seven:

1 Economies of scale. The media industry, even at its most mechanistic, Fordist level, has been considered a cottage industry. A telephone, a fax machine, an address in Soho, London (the heart of the film and television industry) and now an email address are all that are required to turn you into a production company. At one time, to be effective in terms of production a facilities house required huge capital investment. Now editing can be completed off-line on the most modest of domestic PCs. Armed with master tapes and an edit log, this can then be conformed to

a broadcast or broadcastable format within an on-line studio using virtually the same computer software.

2 Product differentiation. This operates at many levels within the media industry. Differentiation is the process by which one production company differentiates its offering from that of another, by which one facility house identifies its skills and techniques from another and, at the ‘top’ level, how the consumers are persuaded to make choices as to whether to watch BBC1, BBC2, ITV1, ITV2, Channel 4, Channel 5, or one of the cable or satellite offerings.

3 Capital requirements. The capital cost of a feature film can be enormous. The struggling film industry within the UK in the late 1990s looked to the Department for Culture, Media and Sport to provide support and assistance. Government tax breaks introduced in 1997 provided British films with an allowance to write-off 100 per cent of production costs over

1 year. This is applicable on films costing up to £15 million. Many smaller films that have been made in the UK in recent years have been funded by paying basic union rates even to star performers, and deferred payments to performers and technical crew.

4 Switching costs. This is the cost attached to changing suppliers or buyers. Retooling for an alternative video format due to supplier or client preferences carries capital and operational costs. New software tools for production or administration will require staff to be trained. The ‘experience curve’ requirement will determine how viable this switch is for the business (see below).

Strategic management

5 Access to distribution channels. Since its very inception, the UK film

industry has been dominated by American distributors. One of the major complaints by British film-makers (and indeed other European film- makers) has been access to these potential markets.

6 Cost advantages independent of scale. In an industry that is still largely

freelance and essentially contract- or production-based, being a name in the market place is vital to continued success. Whilst the well-known phrase ‘You’re only as good as your last production’ is true, with no production track record the chances of breaking into the market place are small. The number of potential entrants into the market are enormous. Those who want to break in to the film and television industry are willing to do ‘almost anything’ to succeed. The learning curve, reduced cost per unit of output or, as Johnson and Scholes express it, ‘the

experience curve’ 8 is a key determinant of company profitablity when

product price is inflexible. If a small, experienced production team deliver the programme on time and to budget, then their costs will be contained and their retained profit as predicted (see Chapter 14).

7 Government policy. Policy has a major impact on the behaviour and action

of players in the media market, especially film and television. It is by government edict and action that the radio and television market exists at all in any structured form in the UK. In the run up to the year 2000, Chris Smith (Heritage Secretary in the Labour Government of 1999) set out the agenda for the transfer to digital transmission. At the RTS conference in October 1999, he said: ‘In a word, there’s a revolution going on in TV technology; and Britain is at the forefront of change. I want to keep us there and press home our global advantage.’ It is the government who therefore establish the regulations by which the media companies operate.

Expected retaliation

Although not one of the listed seven barriers, the expected retaliation to a new entrant has to be considered. Quantel, the broadcast computer graphics manufacturer, took legal action in the late 1980s against several smaller innovative computer graphic companies. The impact was to stop the new companies from trading. Quantel, the market leader, put the smaller companies out of business. Some years later, when Quantel took the same action against Adobe, they lost. Adobe has the funds to fight the case. Some small comfort to the directors of the start-up companies!

Overall, this more detailed analysis can be performed on the other four forces of Porter’s model. The outcome from this process is an anlaysis of the

Managing in the Media

media business environment from which the choices for action can be drawn.

When a company examines its business processes, ideally each stage should ‘add value’ to the product. The value chain (Figure 9.3) is a model to put internal processes to the test.