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Mrinal Ghosh
Business Consultant, India
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Measuring / Calculating the Five Forces of Porter?
Hi, can somebody help me how to calculate the co-efficients for each of the five forces. I understand all of the 5 forces might not be having the same weight. Also it would differ by industry.
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Agustin Cosso Leskovar
Student (University), Argentina
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Calculating the Forces In order for this analysis tool to be effective, you may want to consider a few aspects:
A) In order to solve any optimization problem you need to apply the right formula m(x;y;z;... n)
B) This method stands for a non-numeric type of analysis. It is very hard to determine, whether a co-efficient would be effective or not. Yet, a few of them may be calculated. I'm not quite certain about them, but for example:
Competitors: it would be interesting to know how many competitors exist in the whole market. By knowing this amount, you may decide which style of scale economy you need. If there are only 2 rivals in the same market, you may choose a Stackelberg model, by simply defining your price as a leader, hence: P = a - b [q1+r2(q1)]; where r2 stands for the reaction.
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Anil Kshatriya
Professor, India
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Calculating Porter's 5 Forces Porter's five force model is more of a tool to understand factors that affect competition. It is ordinal and not cardinal in nature. In its true spirit, we must look at it as a map and not as actual territory. We may use it for direction but must avoid trapping our judgements only based on exhibits used therein.
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Mrinal Ghosh
Business Consultant, India
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@ Anil Kshatriya Hi Anil, why do you feel that they are ordinal in nature and not cardinal. I see a similarity between these and the GE Matrix. If we can have coefficients for the GE matrix, then why cant we calculate Porter's Forces?
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Anil Kshatriya
Professor, India
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@Mrinal Why not. It can be extended to logic of the GE Matrix. I only have one apprehension that we might get caught in the loop of proving dominant strategies for the game. This takes us away from the big picture.
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Mrinal Ghosh
Business Consultant, India
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Sub Parameters With due regards, though it is a mixed game, I guess the coefficients can be calculated by considering some of the main forces and their sub parameters. For example, in case of competitive intensity it can be measured by checking the number of competitors in the market and their approach to the game you play (though it comes later, only after you have entered the market).
Personally I feel we can project the measured values by segmenting the market in two types - developed and emerging.
The market dynamics will remain the same across the segments and the manner these forces would react would be same across developed markets and so in case of emerging markets.
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Jagdish B Acharya
Consultant, India
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Hurdles Too Strong to Calculate Though we like the idea of calculation, everything cannot be calculated, because:
1. The company is in a dynamic situation and no static factors can be applied.
2. The influencer of factors also gets influenced by factor. This is like "snakes eating each other" paradox.
3. The pace of change often is higher than the rate at which factors could be calculated or estimated.
4. No competitive advantage is static and when an advantage is seen, players act to use it and that neutralizes it.
5. Often players with "gut" sense rather than analytical strength play and that upsets the predictably of the factors.
Because of the interdependence of forces and objects, any conclusions or use for tactics is risky. One may however take help of evaluation of forces and determine strategy to derive advantage from this knowledge.
Calculating and taking help for tactical decisions in my view is dangerous and should be avoided.
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Agustin Cosso Leskovar
Student (University), Argentina
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Sub Parameters Mrinal, I have made some research in my math books here at home. I think there is a way to determine the future impact of a chain of events by considering only its recent ones. It's a stochastic process. You may want to apply the Markov Process or the Garman-Kohlhagen Formula.
And if you are determined and have enough data you can even split the market segments into developed and emerging as you stated.
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Mrinal Ghosh
Business Consultant, India
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Historical Data Yes, also we can have a look at the historical data to analyse how the markets have behaved in these situation. For example if we take the US automotive market in very early 1900s or the tire industry (when they were at growth stage) and understand how the forces behave in these economic conditions then we can actually extrapolate that to current emerging markets. However we need a lot of empirical data.
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H D SHARMA
Professor, India
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Calculating the Magnitude of the Five Forces Quasi Quantitively Hi the group! The idea is fascinating but we must remember that the numbers so estimated or generated would at best be soft numbers to be interpreted only quasi quantitatively. These estimates can only be amenable to rank statistics and analysed through loglinear or logit analysis. Having said that I would like to mention that loglinear and logit analysis are only qualitatively interpreted.
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Agustin Cosso Leskovar
Student (University), Argentina
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Garman-Kohlgane HD Sharma, with the GK formula you shouldn't have to do any qualitatively interpretation, you just have to adjust the variables to fit the information required, always considering there are two type of variables: static and floating. However it is true, you may need huge algorithms, and therefore, a lot of information, which will not be easy acquirable.
If I have some free time today, I'll try to adjust the formula to measure market changes and flows.
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Umesh
Project Manager, Sultanate of Oman
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Many Variables When variables are many, analysis becomes complicated, even when data is available. So 5 force analysis is a tool which can give you some idea about the conditions in which a business is.
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Hans Joergen Pedersen, Denmark
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The Model is Non-numerical in Nature Until I come across a very advanced micro econometric model (i.e. a book on the subject), I take the view that Porters five forces is more a mind map for strategic consideration than a numerical tool.
To assign parameters based on available data and mechanically go with the computed result is a very dangerous business. Common sense goes a long way on its own; but a computer program capable of interpreting industry data according with the P5F Model is a very ambitious goal in my opinion. It involves stochastic programming on a level beyond my imagination, as the world is changing way too rapidly for historical data to be of any benefit.
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JOSE DELGADO
ACCOUNTANT, Mexico
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Five Fources Measures In my personal point of view, I think it should be fantastic to use algorithms and formulas to predict business but nowadays it is very difficult and definitively is not a good idea to do that when markets are very unstable and in fact maybe the best option to understand is to use the theory of chaos.
Finally if you want to give some importance to one or two of the five forces, then maybe should be better if you determine a percentage of importance, which can depend on the specific situation of your business.
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Parvez
Manager, Mauritius
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Calulating Forces by Social Engineering I believe these statistical tools are important but we should favor social engineering also (finding information about the reality or trends via social networks, web sites or media). This allows us to...
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