By Janelle M. Lewis, Attorney, Business & Legal Strategic Consultant
What are the legal aspects of Porter’s Five Forces Analysis in a company’s business strategy? Or a question you might be asking is: Are there legal aspects in Porter’s Five Forces Analysis of a company’s strategy?
The answer to the latter is yes, there are legal aspects in Porter’s Five Forces Analysis. In fact the basis of each of the five forces that form the basis of a business’ strategic analysis is based on Intellectual Property Law, Antitrust Law, and Contract Law – keeping in mind that this is not an exhaustive list.
The law plays a crucial role in the analysis and in building the strategic framework to understand the competitive market forces in any industry/market-segment.
Assessing the potential for long-term profitability within the industry or market segment in which a business operates, focus is often placed on the interaction of the competitive aspects of the industry (Threat of Entry, Intensity of Rivalry, and Threat of Substitutes) with the competitive aspects of the company’s value chain (Bargaining Power of Suppliers, Bargaining Power of Buyers and again Intensity of Rivalry). The interaction between these five competitive forces help decision-makers understand the industry/market-segment so that they can make those decisions that support the business’ long-term profitability goals – or at the very least, ensure that the business will be profitability in the long-term.
So what role does the law play in Porter’s Five Forces Analysis?
Threat of Entry
Business owners, managers and executives who operate in an existing industry/market-segment want the threat of entry to be low for competitors to be able to operate in their space. In other words, they want it to be hard for competitors to enter their industry/market-segment in order to maintain a competitive advantage. Intellectual Property law is one of the legal tools that provides a business with a competitive advantage by protecting the business against the threat of imitation by new competitors. Patents, licenses, copyrights, trademarks, and trade secrets are legal tools that prohibit new entrants in an industry or market-segment from imitating existing products/services that have a competitive advantage. Contract law is another legal tool that, if used strategically, also provides businesses in an existing industry/market-segment with a competitive advantage. One example is pre-commitment contracts with suppliers and distributors, which can make it harder for new competitors to enter an existing industry/market-segment.
Conversely, new entrants can strategically assess their potential competitive advantage if they were to compete in an existing industry/market-segment.
Threat of Substitutes
Similar to Threat of Entry, business owners, managers and executives want to operate in an existing industry/market-segment where there is a low threat of substitute products or services that threaten their competitive advantage. While cross-elasticity and switching costs play an important role in this part of the analysis, there are areas of law that affect the threat of substitutes in an industry/market-segment. The most prominent being Antitrust law, where the legality of pricing strategies, as well as the impact (and in some cases the acceptability) of mergers & acquisition practices, strategically understood, can help businesses understand and assess the threat of substitutes in an existing/market-segment.
Intensity of Rivals
The level of intensity between rivals resulting in carving out market shares, product or service differentiation or price wars is one of Porter’s Five Forces that is most synonymous with competition. The result of this competition that matters the most to business decision-makers is profit margins. The more intense the rivalry, the lower the profit margins and thus competitive advantage. Similar to Porter’s Threat of Substitutes, Antitrust law, strategically understood, is a legal aspect of this factor that plays a crucial role as decisions that result in antitrust violations could be very costly. Intellectual Property also a legal aspect that when used strategically, plays a role in establishing competitive advantage via product/service differentiation.
Bargaining Power of Buyers & Suppliers
The bargaining power of buyers and the bargaining power of suppliers are two of Porter’s five forces that look to the competitive aspects of a company’s value chain within an industry/market-segment. When determining whether the buyers or sellers in the industry/market-segment have low or high bargaining power, decision-makers consider factors such as, concentration of buyers, concentration of suppliers, ability to segment the consumer base (in terms of buyers), and alternatives to assess competitive advantage.
Strategically, businesses want their buyers and suppliers to have low bargaining power so that they may have a competitive advantage in the industry/market-segment. In this case, as with the other competitive forces, product differentiation, pricing strategy and switching costs play a role in the strategic decision making of businesses, and is where the legal aspects of a company’s business strategy come into play.
To view the law as tangential to business strategy is to lose the opportunity for a complete strategic approach to gain a competitive advantage in competitive markets.
Putting it all together…Law=Profits
While Porter’s Five Forces Analysis is a business strategy tool that assesses the industry/market-segment for long term profitability, the aspects of the analysis are not only business in scope. The law plays a crucial role in the analysis and in building the strategic framework to understand the competitive market forces in any industry/market-segment. To view the law as tangential to business strategy is to lose the opportunity for a complete strategic approach to gain a competitive advantage in competitive markets. In other words, considering the law in Porter’s Five Forces Analysis provides business decision-makers with a more complete picture of the competitive market forces that impact their long term profitability.