How to Analyse Competitive Forces in an Industry

Start from a reading that is already finished and test it line by line. Beside each of the five forces, write the fact the line rests on, where that fact came from, and the date it was true. Any line carrying only a judgement word moves to not established. Then count the answers inside each surviving line. One line can hold two. The finished note carries a count and a date.

Here is the thing worth holding on to before anything else. A reading of a field is either evidence or it is an opinion, and what separates the two is not confidence, not length and not how carefully the person worked. A reading is evidence when somebody else, handed the same fact and none of the words, would arrive at the same reading. A line carrying a fact can be checked by a stranger, laid beside the same line a year later, and corrected when it moves. A line carrying only a word can be agreed with or disagreed with, and there is nothing else anybody can do to it.

The second thing is a property of the frame rather than a fault in anybody's work. The frame allots each force exactly one line, and some forces have two answers. Where two published facts about one force point in opposite directions, writing a single word on that line throws one of them away, and nothing in the frame settles which one to keep. The honest form of that line is both answers written out and no single word at the end of it.

The third is the field most notes leave off altogether. Every fact was true on a date, and a reading is a description of a field at a moment rather than a standing property of it. The words strong and weak carry no as-of dateThe date a figure actually describes, not the date somebody wrote it down and not the date it is being read. at all. The facts underneath them move, and the words travel intact into next year. Undated words over moving facts are the specific way a correct reading turns into a wrong one without anybody making a mistake.

What is being audited, and why the audit is a separate job

A reading of a field's competitive forces arrives on the analyst's desk as five lines. The frame those five lines were written to is Michael Porter's, set out in Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980, and putting it to a field is a procedure of its own, set out under How to Apply Porter's Five Forces to an Industry. The audit begins one step after that procedure stops. The reading exists. Somebody has already done the work. The remaining job is to decide how much of it can be believed.

The job needs its own procedure because of one uncomfortable fact. Each of the five lines was supposed to rest on an observableSomething in the world that can be counted, read or timed directly, rather than something that has to be taken on somebody's word. of its own, and a reading built from written facts and a reading built from impressions come out looking exactly the same: five lines, one word each, no blanks. Nothing on the surface of a finished note says which of the two it is. The only thing that separates them is what sits underneath each line, and a finished note is precisely the document that does not show what sits underneath each line.

So the audit runs six steps, in a fixed order, and every step has a written pass and a written fail. The order matters: each fail hands the step after it something specific to do. How each of the five forces works is set out under its own heading. The audit produces no new reading of the field, only a test of the one that already exists.

Step one: does every line carry a fact, a source and a date?

The five lines are taken one at a time, and three things are written beside each of them, in words, rather than referred to as findable elsewhere. The fact the line rests on. Where that fact came from. The date it was true. Three fields, five lines, fifteen boxes, and the audit is decided by how many of the fifteen can actually be filled.

A line with no source is not a weak line, it is an uncheckable one, and the difference is not a matter of degree. Think of a repair quotation. A quotation carrying the price, the workshop's name and the date can be argued about, taken to another workshop, or held up next year when the same repair costs more. The same price written on the back of a scrap of paper can only be believed or not believed. Nothing else can be done with it, by anybody, ever.

The note under audit reads a single city's field for hard-bound registers built to a school specificationA written statement of exactly what a thing has to be: paper weight, number of sheets, binding, cover, size. Two different makers working to the same one produce the same article., seen from the makers' side, and its facts are those of one of them, Anjani Stationers Private Limited, an invented maker. The buying side line fills all three: one buyer at 30.00 per cent of revenue and 40.00 per cent of the money still owed, with a collection periodThe average number of days between sending an invoice and the money arriving, worked out from what is still owed against a year of sales to that customer. of 171 days against 110 days for every other account, from a customer list, as at one published year end. The input side line fills all three as well: 46.0 per cent of outside payments going to a supplier with nine known alternatives and about two weeks to replace, and 4.0 per cent going to one with a single alternative and about twenty six weeks, from the arrangements themselves, as at the same year end.

The other three lines carry a sentence each and nothing underneath it. Rivalry says competition is moderate. The line about somebody new setting up says entry is difficult. The line about what a buyer turns to instead says there are few alternatives. Each is a sentence somebody could defend in a meeting and none of the three has a fact, a source or a date attached. Three of the five lines fail step one, and they fail it before anybody has argued about whether the words are right.

Step two: strike the judgement word, and does it come back?

Each surviving line is split in two. The judgement word goes on one line and the fact goes on the line underneath. The word is then covered, the fact handed to somebody who was not in the room, and that person asked what they would write. If they write the same word, the word was a summary. If they write something narrower, the word was travelling on credit.

A judgement word is a summary of a fact that has not been shown, and striking it is the cheapest test in the audit. On the note under audit the input side line says the input side holds the terms. With that word covered and only the facts handed over, a second reader gets to one counterparty at 4.0 per cent of outside payments, holding a single alternative and about twenty six weeks of replacement timeThe number of weeks from the morning a counterparty stops until the business is running normally on somebody else, including finding them, fitting them and getting them working., as at the published year end. The second reader does not get to a statement about the input side in general. Another 46.0 per cent of the same payments sits with a supplier holding nine alternatives and about two weeks. The word said more than the fact, so the word goes and the fact stays.

The buying side line takes the same treatment and returns the same result in one clause: its facts describe one named buyer and its word described the buying side. Keep the facts about that buyer and drop the general word. Both surviving lines now carry facts and no words at all. Step three needs them in exactly that state.

Step three: how many answers are inside each surviving force?

Now stop treating a line as a line. Take each surviving force and list every published fact bearing on it, separately, without merging them into a summary. Then count. Most of the time the count is one and the step is over in a second. Sometimes it is two, and the two point in opposite directions, and that is the case the frame has no room for.

The frame gives each force one line and the field does not always supply one answer, and this is the exact point at which a careful note quietly throws away half of what it knows. On the reading under audit both survivors fail step three. The input side holds one counterparty at 46.0 per cent of outside payments with nine alternatives and about two weeks, and another at 4.0 per cent with one alternative and about twenty six weeks. Which of those two is the larger exposure is a real question with a settled answer, and that answer is worked out under The Value Network. Step three does not rank the two facts, it records that the force holds both.

The buying side holds two as well, and the two are stranger. Both are about the same buyer. The Sunrise Public School group collects at 171 days against 110 for every other account and it has stopped paying. The same group's order bookThe orders a business has taken and not yet delivered, taken together. The total tells a business how much work is standing in front of it. refills each spring without anybody at Anjani Stationers having to persuade the schools all over again. One buyer, two published facts, pointing opposite ways, on one line the frame allots a single word.

Step four: what date was each fact true, and what would move it?

Every fact that survived now gets two more things written beside it: the date it was true, and one sentence naming what would change it. The second is not a forecast and it is not a guess about the field. The sentence plainly names the event that, if it happened, would make the fact wrong.

The vintage of these particular facts is itself published, so step four bites hardest on this note. The 30.00 per cent of revenue is a total across one whole trading year. The 40.00 per cent of the money still owed is a position on one evening at the end of that year. And here is the part worth sitting with: both of those figures had been sitting on the sheet for a full year by the time the Sunrise Public School group stopped paying. Nothing was wrong when they were written down. The facts were true, the reading followed from them, and then the field moved while the words stayed exactly where they were.

The input side facts take the same treatment. The twenty six weeks holds only while one firm is the only one within reach certified on that folding and gluing machine, so a single further certification moves it. The two weeks and the nine alternatives hold while nine mills are still making that weight and finish, so a mill closing moves that one. A reading is a description of a field at a moment, and the words strong and weak carry no date at all. A doctor's note from two years ago is not wrong, and it is also not about the person sitting in the room today.

Step five: which fact would settle what is still open, and has anybody got it?

Two kinds of line reach this step. The ones that failed step one and are sitting in the not established column, and the oppositions from step three that are still standing. For each of them, write one sentence naming the fact that would settle it. Not a topic, not an area to look into. The fact.

Run it on the rivalry line, the line that failed step one. The fact that would settle it is how many makers the city holds and what they charge. Now check whether anybody has that. Bhavani Register Works is a promoter runRun by the person or household whose own money started the business, rather than by salaried managers answering to shareholders outside it. maker of the same registers to the same specification, making 1,50,000 registers a year, and neither what it charges nor what it pays for its paper is published anywhere. Nor does anything published say how many makers the city holds altogether. So nobody has the fact in reachable form, the step fails, and the question is written into the note as standing with the fact named.

The other two failed lines get the same one sentence each. For the line about somebody new setting up, what would settle it is what it costs to fit out a works to that specification and how long before it is delivering. For the line about what a buyer turns to instead, what would settle it is what a school actually buys when it does not buy a hard-bound register. Neither is published, so both stand. The frame contains no rule for which of the five forces wins: it produces five readings rather than a score, and adding or averaging them would need a weight nobody has published.

Step six: what does the finished note actually say?

Everything now goes on one sheet: the lines that survived, the oppositions that stand, the standing questions with their named facts, and one date covering the facts underneath. Step six is where the audit either produces something a stranger can use next year or quietly turns back into the note it started as.

Notice what is not there: a word for the field. No summary, no rating, no verdict, and nothing that could be lifted out of the note and repeated in a corridor. A count and a date can be lifted out, and both carry their own limits with them wherever they go. Nobody has established a threshold at which a count of established lines becomes enough or a fact becomes too old.

What does this frame not settle?

Three things, and none of them is a fault in the frame. The frame allots each force one line, so it does not settle a force that has two answers. The frame carries no date of its own, so it does not settle when a reading stops being true. And nothing in the frame supplies a weight, so it does not settle how the five combine.

All three are reasons to write a reading down more fully rather than reasons to distrust it. A reading with its facts, its dates and its oppositions attached is worth more next year than a confident word was worth this year, and the whole six step audit exists to produce that fuller reading. The frame is doing a frame's job, naming which five questions to ask. The frame never promised to say whether anybody had answered them.