How internal “politics” should also be taken into consideration when assessing the profitability of an industry
Bite Size Management Thoughts by Dr. Constantine “Dino” Kiritsis, founder, StudySmart
In one of my discussions with my good friend, HR professional and trainer Maria Ratz from Bulgaria, we started analyzing a specific industry and started to explore organizations from within. The discussion led me to realize a new competitive force that needs to be featured when analyzing competition. Thanks Maria for leading me to this.
Everyone who has studied a business related degree knows the 5 forces theory by Michael Porter. For those who do not know, or do not remember, it is a business model that assesses the profitability of an industry. It was developed in 1979 and it is a truly amazing model as it helps one assess the competitive environment in a simple way by examining – basically – 5 questions.
What are the barriers of entry? In a simple manner, organizations should ask themselves how easy it is for a new company to enter the industry.
What is the power of buyers? In essence, if the customers have power, you are actually competing with them (see my bitesize thought in 2017 on why customers are actually competitors).
What is the power of suppliers? Suppliers can ask for high prices and therefore limit profits for an organization making them – in a certain sense – competitors.
What is the threat of substitutes? In the education industry, on-line training/learning has disrupted face to face training and in the banking industry bitcoin has disrupted the financial industry.
What is the overall rivalry? This assesses the direct competitors and the intensity of competition of the overall industry after including the above 4 ’forces’.
Well, there is another force that is not included in the above. And even though all of the above are ‘external’ elements, mine can be considered ‘internal’ but with ‘external’ characteristics. Drumroll please…
6. Competition from ‘within’
Competition can also come from “within” the company in the form of stupidity, internal politics, silos, subsidiaries conflict (i.e. from the same conglomerate, business units competing with one another willingly for budgets and short - term opportunism). I know that some will state that 5 Forces theory looks at the profitability of an industry and not internally. However, if we assume that customers and suppliers indirectly compete with the organization at stake, internal friction and conflict within a large multinational with global presence can also affect the profitability of the industry and as a consequence – the company. Therefore, if we would like to have a complete holistic picture of the industry dynamics and the profitability of that industry we should take into consideration the internal multinational ‘politics’ that affect it.
Competition in economics can be defined as the effort of enterprises to be leaders in their industry and increase their market share. In other words, it’s when one business tries to win over another business’ customers or clients by offering different products, better deals, or by other means. It becomes somewhat evident that a company can actually ‘shoot itself in the foot’ by competing internally for customers, ruining relationships with the clients, killing products, being aggressive in sales, trying to cross-sell in the wrong way to help other SBU’s or divisions, abusing their power, or simply acting in an ‘internal competitive nature’. If that doesn’t count as a competitive force, what does? Not being able to go/enter to a new market because another subsidiary ‘runs that area’ or is ‘responsible’ for that territory may create problems to the client overall and the result may be losing that client all together!
A highly diversified organization (i.e. a conglomerate holding an energy business, a hospitality business, a construction business, technology etc.) may be ‘limiting’ or sacrificing profitability of one of its subsidiaries to help another SBU within its control. Isn’t that a possibility? The subsidiaries themselves may be in ‘different industries’ and thus will require a different 5 forces analysis for each industry but in a unique way, one’s profitability may be negatively affecting the other’s, for example the energy business through the tech business’ need to move to battery power.
The argument above may be a limitation to the model but I think in the fast pace disruptive world we live in we need to give it more attention. Are you competing or affecting others from the same organization? Are you creating products that may ‘kill’ other SBU’s? Are you FORCED to ‘avoid’ certain markets because others from the same company will be disappointed? (but it kills you to see that they are doing nothing…). Are competing leaders within the same organization fighting for the same budget? And in doing so, are they driving customers away?
Note: In 1990, there were articles on a 6th force being complementors to organizations, however in a wider sense these can also be under ‘suppliers’ in most (not all) cases.