Leg Zero: Porter´s model explained. Force number One: Industry Rivalry (part V)
Let´s continue learning about Porter´s model.
Porter´s model of competitive analysis identifies five forces in an organization´s environment that influence competition. Some academics have added a sixth force called Complementors. Professors Adam Brandenburger and Bare Nalebuff proposed the sixth force “Complementors”.
“Complementors are companies or entities that sell or offer goods or services that are compatible with, or complementary to, the goods or services produced and sold in a given industry. Successful complementarities abound in business, in the form of alliances or partnerships, such as Intel chip complementarity with notebooks or tablets, Microsoft Windows with notebooks or laptops, or smartphones with telecom services”. Source: Reynaldo Lugtu Jr.
I have not added this sixth force Complementors inside Porter´s Industry Analysis Structure because I wish to respect the integrity of Porter´s model. I include the concept of “Complementors” in another parallel model based on the book Co-opetition, which I will explain later after we finish with Porter´s five forces. But if you feel comfortable adding the Sixth force “Complementors” in your industry analysis inside Porter´s model, it is up to your taste. Personally, I do it separately.
Today we will continue learning about another key determinant from the Force Industry Rivalry. It is the turn of Industry Growth.
Each industry has a pace of growth. When we decide what business we wish to work with, we must be aware of the respective industry´s growth.
The definition of Industry´s growth is “The increase in the size of sales and net income observed within a given economic sector or industry over a specified time frame”. To measure the industry´s growth we use the Compound Annual Growth Rate (CAGR). When the management of a business is reviewing the success of a product, it needs to deduct the overall industry´s growth rate from the observed product sales growth.
Each consulting firm has calculated the CAGR for each industry or economic sector. For example, the advertising sector shows a CAGR of sales (5 years) of 11.92%, meanwhile, the CAGR in sales of the Farming/agriculture sector is 5.52%. For the purpose of this blog, I am showing you all the CAGR data calculated by professor Aswath Damodaran from New York University, who is really one of the top professors of Finance and Valuation in the world.
The healthcare products sector shows a CAGR in sales (last 5 years) of 9.88%, meanwhile, the power sector has a 0.54%. Each economic sector has a different CAGR in sales, and a different CAGR in net income too. It is specific for each industry and we must be aware of it. We can´t expect to outperform the industry growth automatically. Also if we are innovators initiating a new economic sector or we are planning to enter our business in a mature phase industry, it is very important that we can foresee in which stage of growth is the industry of our business.
Each economic sector has different stages of growth:
Each industry has to be well understood, because our business model should reframe the future projections of sales growth based on assumptions, and one possible assumption for our revenues growth could be to reach the industry´s growth rate or to outperform the industry growth rate.
This is all for this week. Next week, we will continue learning about the rest of key determinants of the Industry Rivalry Force. As I told you, if we wish to learn Porter´s model, we must dig in each of the key determinants for each of the five forces, trying to understand it as much as we can. Otherwise, our industry analysis will be lame and superficial. And we don´t want to do that, don´t we? In addition, if you don´t know how to make an industry analysis, how will you understand your own consultant when you hire him or her? It is very important to know these things if you wish to set up a beautiful business.
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