Mapping the five competitive forces the carpet cleaning market, 2004.
226 Tony Grundy
had inhibited growth but had also sustained a low competitive rivalry. However, key players in the industry had identified considerable latent growth as the rate of penetration of the potential market was low. These conditions triggered a wave of major expansion as the economy grew again through new site devel- opment. Also, existing players grew by acqui- sition, creating greater industry concentration, hopefully a positive factor. Many buyers were relatively new to the market, being either new- comers to a gym, or because of industry ‘churn’ as many people rapidly dropped out of the gym. This meant that many were unso- phisticated in their information available, making it easier for companies to charge rea- sonably high prices relative to the standard and value added of what they actually offered. Current margins were good, sites in the indus- try were available and reasonably cheap, and the industry mind-set was very positive. Over 1996–2001 there followed a major expansion in capacity with players chasing market share and neglecting the future set of five competi- tive forces which it was just about to encounter.
Just as Hamel and Prahalad extolled us to think about ‘future competitive position’ as well as ‘present competitive position’, so we should anticipate competitive dynamics (see Figure 15) by thinking about ‘future competi- tive forces’ and against the surrounding growth drivers and PEST factors (see Figure 3). One company that took advantage of this opportunity was Topnotch. In the 1990s Top- notch was a small chain of independent health
clubs with an appeal to the younger market segments and with a theme of excitement. Fundamentally, however, Topnotch was a lowest price operator with a lack of scale and little brand awareness — two of the critical success factors necessitated by the future five competitive forces which it was about to enter (after 2001).
In 2001, Topnotch floated its shares on the stock market and used these funds, after con- siderable transaction costs, to expand into a chain of over 20 clubs. For reasons of speed, many of these new sites were acquisitions of existing ones.
At the time of flotation, financial markets saw this market as ‘very attractive’ — seeing growth prospects but not perhaps inquiring into probable trends and discontinuities in both growth drivers and PEST factors. They therefore played a highly encouraging role in this expansion. The effect of 9/11 on the service economy and of economic slowdown generally had a particularly sudden and adverse effect on this industry, and especially on Topnotch. This can be analysed using an extended Porter’s five forces combined with ‘from–to’ analysis (see Table 1).
Overall, the ‘from–to’ analysis represents a negative shift in forces and one significant enough to cause a decline in margins. When combined with volumes being lower than expected and with over-enthusiastic expan- sion of many companies’ central costs, the effect was, predictably, profit warnings across the industry. By 2002, Topnotch, like many other chains, was in financial trouble. Yet
Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc
Table 1. Porter’s five forces: ‘from–to’ analysis
From To Because of
Bargaining power of buyers Medium High Buyers more discerning, experienced and price-sensitive
Rivalry Medium Very High Companies desperate to find health club capacity — producing discounting, etc.
Substitutes (threat of) Medium Medium/High Buyers can find alternatives — thus saving money Entry barriers Low/Medium Medium Sites now so expensive — hard to enter — but
could change again Suppliers Low — staff Low — staff Variable
High — sites Medium — sites
instead of looking for further ways to adapt the industry mind-set, the reactive response of the industry generally was simply to reduce their largely unnecessary costs. In 2002 Topnotch went into administration, although a major part of it is still in operation today.
Clearly the above was a very painful learn- ing process for all of those involved, particu- larly investors and many staff, and also for the entrepreneurs who led this growth surge, into the teeth of the (future) five competitive forces. If an in-depth analysis had been per- formed as of 1996–8 of the future competitive climate for 2001–4 (Figure 3), then much of this financial pain might have been avoided.As Matthew Harris, CEO of the original Topnotch and of its remaining, independent sites, today reflects:
I hadn’t really heard about the five com- petitive forces to be honest. I had absorbed a lot of management theory from various sources, especially the financial stuff but I just felt from everything I saw, heard about and imagined, that we could only win through this growth. I first saw Porter’s five forces well after we had gone over the precipice. It didn’t seem very helpful at the time as I couldn’t see what I could really do with it in that situation and it did seem quite theoretical.
Looking back on the experience and reflecting on the competitive situation as we have now, I can see its now obvious rel- evance. Besides the obvious cost reduction which it implied we are now focusing on how we can turn the buying power of the buyers to our advantage in our marketing strategy. I can certainly see how the forces interplay with each other and with the rest of what is going on and even down to a very specific transaction like someone joining or leaving us.
In sum, the short case above has helped to bring alive some considerations of this paper, particularly of the interdependency of the forces both within each other, with PEST factors and growth drivers. It also illustrates
how operating managers, however senior, can fail to see the full potential of the technique.