Restructuring & turnaround management as a response to Porter’s Five Forces
Executive Education / 14 October 2021
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Programm Manager Executive Education
Dr. Michael Fliegner ist seit 2013 Manager für Executive Education an der Frankfurt School. In dieser Funktion ist er mit der Konzeption und dem Management von Talent Development-Programmen und Qualifizierungsprojekten betraut. Sein Schwerpunkt lag zunächst auf den Bereichen Leadership und Strategy & Innovation, seit 2021 widmet er sich vorrangig den Themen Controlling & Finance.

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“COVID-19 has mercilessly exposed the weaknesses of corporate business models to the burning light of day.” This assertion is typical of commentaries on the situations in which many companies now find themselves as a result of the pandemic. And yet business models and strategies were already under pressure long before the pandemic arrived – pressure that will not simply vanish away once it has subsided. Five different forces can jeopardise a company’s competitive success and enforce restructuring or turnaround management.

In 1980, Michael E. Porter, then Professor of Economics at Harvard Business School, published Competitive Strategy, in which he presented a structural analysis of industrial organization that uses the “Five Forces” framework to describe a company’s situation in relation to the competition in its industry sector.1

The automotive industry provides a very useful example for illustrating these competitive forces.

  1. Intensity of competitive rivalry – this refers to the intensity of competition between companies with easily interchangeable products in the supplier pyramid.
  2. Threat of new entrants – this describes the entry of new providers into the market. Examples include Google’s autonomous driving activity (based on its financial power and core competence in big data) and Tesla’s success with electric cars.
  3. Bargaining power of suppliers – this covers suppliers’ demand-based negotiating power, such as the influence of chip manufacturers (charging higher asking prices or allocating chip deliveries), or of skilled workers able to seek out employers offering the best conditions.
  4. Bargaining power of buyers – this denotes the bargaining power of customers or purchasers at the end of the production process. Oversupply in the automotive market makes it easier for customers to choose alternatives offering better terms.
  5. Threat of substitutes – this characterises the threat posed to business models by alternative products. In large cities, for example, it is evident that urban transport policymakers are no longer prioritising easy access and parking for cars. Instead, they are making car driving less attractive by encouraging alternative modes of transport such as public transit services, carsharing, cycle paths, e-scooters, etc.

Government as a force in industry competition – this is, according to Porter, yet another boundary condition or factor that can affect successful action in a competitive environment. Here he is referring to governments and supranational institutions that, by imposing regulatory requirements, restrict business options or make chosen options more costly to implement. This primarily includes the latest regulatory limits on particulate or CO2 emissions, which are having a significant impact on the automotive industry.

Disastrous consequences for companies that fail to review their strategies

Possible future scenarios for other industry sectors may not be as easy to model as they are in the automotive industry. Nevertheless, senior managers who do not regularly and carefully review the competitive situations in their respective markets run the risk of embroiling themselves in a strategic crisis. Disastrous consequences await any company that continues to travel in a previously defined strategic direction despite the emergence and growing market penetration of new developments or forces. Case in point: the German automotive industry’s persistent attachment to the internal combustion engine.

Failure to identify a strategic crisis results in declining profitability and plunging revenue. If a company generates too little income over an extended period and consequently slides into a liquidity crisis, it only has a very small window of time in which to turn things around and become successful again. Thus the risk of a strategic crisis represents a peculiarly personal challenge, because the company’s strategic decision-makers must conduct regular, in-depth reviews of the goals they themselves have set and the paths they themselves have chosen. Anyone – other than the senior management team – who intends to tackle this challenge and return a company to profitability will need a generous portion of courage, as well as sound commercial and legal knowledge supported by suitably powerful tools.

Frankfurt School’s Restructuring & Turnaround Management certification course equips participants with the requisite expertise and tools. Using these resources, they can acquire the clarity so urgently needed to enable them, along with the senior management team, to accept unpleasant facts and develop and implement new, promising strategies.

1 Porter, Michael E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press