Analysing the environment: Porter's five forces, McKinsey 7S and SWOT
Analytical tools turn scanning into decisions: Porter's five forces for the industry, McKinsey 7S for internal fit, and SWOT to bring both together.
Porter's five forces
| Force | Strong when… | Sri Lankan example |
|---|---|---|
| Threat of new entrants | Entry barriers are low: little capital, no licence, weak brand loyalty | Easy to open a new café; hard to start a mobile network, which needs a licence and costly towers |
| Bargaining power of suppliers | Suppliers are few, inputs are unique, switching is costly | A single importer of a key raw material can push up prices |
| Bargaining power of buyers | Buyers are few and large, products are standard, switching is easy | Large global clothing brands buying from Sri Lankan apparel exporters |
| Threat of substitutes | Other products meet the same need at a similar price | App-based voice calls replacing normal phone calls |
| Rivalry among existing competitors | Many equal rivals, slow growth, high fixed costs | Dialog, SLT-Mobitel and Hutch in mobile services; Keells, Cargills Food City and Arpico in supermarkets |
Using the five forces
Michael Porter of Harvard argued that these five forces decide how attractive (profitable) an industry is. The stronger the forces, the lower the profit potential. A firm then chooses a competitive strategy: cost leadership, differentiation or focus. To apply it: define the industry, rate each force high, medium or low with evidence, judge overall attractiveness, then pick a strategy that defends against the strongest forces.
The McKinsey 7S framework
| Element | Type | Meaning |
|---|---|---|
| Strategy | Hard | The plan to build and keep a competitive advantage |
| Structure | Hard | How work, reporting lines and departments are arranged |
| Systems | Hard | Daily processes and procedures: IT, budgeting, HR, quality |
| Shared values | Soft (centre) | Core beliefs and culture that link all the other elements |
| Style | Soft | The leadership style of top management |
| Staff | Soft | The people: their numbers, types and development |
| Skills | Soft | The distinctive capabilities of the organization |
SWOT analysis
| Source | Helpful | Harmful |
|---|---|---|
| Internal (inside the firm) | Strengths: strong brand, skilled staff, wide branch network | Weaknesses: high costs, old machines, weak online sales |
| External (the environment) | Opportunities: tourism recovery, new export markets, digital payments | Threats: new rivals, rupee swings, sudden policy changes |
How to carry out the analytical tools
- Set the purpose and the unit of analysis: the whole firm, a business unit or a product.
- Collect facts from CBSL and government data, customers, staff and competitors' annual reports.
- Use PESTEL and the five forces for the outside; the 7S framework and a resource check for the inside.
- Put the findings into a SWOT, with evidence for each point and the most important first.
- Match them in a TOWS matrix: SO (use strengths to seize opportunities), WO, ST and WT strategies.
- Turn the chosen strategies into plans, and repeat the analysis regularly.
Sri Lanka's mobile market shows Porter's forces clearly: strong rivalry between Dialog, SLT-Mobitel and Hutch, substitutes from app-based calls, but high entry barriers, because a licence and a costly network are needed. Dilmah builds on a SWOT strength, its pure Ceylon tea 'packed at source' story, against the threat of cheaper blended teas abroad.
Short answer: “What does SWOT stand for?” Strengths and weaknesses (internal); opportunities and threats (external).
Structured question: “Explain the McKinsey 7S framework.” Name the seven elements, split hard (strategy, structure, systems) from soft (shared values, style, staff, skills), and explain that all must fit, with shared values at the centre.
Essay: “Explain Porter's five forces model with examples.” Introduce Porter, explain each force with when it is strong and a Sri Lankan example, draw the five-force diagram, then link to industry attractiveness and generic strategies.
Five forces: 'New Suppliers Bring Substitute Rivals' = New entrants, Suppliers, Buyers, Substitutes, Rivalry. The three hard S's: Strategy, Structure, Systems.