The new 5 forces shaping strategy in a post-pandemic world

It is over forty years since Michael Porter published his groundbreaking article on 'How Competitive Forces Shape Strategy' in Harvard Business Review in 1979. In the four decades since then, Porter's thinking and the five forces he coined have become the gold standard for understanding an industry and developing competitive strategy.

At its core, Porter's five forces framework helps strategists better understand competitive dynamics by analysing the bargaining power of suppliers and customers on the one side and the threat of new entrants and substitutes on the other. This allows businesses to understand the critical market forces that shape their industry structure, identify the most advantageous position, and accordingly orientate their strategy for value creation.

While over the years there have been debates about whether an additional force such as government regulation should be added or, whether it can better account for sustainability, the basic framework has been remarkably resilient. 

However, in today's COVID world although Porter's five forces remain valuable and relevant, we need to complement his framework of analysis with an understanding of the unique macro-economic forces shaping business strategy during the current crisis. In particular, we identify five new forces shaping strategy during COVID that need to be considered alongside Porter's five forces. Each of which need to be carefully tracked, analysed and integrated into the strategy development process. These new forces include the progression of the virus, steps toward its containment, the government response, public sentiment, and the actions of business.

The new five forces are a critical consideration for strategic analysis and decision making during the crisis for three important reasons.

First, in the current moment, the key strategic questions are how long will the crisis last and how big will be the impact (both positive and negative), rather than how do I gain a position of advantage. However, business leaders are currently operating in a fog of uncertainty with very little visibility over how the virus will play out and what the second-order effects on the economy will be. Therefore strategic decision-making requires a framework that can help dissipate this fog by identifying and disaggregating the key drivers of uncertainty. The new five forces provide such a framework.

Second, while Porter's five forces are well-tuned to help us understand competitive forces in an industry they do not account for how strategy should adapt to sudden and profound demand shocks that we have witnessed during the current crisis that upend established market dynamics. Therefore anticipating and responding to these kinds of highly disruptive events that live outside Porter's framework needs to be at the heart of business strategy in the present moment and going forward. And here again, the new five forces provide a template for real-time monitoring of an incredibly dynamic external environment.

Third, when the current COVID crisis eventually wanes, it is unlikely that we will land up where we left off. The virus will result in enduring changes to how government, businesses, and consumers behave. Consequently, companies need to start monitoring these shifts today to start building a clearer picture of the future business landscape. By capturing the evolving behaviours of the key actors in the economy the new five forces provide us with a window into the post-COVID world.

The new five forces of strategy

In light of the importance of complementing Porter's analysis with the new five forces, it is vital that leaders understand each of them, track their underlying drivers, and use them to build scenarios to inform their strategic decision-making during the crisis. We discuss each of these new five forces in turn along with their implications for business.

COVID progression

The first of the new five forces to monitor is the progression of the virus itself. The rate of case growth, hospitalisation, and mortality is a crucial driver of government policies and public behaviour. As we have seen across Europe and in parts of India in recent weeks, any uptick in cases can rapidly lead to renewed restrictions with implications for both supply and demand. On the flip side, the sense that the virus is under control can give the confidence to workers to return to offices and to consumers to go into the marketplace. Therefore companies need to closely track COVID progression at a highly granular level as outbreaks and the response are often localised, affecting specific regions, countries, or cities where a business may operate. 

To illustrate the importance of this point recent Kanvic analysis found that although India has now entered its fourth phase of 'Unlock', the country's lockdown stringency index actually rose in July and August due to the effect of local lockdowns in various regions. 

Furthermore, a granular approach can reveal other important trends such as the shift in virus hotspots from urban to rural areas. In April rural districts of India accounted for only 23% of new cases while by August this had risen to 55%. The impact of the virus on a rural population served by much weaker healthcare infrastructure could have a major impact on the fortunes of the agricultural sector which was one of the few bright spots in the economy in the first half of the year.

COVID containment

The second force to track during the crisis is progress toward COVID containment including the development of effective vaccines and treatments or community-level immunity. Firstly, an effective vaccine could immunise a large share of the population against the virus giving them the confidence to return to normal life and allowing governments to relax social distancing rules. Currently, there are eight vaccines in final phase three trials around the world with the best estimates for large-scale availability currently pointing to mid-2021. 

At the same time, a better understanding of the virus and the development of more effective treatments could reduce mortality and morbidity, reducing pressure on health systems, and reducing fear of infection among citizens. Therefore it is important to track advances in therapeutics as well as the average length of hospital stays, ICU admissions, and case-fatality rates.

Finally, the progression of the virus may gradually lead to a larger share of the population developing some level of immunity which might ultimately slow the virus. The latest national seroprevalence study conducted between August and September by the Indian Council of Medical Research (ICMR) found the presence of antibodies against COVID-19 in 7.1% of the population, up from 0.7% in May and early June.

While implications of these developments still contain a significant degree of uncertainty, by closely monitoring progress in each area businesses can begin to form a picture of when the impact of COVID will begin to wane.

Government response

The third of the new forces to consider when developing business strategy during COVID is how governments respond. The government response has two dimensions - the response to the healthcare crisis and the response to the economic crisis. 

The healthcare crisis has required governments to impose lockdowns and social distancing which have had a huge impact on both supply and demand. At the same time, there have been major increases in spending on healthcare infrastructure from testing capacity to hospital beds. 

Meanwhile, in response to the unfolding economic crisis, there have been a variety of responses to support financial market stability, business liquidity, and household income levels. For example, the Indian government suspended the country's bankruptcy code for six months in March which was recently extended for a further three months. Whilst providing a lifeline to indebted companies this action has important implications for lenders, investors and those well-capitalised companies who may be looking at acquisition opportunities. 

The continuation or expansion of these government measures and their effectiveness will continue to be critical factors in formulating business strategy during COVID. What is more, beyond the tangible impact of policy decisions strategists must also be cognisant of the messaging employed by governments which is an equally important factor shaping both public and business sentiment.

Public sentiment

The fourth force businesses need to closely observe during the crisis is public sentiment. Consumer confidence is the key driver of economic recovery and it will be determined by the progression of the virus and scientific advances on the one hand, and business and government responses on the other. If the perceived risk of the virus reduces, we can expect to see consumers resume some pre-pandemic behaviours however, fears of a prolonged economic downturn could well overtake fears of the virus itself. Therefore tracking sentiment toward both the virus and the economy is key. The Reserve Bank of India's Consumer Confidence survey hit a record low in July. However, it also tracks consumers' perceptions of both the current situation and their expectations for the future. While the former fell the future outlook actually rose, indicating that consumers' longer-term outlook may be improving.

In addition to survey data, a variety of experimental indicators are providing real-time snapshots of observed behaviour rather than relying on reported sentiment. One such example is Google's mobility index tracks the movement of app users and is therefore able to measure changes in behaviour such as commuting to work or spending time at home. Whilst movement to workplaces increased as India exited lockdown in late May, office commuting has remained consistently 30% below pre-COVID levels in the subsequent months. Continual monitoring of such data will be key to companies from retail to transport and real estate to facilities management as they try to gauge whether this will become a long-term shift to work from home.

Business actions

The fifth and final force shaping strategy during COVID is the actions taken by businesses in response to the crisis. As businesses anticipate or observe actual improvements in demand business confidence will improve, companies will expand production, grow their inventories, and hire more workers. This will have ripple effects across supply chains. Therefore key indicators like the Purchasing Managers Index (PMI) are a valuable means of tracking sentiment in both manufacturing and services sectors as it indicates whether businesses expect an increase of orders in the coming month.

Another important indicator of business confidence about the future is hiring. Tracking the number of advertised positions at aggregate and sectoral levels can give important clues to which parts of the economy are likely to expand or contract - and indeed which customer segments may be the most promising to target. Further, such business responses are also key to consumer confidence as decisions about hiring, layoffs, and pay cuts will directly affect consumers' future earnings expectations.

The new five forces shaping strategy in a COVID world provide a vital and necessary addition to Porter's framework as business leaders navigate through the crisis in the coming months and quarters. By closely tracking these new five forces and their drivers, leaders can make better strategic decisions and respond with greater speed and agility to what will continue to be a volatile and highly uncertain business environment.