Porter’s Model of Competition Essay Sample

Porter’s Model of Competition Pages
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Michael Porter’s competitive forces model is a well-known framework for analyzing competitiveness. Competitive force model is used to develop demonstrates on how Information Technology can upgrade the competitiveness of a corporation. It is also used to develop strategies to increase competitive edge. Competitive strategy must grow out of a sophisticated understanding of the structure of the industry and it is changing. In any industries, whether it is domestic or international, the nature of competition is embodied in five competitive forces: (1) the threat of new entrants, (2) the threat of substitute products, (3) the bargaining power of suppliers, (4) the bargaining power of buyers, and (5) the rivalry among the existing competitors (Richard, E, pg. 16). In industries in which the five forces are favorable, such as soft drinks, mainframe, computer, Internet, database publishing, pharmaceuticals, and cosmetics, many competitors earn attractive returns on invested capital.

The five competitive forces determine industry profitability because they shape the prices firms can change, the costs they have to bear, and the investment required to compete in the industry. The threat of new entrants limits the overall profit potential in the industry, because new entrants bring new capacity and seek market share, pushing down margins. Powerful buyers or suppliers bargain away the profits for themselves. Fierce competitive rivalry erodes profit s by requiring higher costs of competing advertising, sales expense

or passing on profits to customers in the form of lower prices. These five forces model show how it could endanger a company position in an industry. The Internet has changed the Porter’s competitive forces model, and this research paper will show now the impact of Information technology on the model of competition.

How did the impact of information technology influence the threat of substitute product of service? The emergence of the Internet on competition levels in the banking industry that uses Porter’s Five Force Model is how. (Siaw.7, 1996, pg. 514). The Internet has affected the world by its ability to pull enormous information on any subject virtually. In today’s society, business models have to adapt to the growing acceptance of Internet and e-business. The impact of the Internet on the banking industry is often under- valued by executives. Home banking experienced a lot of problems in the early 1980’s. The Chemical bank introduced Pronto Business Banker, a small business. Pronto Business Banker failed to break even and it didn’t attract many customers. In 1989, Promo Business Banker and Chase Manhattan Spectrum Home Bank had to resign. In 1989, executives asked many questions. Will Internet banking customers adopt this service? Can we breakeven? The previous questions are just a couple of these questions. In 1996, Netbank started an Internet bank, in Atlanta. Netbank lost $5.6 million in 1997, but in 1998, they reported 4.5 million in net income.

Most executives still wonder if the Internet banking industry can satisfy customers. E-Commerce has brought about different kinds of business people that involve themselves in the Internet and commercial technology. The real value of E-commerce comes from enhancing communication and transactions. They then integrate this with customers, business partners, suppliers, government regulators and the public at large. This ultimately moves us towards an electronic market place where goods and services are exchanged over the Internet (Siaw, 7, 2000, pg 515). Internet banking and traditional PC banking are different forms of applications of the Internet that help in banking. One-way information technology has an impact on products and services. The Internet lowers the barriers to entry that allow more new competitors. This gives companies more opportunity to succeed in businesses where there had been little or no competition before.

How did the impact of information technology influence the rivalry among existing firms in the industries? Marketing strategies and business model have shifted because of the fast diffusion of the Internet. Customers have the option to buy over the Internet and can make online comparisons among various products and services. The growth of technology has given customers the opportunity to shop at home. Wireless technology is also on the rise. For example, walk past your local cinema. Listen to your wireless phone ring. Read your short message that informs you that you can receive a dollar off of the movies of your choices. You can see this wireless information technology all around you. This advertising is called m – commerce. M-commerce is defined as the delivery of products and services in which wireless technologies enable e- commerce activities to be delivered at any time and anywhere. Japan originated wireless Internet in 2000. The main strength of m –commerce is ability to provide service everywhere. The key weakness of m – commerce is the security of this technology. This makes it easy to get customers information. The Porter Model is a structural analysis for industries. This is now the rivalry among existing cellular service providers of the cellular industry.

Taking NIL DoCo Mo i-mode for example, there are many competitors in the cellular industry. In Japan alone, there are two other cellular service providers that must provide incentives to retain consumers. They offer attractive packages to attract new customers (Julia, Yeo, pg. 328). Japan is popular for I – mode having over 60% of wireless Internet, but it is expanding globally. Information technology impacts competition in other areas as well. In the category of “New Entrants”, information technology has affected this force of Porter’s Competitive Advantage Model. The Internet is the major new concept in information technology over the last thirty years. The Internet has made it easier for new entrants to gain access to their market of choice. This raises the competition level of already established companies within an industry. The Internet reduces the number of barriers into the market. In the “old economy”, new entrants had to overcome many obstacles to even gain access into the market of choice. It was even harder to gain a foothold in the industry and become established. New entrants had to find some sort of advertising medium that was not too expensive but also very wide reaching.

The owner of the company had to somehow get the name of his company out into the eyes and minds of the consumer. This was usually done by putting ads in newspapers, radio, and television. These advertising mediums were often expensive and often led to inconsistent success with sales. As you can see, in the “old economy”, market penetration was very hard and also very risky. In “today’s economy”, there is always the threat of new entrants into the market for the already established companies. Now, all a new company has to do to get noticed or even to set up an interactive storefront is to set up a website advertising its products and brand name. The Internet is far reaching in its range. Consumers all over the globe can learn all about a
company and its products in a matter of minutes from the comfort of their own home. The simplification of the process of introducing a product or company to the world means that more people are starting companies than at anytime before. This means increased competition for already existing companies. Also, the startup costs are generally cheaper for starting an online business. Many small book companies have felt this firsthand. Amazon.com, an online book company ran many small book companies out of business because of how cheap they made the books they sell. You can browse their inventory in the comfort of your own home. Consumers will generally gravitate towards what is most convenient and cost efficient. This often gives the online businesses a competitive advantage on older existing companies. It does not however always lead to success for the new entrants. Consumers also use brand recognition as a part of their decision making process when it comes to buying products and buying from new companies. Information technology also impacts the “Suppliers” category of the Competitive Advantage Force Model. The impact on suppliers is like a “double-edged sword”. On one hand, suppliers have a lot of power. They control the supply in the supply/demand chain.

This affects the prices and quality of the products. Suppliers are at their most powerful when they are concentrated and together with each other. Some suppliers even buy their distribution channels and this brings in more profit and also allows the newly merged companies to lower prices and thus gain more customers. Due to the Internet and newer digital technology, suppliers now can join digital exchanges. This leads to the concentration of suppliers. As said earlier, this leads to strong suppliers. Suppliers can also lock in customers at negotiated prices. This gives suppliers customers to sell to no matter the conditions of the market or surpluses. By using the Internet, suppliers now have access to potential customers that were, before, not in reach. Geographical barriers usually kept suppliers separated from customers that were far away. The Internet allows the customer and supplier to find each other and often times allows the customer to order from the supplier via the Internet. Having more customers to choose from makes suppliers strong. A supplier can afford to be a little more selective of its customers since there are more potential buyers. This is a “double-edged” sword however.

Buyers have the same ability to shop for better prices from suppliers. Often, this means that negotiations go on until there is a contract between a supplier and a buyer. The bargaining power of the buyer reduces the power of the supplier. Very briefly, we’ll go over the determinants of supplier power. They are: differentiation of inputs, switching costs of suppliers and firms in the industry, the presence of substitute inputs, supplier concentration, importance of volume to supplier, cost relative to total purchases in the industry, impact of inputs on cost or differentiation, threat of forward integration relative to threat of backward integration by firms in the industry. The determinants that are affected the most by information technology are switching costs of suppliers, substitute inputs and, supplier concentration. Supplier concentration was discussed earlier in the paragraph. Newer technology has generally lowered the price of switching costs of suppliers and buyers for that matter. Suppliers can switch to them in a fraction of the time that it used to take. The Internet allows suppliers to manage databases of customers and easily move and switch customers from and information standpoint.

This causes less of a tendency for a supplier to feel that it cannot switch customers without suffering insurmountable losses. This allows the supplier to shop for better prices from customers. Substitute inputs of suppliers can cause a less than desirable outcome when suppliers in the same industry can make substitute products at cheaper prices. This causes less concentration of the suppliers and this takes away the power of the suppliers because customers will then buy from the cheaper suppliers and this gives the buyers better bargaining power. The “Substitutes” category of the Porter Competitive Advantage Model is impacted by information technology also. Any industry that is based on information is in the greatest danger from the substitution of its products in a more digitally advanced form. An example of this would be when books are made into audio books. This is usually appealing to consumers because you can listen to a book when driving in your car or just by listening to it at home in your bed. Another example is what happened in the late 1970’s when 8 track tape players were replaced by cassette tapes.

Cassette tapes became the standard of how music was sold. 8_track tape makers either had to switch to producing cassette tapes or go out of business. The same transition is going through its late stages now. Cassette tapes are becoming obsolete because of compact discs. CC’s are becoming the standard. CD’s can hold much more information and are usually less bulky than cassette tapes. Even those who sell media such as news or music or even information also must feel the danger that the Internet provides. People can get the news online. This takes away revenue from newspaper companies. So much information can be found on the Internet for free. Sellers of information often find it hard to keep their product secret and therefore available for selling. Downloading of music, whether legally or illegally has diminished the sales of music from physical stores. Consumers have seen the price of music decrease over the last 8-10 years. It is hard for stores to compete with the convenience and low price or lack of price of downloading music. The three determinants of the severity of the substitution threat are: relative price/performance of substitutes, switching costs, and buyer propensity to substitute. As said earlier with suppliers, switching costs are reduced due to the amount of technology in the digital age.

When CD’s were made the standard of music, the costs were not as extravagant as you would think for the type of overhaul that it was. To change the entire way of how music is distributed is a large undertaking but it was done with relative efficiency. Information technology also creates more knowledge of the new technology that is coming in to replace the old. With the information that the Internet provides, consumers know more about the substitutes for the products that they buy. Usually, customers are more probable to buy into newer technologies when they know a lot about it. This increases the propensity of buyers to buy the substitute. Information-based industries are clearly in the most danger of substitutes due to information technology, namely the Internet. It really favors the substitutes in the role of competition. These industries must be dynamic in keeping up with customer demand and requirements to stay afloat in the new digital age. In conclusion, information technology has made it easier for new products and new companies to penetrate the market and be successful in a competitive industry.

With the Internet’s help, many companies have been successful without ever having to open a physical store. This trend looks as if it will continue. More Internet businesses will open and consumers will generally be the beneficiaries of increased competition and more convenience than ever before. Information technology affects Porter’s model in everyway as described in the paper. Stable already existing businesses must adapt to the ever-growing amount of technology to continue to adapt and be successful.

Reference:

Siaw, Irene (2004, Dec).International Journal of Management .Business Source Premier, pg514-523. Retrieved 7/06/2006

Julia, Yeo. (2003, June).International Journal of Information Technology & Decision Making. Business Source Premier. Pg.313-330. Retrieved 7/06/2006

Turban, Efraim & Rainer, R. Richard, E. (2005) Introduction to Information Technology. New Jersey; Hoboken pg, 16 Retrieved 7/06/2006

http://drivedemand.com/logo.html Retrieved 7/06/2006

http://www.referenceforbusiness.com/management/Or-Pr/Porter-s-5-Forces-Model.html Retrieved 7/06/2006

http://www.quickmba.com/strategy/porter.shtml Retrieved 7/06/2006

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