Porter's Five Forces Model

Topics: Strategic management, Supply chain management, Supply chain Pages: 8 (2683 words) Published: July 14, 2012
Describe and discuss Micheal Porter's competitive forces model and how information systems may be used to influence a firms competitive position within it's industry. Provide a defensive and an entrepreneurial example of how information technology/systems could be used to influence each of the forces.

Porter's Five Forces Model
Porter's Five Forces model is often used as a tool for analyzing industries and competitive structures within them. An industry's profit potential is determined by either one or a combination of five competitive forces within that industry. These forces are: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services, and the intensity of competition among current rivals within the industry.

The power of suppliers is high when a small number of suppliers dominate an industry, as is the case with Microsoft and Intel, which dominate the highly-fragmented PC industry. These suppliers of key components dominate price, terms, and quantities of operating systems and CPUs. The result is a PC industry that is far less profitable than the suppliers of critical components like Microsoft and Intel. Suppliers also gain power when the supplied components are highly differentiated making switching from one supplier to another difficult. Suppliers also gain power when there are few substitutes for a component as is the case with CPUs. Buyers have increased power in an industry when they are small in number and/or they buy in large volume. This is exemplified by the feed grain market dominated by a few large buyers like Cargill and ConAgra purchasing in very large volume. Coupled with a large, fragmented group of sellers (farmers), these buyers dominate the price structure. Similarly, the power of buyers increase when the product is undifferentiated, as is the case in commodities. This allows the buyer to switch from one supplier to another with relative ease. When a buyer purchases in large volume from a supplier, that buyer can account for a sizable portion of the supplier's revenue thus having more power in the transaction. Substitute products and services are an increasing threat in the U.S. economy as a greater portion of economic activity occurs as a result of discretionary spending. We see many substitutes in entertainment, leisure, recreation, and fitness. Each gains power if it offers better price-performance relative to the industry average. Now, a pay-per-view movie is cheaper than going to the movie theater, and in-home workout equipment is far less expensive than health club memberships. Power also increases when the substitute product or service is produced by a supplier with "deep pockets," as may be the case when media companies are owned by large manufacturing conglomerates like GE (Lea, 2005). The fifth force in Porter's model is rivalry among existing participants. Here we see the intensity of the rivalry increasing when competitors are large in number and equivalent in size and power. This tends to lower prices and margins and is evident in many retail sectors. Rivalries are also intense in mature industries where competition is more about shifting market share than creating new customers. Autos, heavy equipment, petrochemicals and airlines serve as examples. A THEORY OF STRATEGIC ALIGNMENT

Strategic alignment has two major tenets. First, IT strategy must be focused on external competitiveness, rather than on internal operations. This is a significant contribution of the original strategic alignment model as presented by Henderson and Venkatramen (1989). Second, IT influences competitive advantage as it alters the direction or strength of one or more of the forces in Porter's model. The competitive dynamics of industries change as new technologies and their application change the power of buyers, suppliers, new entrants, substitute products and existing rivals (see Sasidharan et. al., 2006). What follows...
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