Chapter 3 Porter Competitive Model for Industry Structure Analysis

Chapter 3

Porter Competitive Model

for

Industry Structure Analysis

Introduction

• Porter Competitive Model

• Value Chain

Can Information Technology:

• Build barriers to prevent a company from entering an industry.

• Build in cost; difficult for a customer to switch suppliers.

• Change the basis for competition within the industry.

• Change the balance of power in the relationship that a company has with customers or suppliers.

• Provide the basis for new product and services, new markets or other new business opportunities.


Intra-Industry Rivalry

Strategic Business Unit

BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979

Generic Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SU

PP

OR

T A

CT

IVIT

IES

Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright © 1985 by Michael E. Porter.

Key Objective

• Gain a competitive advantage!

• Understand the forces that influence this.

• Know how to use models to do an objective evaluation.

Chapter 3

The Porter Competitive Model

for


A Successful IS ProfessionalUnderstands both IT and the business in which they work.

Has good communication skills.

Can sell their IT solution to someone else’s problem.

Is a self starter and can handle a large amount of personal responsibility.

Manages their own career.

Has a high degree of personal confidence.

ATP Approach1. Read Value Line articles for industry perspective and

company information.2. Log onto the company web page and look at general business information and most recent annual report.

A. Determine dominant business.B. Identify business and IT leaders.C. Define the industry the company is in.D. Identify the major markets in which they operate and determine the market that you will analyze using the Porter Competition model.E. Start to develop an understanding of the six

primary business strategies in this industry.

ATP Research

1. Value Line

2. Company web page and annual report.

3. Internet search engines:

Yahoo

Ask Jeeves

Google

4. Library reference documents

5. Jack Callon and his documents

How and Where to Search

Company Name and Executive Names

Competitor Name/Web Pages

IT Publications - Datamation, InformationWeek

Business Publications - ABI, Fortune, BusinessWeek

Industry Associations - e.g. Semiconductor Industry Association

Financial Analysis Web pages

Library Reference Desk - Barons, Moodys, etc.

Jack Callon’s office

Awareness of competitive forces can

help a company stake out a position

in its industry that is less vulnerable

to attack.

Michael E. Porter

Competitive Strategy

The Plan• Address the Concepts of the Porter

Competitive Model.

• Provide some industry examples using the

Competitive Model.

• Address the Value Chain conceptually and with industry examples.

• Revisit each of these using the Airline Industry as the example in Chapter 4.


• Was not developed for IS use.• Breaks an industry into logical parts, analyzes them and puts them back together.• Avoids viewing the industry too narrowly.• Provides an understanding of the structure of an industry’s business environment.• Provides an understanding of competitive threats into an industry.

Two Key Questions

1. How structurally attractive is

the industry?

2. What is the company’s relative

position within the industry?

Why Do You Care?The collective strength of the industry forces determines the ultimate profit potential of an industry.

The strongest competitive forces are of greatest importance in formulating competitive strategies.

Every industry has an underlying structure, or a set of fundamental economic and technical characteristics that gives rise to these competitive forces.

Why Do You Care?

This view of competition pertains to industries selling products and those dealing in services.

A few characteristics are often key to the strength of each competitive force.

Key Industry Analysis Factors

• Collecting the data.

• Determining which data is crucial.

• Selecting an appropriate overall approach.

• Deciding on the logical starting point.

Basic Objectives of the SBU

1. To create effective links with buyers and suppliers.

2. To build barriers to new entrants and substitute products.




BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services


Figure 3-1


Rivalry Likelihood• Profit margins.

• Industry growth rate and potential.

• A lack of capacity to satisfy the market.

• Fixed costs.

• Competitor concentration and balance.

• Diversity of competitors.

• Existing brand identity.

• Switching costs.

• Exit barriers.

A Buyer Has Power If: 1. It has large, concentrated buying power that enables it to gain volume discounts and/or special terms or services.2. What it is buying is standard or undifferentiated and

there are multiple alternative sources.

3. It earns low profit margins so it has great incentive

to lower its purchasing costs.

4. It has a strong potential to backward integrate.

5. The product is unimportant to the quality of the

buyers’ products or services.

A Supplier Has Power If: 1. There is domination of supply by a few companies.

2. Its product is unique or at least differentiated.

3. It has built up switching costs.

4. It provides benefits through geographic proximity to

its customers.

5. It poses a definite threat to forward integrate into

its customers’ business.

6. A long time working relationship provides unique

capabilities.

DefinitionsNew Entrant: An existing company or a startup that has not previously competed with the SBU in its geographic market. It can also be an existing company that through a shift in business strategy begins to compete with the SBU.

Substitute Product or Service: An alternative to doing business with the SBU. This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.

Possible Barriers to Entry• Economies of scale.

• Strong, established cost advantages.

• Strong, established brands.

• Proprietary product differences.

• Major switching costs.

• Limited or restrained access to distribution.

• Large capital expenditure requirements.

• Government policy.

• Definite strong competitor retaliation.

Substitute Threats

• Buyer propensity to substitute.

• Relative price/performance of substitutes.

• Switching costs.

Competitive Strategy

• What is driving competition in my current or future industry?

• What are my current or future competitors likely to do and how will we respond?

• How can we best posture ourselves to achieve and sustain a competitive advantage?

Strategy OptionsAccording to Michael Porter

Primary Strategies

1. Differentiation

2. Least Cost

Supporting Strategies

1. Innovation

2. Growth

3. Alliance

Can Information Systems:1. Build barriers to prevent a company from entering

an industry?

2. Build in costs that would make it difficult for a customer to switch to another supplier?

3. Change the basis for competition within the industry?

4. Change the balance of power in the relationship that a company has with customers or suppliers?

5. Provide the basis for new products and services, new markets or other new business opportunities?

Porter Competitive ModelHeavyweight Motorcycle Manufacturing Industry

North American Market

Bargaining Power of Buyers

• Recreational Cyclist• Young Adults• Law Enforcement• Military Use• Racers

Potential New Entrant

Substitute Product or

Service

Intra-Industry RivalrySBU: Harley-Davidson

Rivals: Honda, BMW, Suzuki, Yamaha

• Foreign Manufacturer

• Established Company Entering a New Market Segment• New Startup

• Parts Manufacturers• Electronic Components• Specialty Metal Suppliers• Machine Tool Vendors• Labor Unions• IT Vendors

Bargaining Power of Suppliers

• Automobiles• Public Transportation• Mopeds• Bicycles

Engineering Product Design Manufacturing Sales/Distribution Business

Information Systems

Company Structure

Independent Alliances Joint Ventures/Subsidiaries

Sales/Distribution Strategy

Distributors Independent Dealers Franchised Dealers

Manufacturing Strategy

Vertically Integrated Vendor Emphasis Outsource

Market Strategy

North American Europe Japan/Asia Latin America

Law Enforcement Military Recreational Professional Young Adult

Product StrategyType/Purpose/Size

Heavyweight Off-Road Dual Purpose Road Racing Café Racer Price Strategy

Entry Level Moderate Premium

Business Strategy Model - Motorcycle Manufacturing Industry

Porter Competitive Model Analysis for the San Francisco Giants


SBU: SF Giants

BuyersSuppliers

Substitute Products and Services

New Entrants

Porter Competitive Model Analysis for the San Francisco GiantsBay Area Market

Intra-Industry RivalrySBU: SF Giants•Rivals: Oakland A’s•Minor League Baseball•S.F. 49ers•Golden State Warriors•College Athletic Events•High School Athletic Events•Movies, Stage Plays, etc.•General Travel and Travel Packages

Buyers•Die Hard Giants Fans•Die Hard Baseball Fans•Fair Weather Baseball Fans•Non-baseball Fans•Out of Town Visitors•Opposing Team Fans•Age Group Segments•Groups Versus Individuals•Corporate Sponsors•Sports Writers and Media

Outlets

Suppliers•Players Union•City of SF•Transportation Services•Food Service•Sovereigns•Police and Sanitation Service•Utilities•Stadium Employees

Substitute Products and Services•Televised Baseball Games - Free or Cable Service at Home•Televised Games at Sports Bars• Radio Broadcasts of Baseball Games• Rotisserie Leagues, Trading Cards, Memorabilia

New Entrants•Arena Football League•Canadian Football •Professional Hockey•Professional Soccer•Sumo Tournaments

BargainingPower

of Suppliers


SubstituteProducts

and Services

Bargaining Power

of Buyers

Intra-Industry RivalrySBU: Kleiner Perkins Caufield & ByersRivals: Hambrecht & Quist Sequoia Capital Sierra Ventures Sequoia Capital Arthur Rock & Co. Asset Management Corp.

Porter Competitive ModelVenture Capital Industry in the U.S.

• Breakdown of industry boundaries

• Increasing sophistication• More options• Better information

• Low Barriers to Entry• Rapid Entry• Attractive Rates of Return• More global sources

• Concentration in the hands of a few institutions• Increasing sophistication• Better information

•More firms•More capital•Diminishing opportunities•Cut-throat competition•Higher deal prices

VC Sponsored Companies

• Digital Equipment

• Apple Computer

• Federal Express

• Sun Microsystems

• Compaq

• Lotus Development

• Staples

Major Start-up Company Sources

• Stanford University

• MIT

• University of Texas

Venture Capital Industry

• The roots of the industry can be traced to the 1920s and 1930s within the U.S.

• Early companies that obtained VC funding were Eastern Airlines and Xerox.

• First VC firm was ARD in 1946 founded by Ralph Flanders, President of Federal Reserve Bank of Boston.

• Big push to take advantage of WWII technology developed at MIT.

• The industry all but shut down between 1970 and 1977.

• Economic growth implications of emerging, small companies.

VC Strategies in 1960-1970

• Invest in management team and market potential.

• Stress value-added company building.

• Concentrate on start-up and early stage companies.

• Be a lead investor.

• Invest for ten years, maybe longer but harvest when

appropriate.

• Raise a new fund once your present fund is performing well.

• Deal making and transaction skills are important but not central to the value creation process.

1980 and Beyond Strategies• Raise new funds while the money is flowing instead of when

you need the money.• Rely on financial engineering for quick entry and exits.• Exploit hot IPO markets to harvest early and often.• Co-invest versus being the lead investor.• Look to later-stage LBO and MBO deals for large minimums

and faster returns.• Worry less about the management team (You can shape it

later).• Worry more about the fiduciary expectations of the limited

partners.• Trade the horse before it dies.

Porter Competitive ModelEducation Industry: U.S. Universities

Intra-Industry RivalryStrategic Business Unit

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew

Entrants

• Faculty• Staff• Equipment and Service Suppliers• Alumni• Foundations• Business• Government

• Books and Videotapes• Computer-Based Training• Training Companies• Consulting Firms

• Students• Parents• Business• Employers• Legislators

• Foreign Universities• Distance Learning• Motorola U. • National Technical University

U.S. University Industry StructureIntra-Industry Rivalry:

Low growth rate or shrinkage

Excess capacity

Undifferentiated product

Competition for funding

and contributions

Bargaining Power of Buyers:

Price Pressures

Mobility

Bargaining Power of Suppliers:

Cost Pressures

Bid Processes Are Common

Unions and Tenure

Barriers to Entry:

Low entry barriers

High exit barriers

Substitutes:

Easy to substitute

Self-study success

Porter Competitive Model Tips

1. To incorrectly define the industry can cause major

problems in doing Section I of the analysis term paper.

2. You must identify the specific market being evaluated.

3. Your analysis company is the Strategic Business Unit.

4. Identify rivals by name for majors, by category for minor

rivals if needed to present the best possible profile of

rivals.


5. Be sure to address the power implications of both

customers and suppliers. Power buys them what?

6. Identify buyers and suppliers by categories versus

companies.

7. Summarize your Porter Model analysis.

Computer Industry

Why is this industry more of a challenge to evaluate using the Porter Competitive Model?

Old Computer Industry

Layer 5Distribution

Layer 4ApplicationSoftware

Layer 3OperatingSystemSoftware

Layer 2ComputingPlatforms

Layer 1Basic Circuitry

IBM DEC HP Fujitsu NCR

Figure 3-3

The New Computer Industry

Layer 1Microprocessor Intel X86 Motorola RISC Power PC

Layer 2ComputerPlatforms

IBM Compaq Other Intel-Based PCs Apple Macs Other

Layer 3OperatingSystem Software

MS DOS Windows OS/2 Unix Apple

Novell Netware Banyan IBM Others

Layer 4Applications•Spreadsheets•Word Processors•Database

Lotus 1-2-3 Microsoft Excel Quattro Pro

Layer 5Distributors

ComputerDealers

SuperStores

Mass Merchandisers

Clubs MailOrder

Value-addResellers

DirectSalesForce

Other

Figure 3-4

Computer Industry Market Segments

•Supercomputers

•Mainframes

•Minicomputers

•Workstations

•Personal Computers

•Peripheral Equipment

•Hardware

•Software

•Services

•Telecom Networks?

PC Industry Segment

1. Passed $100 billion in sales in the first ten years.

2. Growth and competition was based on industry standards

like never before.

3. This has spawned thousands of niche companies.

4. The PC has fundamentally restructured the Computer

Industry.

5. Industry pioneers believe the revolution is no more than

half over.

Change Relative to Selling PCs

1. Languages

2. Application Packages

3. Connectivity and Compatibility

4. Multimedia

5. Groupware

Computer Industry

Of the top fifteen companies in 1975, only four remain:

• IBM

• NEC

• HP

• NCR

The Old Computer Industry

IBM and the BUNCH

Burroughs

Univac

NCR

Control Data

Honeywell

PC Industry Change

• Atari

• Cromemco

• Fortune Systems

• Wicat Systems

• Kaypro

• Morrow Designs

• Osborne Computer

• Victor Technologies

• Compaq

• Dell

• Gateway

• IBM

• HP

• NEC

The Future Computer Industry

1. Traditional US Companies (large).

2. Asian Electronic Companies.

3. The New Strategy Companies.

Why has the US continued to be the world leader in the computer industry?

Porter Value Chain

Basic Concept:

1. Deals with core business processes.

2. Enables tracking a new idea to create a new

product and/or service from origination all the

way to customer satisfaction.

Porter Value Chain

Service Sales and

Distribution Marketing

Production and

Manufacturing Engineering

Manufacturing Industry Value Chain

Research and

Development

Retail Industry Value Chain

Marketing and

Selling

Operating Stores

Distributing Inventory

Managing Inventory

BuyingPartnering

withVendor

Value Chain Things to Remember

1. Value to customer objective is not clear.

2. Relay team concept is too time consuming and doesn’t

work in the current competitive environment.

3. Maximize the value-add activities and eliminate as

much as possible the things that do not add value.

4. Make sure that each step in the overall process (each

function) does things consistent with the overall

objective of value to customer.

Generic Value Chain

INBOUNDLOGISTICS


MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES

PROCUREMENT


HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SU

PP

OR

T A

CT

IVIT

IES

Figure 3-6Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright © 1985 by Michael E. Porter.

Property and Casualty Industry Value Chain

INBOUNDLOGISTICS


MARKETING AND SALES

SERVICE

PROCUREMENT


HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

-Financial Policy -Regulatory Compliance - Legal - Accounting

Actuary Training

Agent Training

Claims Training

Claims Procedures

•Claims Settlement•Loss Control

•Policy Sales•Policy Renewal•Agent Manage- ment•Advertising

•Independent Agent Network•Billing and Collections

• Underwriting• Investment

•Policy Rating

Actuarial MethodsInvestment Practices

I/TCommunications

Product DevelopmentMarket Research

Figure 3-7

Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

Technologies in the Value Chain

INBOUNDLOGISTICS


MARKETING AND SALES

SERVICE

PROCUREMENT


HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Information System Technology

Planning and Budgeting TechnologyOffice Technology

Training TechnologyMotivation Research

Information Technology

Product TechnologyComputer-Aided DesignPilot Plant Technology

•Diagnostic and Testing Technology•Communications Technology•Information Technology

•Transportation Technology•Material Handling Technology•Storage and Preservation Technology•Communication System Technology•Testing Technology•Information Technology

Information Systems TechnologyCommunication System TechnologyTransportation System Technology

Software Development ToolsInformation Systems Technology

•Basic Process Technology•Materials Technology•Machine Tools Technology•Materials Handling Technology•Packaging Technology•Testing Technology•I/nformation Tech.

•Transportation Technology•Material Handling Technology•Packaging Technology•Communications Technology•Information Technology

•Multi-Media Technology•Communication Technology•Information Technology

Figure 3-8Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright © 1985 by Michael E. Porter., p. 167.

Summary of Chapter 3

By Sandra Chu

The Porter Competitive Model

for


Chapter Objectives1. To identify significant forces in addition to direct

competitors and customers that impact a company’s position within an industry.

2. To understand the importance of basic objectives that a company has relative to the forces within the Competitive Model.

3. To appreciate the power implications within the Porter Competitive Model.

4. To understand the two basic strategies and three supporting strategies used by intra-industry rivals.

5. To recognize industry characteristics that make the use of the Porter Competitive Model most effective.




BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services


Figure 3-1


Industry Structure and the Company Position

• How significant is the structure of the industry to existing companies and possible new entrants or providers of substitute products or services?

• What is the company’s relative position within the industry?


• Intra-Industry Rivalry– Logical starting point.

– Deals with the nature and degree of competition.

• Strategic Business Unit has two primary objectives:– Create effective links with buyers and suppliers

– Build barriers to new entrants and substitutes

SBU and Competitive StrategiesPrimary Strategies:• Differentiation: be different, be unique at meeting

some need valued by the customer.• Low-Cost: be the cheapest.

Supporting Strategies:

• Innovation: doing creative, often original things.

• Growth: stressing the importance of business growth.

• Alliances: competing through formalized relationships with other business enterprises.


• Threat of New Entrants– Two possible sources.– Consideration of barriers to entry.

• Threat of Substitute Products or Services– Important to clearly understand the definition.– Focus on viable alternatives.– Determine attractiveness and deterrents of

substitutes.

The Value Chain

• Systematic method for examining the business processes of a firm and the interactions between them.

• Idea of a “chain” -- identify core business processes and how they can be linked.

Value Chain

1. The ultimate objective is value to customer.

2. A focus needs to be on value-add activities and trying to eliminate as many activities as possible that do not add value to customer.

3. Make sure that specific business functions keep in mind the ultimate objective and not become distracted by doing things that seem to make them look good.

4. Remember that time has become a major competitive consideration and that a relay team concept can contradict this premise.

Conclusions

• The Porter Competitive Model is key to understanding business competitiveness.

• It is important for a company to assess its position within an industry and relative to customers and suppliers.

• The model can be used to understand if IT can change the competitive environment of an industry.

Possible Exam Questions1. Identify an industry where information systems act as a

significant barrier to entry and explain the significance of this

barrier.

2. Identify and explain the two basic strategies and three

supporting strategies used by intra-industry rivals.

3. What is the primary benefit to be derived through the use of

the Porter Value Chain?

4. Explain the logic of growth as a competitive strategy and provide two company examples where this was a key

strategy.

Documents

Chapter 3 Porter Competitive Model for Industry Structure Analysis