PORTER’S MODEL OF COMPETITIVE RIVALRY

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E-COMMERCE IT430

Lesson 39

PORTER'S MODEL OF COMPETITIVE RIVALRY

Porter's Model helps a firm to identify threats to its competitive position and to devise plans including the

use of IT and e-commerce to protect or enhance that position. Porter identified five forces of competitive

rivalry described as under:

Threat of potential/new entrants to the sector

Threat of substitute product or service in the existing trade

Bargaining power of the buyers

Bargaining power of the suppliers

Competition between existing players

These five forces are also shown in Fig. 1 below:

Threat of

potential

entrants

Bargaining

Competitive

Bargaining

power of

rivalry among

power of

suppliers

existing players

buyers

Threat

substitution

Fig. 1

Threat of new entrants

This threat relates to the ease with which a new company or a company in different product area can enter a

given trade sector. Typically, barriers to entry are capital, knowledge or skill. IT/EC can be a barrier for new

entrants, for instance, where competing businesses have heavily invested in EDI and are using the same,

their investment would act as a barrier for new businesses to enter that trade sector. Conversely,

advancements in technology have given rise to new ideas providing opportunity to new entrants without

any need to build the IT infrastructure or make heavy investment to compete existing players. For example,

to start online banking a company does not require heavy investment in constructing buildings (branch

offices), hiring staff etc. as required in traditional banking. Rather, making use of internet technology

coupled with a sound marketing plan, unique online banking services can be initiated.

Threat of substitution

This threat arises when a new product is available that provides the same function as existing

product/service. For example, cotton fiber was, in the past, replaced by synthetic fiber, and glass bottles

were substituted by plastic ones. This threat got materialized in case of music shops in physical world when

due to the advent of e-commerce; music became available in downloadable format through the artist's

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website. The site, in fact, had provided a substitute distribution channel. Another example is that of online

banking which substituted traditional banking in physical world.

Bargaining power of buyers

The cost of producing and distributing a product should be less than the price it can bring in the market in

order to be profitable. Number of competitors and the supply of a product are the two major factors that

determine bargaining power of the buyers. A buyer is in a strong position to bargain for low price if there

are many competitors and/or the supply of the product in the market is in surplus. Note that with the help

of e-commerce, low production cost, more inventory control and quick response time can be achieved.

Besides, direct sale to the customers is also possible that cuts the cost of involving intermediaries.

Therefore, a business using IT/EC can reduce the overall production cost and afford to keep the price of

the product relatively low.

Bargaining power of suppliers

Businesses try to find more favorable terms from their own suppliers. If supply of raw material is plentiful

and/or there are many suppliers, the supply can be procured at a low price. Otherwise, position is more

favorable to the supplier having more bargaining power. Ability to trade electronically is a factor in the

quality of service and may be a requirement of the buying organization. Accordingly, bargaining power of a

supplier is reduced if it is not electronically enabled.

Competition between existing players

Competition among businesses is to get more buyers and trade at a price that produces an acceptable profit.

If there are many players of the same size, capacity and strategy having little difference between their

product/service, then there is fierce competition among them as regards the price of the product/service.

Even a small change in the price of the product/service can be crucial for the business. Again, the use of

EC can cause a significant difference by reducing administration/transaction cost, increasing efficiency of

supply chain, improving product quality and customer service.

The five force analysis determines attractiveness of the industry whether to enter that industry as a business

or not.

Strategic Planning Cycle

E-business competitive strategy is normally formed and implemented according to a planning cycle which is

called strategic planning cycle.

There are four stages in this planning cycle as shown in Fig. 2 below:

Strategic Planning Cycle

Industry and

Competitive

Analysis

Strategy

Formulation

Implementation

Performance

Assessment or

Strategy

Reassessment

Fig. 2

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Industry and competitive analysis

It aims at identifying those factors on which the success of an EC project or business would depend. One

way of doing that is to carry out SWOT analysis and study your business as well as the business of your

competitors. Analysis of online competitor businesses is relatively easy since they are just a few clicks away

on the web.

Strategy formulation

Based upon this study of internal and external business environment and in light of a company's strengths

and weaknesses, a competitive business strategy is formed. It may be a strategy of cost leadership, product

differentiation or focus. One can also identify ways how information technology can be used to

implement/enforce such strategy.

Implementation

In the implementation stage, you build a plan to identify steps needed to put the strategy into action and

practically take those steps. For example, where your strategy is to pursue differentiation in terms of quality

of service by using/arranging a web-based call centre through which the customers can immediately register

their complaints; then you will have to select appropriate individuals who are suitable for the job in the

implementation stage. Creating a web team and defining the role/ responsibility of each member of the

team is a critical component of implementation stage. For example, you define that this person would be

the team leader; this would be in the technical staff (web master etc.) or the management staff. Note that

involvement of key persons from marketing, accounting, finance, human resource, IT, customer relations

etc. will be important in decision marking as to how a particular implementation plan can be executed. A

strategic plan can be at times initially implemented in terms of a pilot project before launching it to a full

scale. For example, an automobile manufacturer in America had implemented a plan/scheme which allowed

the potential customers to have scheduled test drives before buying a particular car. Initially, this scheme

was introduced to four American states but later it was implemented all over the country. Another point is

to consider whether you should build your own infrastructure for execution or outsource the task of

execution of a strategic plan. For example, where a strategic plan requires a particular web design, you can

either mange your own team of web designers or outsource this task to an outside firm having expertise in

this area.

Strategy assessment

Results of implementation plan are monitored and assessed so that any corrective measures or expansion

plan can take place. Basically, you want to assess whether your strategy has delivered what it was supposed

to deliver; whether your strategy is still viable/workable in the ever changing environment. In strategy

assessment phase, you can learn from your mistakes and do your future planning. In case your EC project

has been a failure, you can identity the problems and try to remove them. Some of the corrective measures

can be to property train your web team, establish or review your security or privacy policy, review or

reassess your web design content, reconsider your marketing plan etc. For the strategy assessment, you can

conduct surveys, collect information and receive feedback from different groups of people so that you have

solid input from people coming from a variety of background. Sometimes, you have to entirety give up a

particular strategy you followed and formulate a new strategy or set of strategies in light of the company's

main objective or its mission.

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