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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.

Porter Competitive Model


Potential
New Entrants

Bargaining
Power
of Suppliers

Intra-Industry
Rivalry
Strategic Business Unit

Substitute
Products
and Services
Source: Michael E. Porter
Forces Governing Competition in
Industry
Harvard Business Review, Mar.-Apr. 1979

Bargaining
Power
of Buyers

SUPPORT ACTIVITIES

Generic Value Chain


FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS OUTBOUND
LOGISTICS

MARKETING
AND SALES

SERVICE

PRIMARY ACTIVITIES
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
Industry Structure Analysis

A Successful IS Professional
Understands both IT and the business in which
they work.
Has good communication skills.
Can sell their IT solution to someone elses
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 Approach
1. 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 Callons 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.

Porter Competitive Model


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 industrys 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 companys 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.

Porter Competitive Model


Potential
New Entrants

Bargaining
Power
of Suppliers

Intra-Industry
Rivalry
Strategic Business Unit

Bargaining
Power
of Buyers

Substitute
Products
and Services
Source: Michael E. Porter
Forces Governing Competition in
Industry
Harvard Business Review, Mar.-Apr. 1979

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.

Definitions
New 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 Options
According 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 Model


Heavyweight Motorcycle Manufacturing Industry
North American Market
Parts Manufacturers
Electronic Components
Specialty Metal Suppliers
Machine Tool Vendors
Labor Unions
IT Vendors

Bargaining
Power of
Suppliers

Automobiles
Public Transportation
Mopeds
Bicycles

Potential
New Entrant

Intra-Industry Rivalry
SBU: Harley-Davidson
Rivals: Honda, BMW,
Suzuki, Yamaha

Substitute
Product or
Service

Foreign Manufacturer
Established Company
Entering a New Market
Segment
New Startup

Bargaining
Power of
Buyers
Recreational Cyclist
Young Adults
Law Enforcement
Military Use
Racers

Business Strategy Model - Motorcycle Manufacturing Industry


Product Strategy
Type/Purpose/Size

Heavyweight Off-Road Dual Purpose Road Racing Caf Racer


Price Strategy

Entry Level
Law Enforcement

North American

Moderate
Market Strategy
Military

Premium

Recreational

Professional Young Adult

Europe
Japan/Asia
Manufacturing Strategy

Vertically Integrated

Vendor Emphasis

Latin America
Outsource

Sales/Distribution Strategy
Distributors

Independent Dealers

Franchised Dealers

Company Structure
Independent

Alliances

Joint Ventures/Subsidiaries

Information Systems
Engineering Product Design Manufacturing Sales/Distribution Business

Porter Competitive Model Analysis


for the San Francisco Giants
New Entrants

Suppliers

Intra-Industry
Rivalry
SBU: SF Giants

Substitute Products and Services

Buyers

Porter Competitive Model Analysis for the San Francisco Giants


Bay Area Market
New Entrants
Arena Football League
Canadian Football
Professional Hockey
Professional Soccer
Sumo Tournaments

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

Buyers

Die Hard Giants Fans


Die Hard Baseball Fans
Intra-Industry Rivalry
Fair Weather Baseball Fans
SBU: SF Giants
Non-baseball Fans
Rivals: Oakland As
Out of Town Visitors
Minor League Baseball
Opposing Team Fans
S.F. 49ers
Age Group Segments
Golden State Warriors
Groups Versus Individuals
College Athletic Events
Corporate Sponsors
High School Athletic Events
Sports Writers and Media
Movies, Stage Plays, etc.
Outlets
General Travel and Travel Packages

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

Porter Competitive Model


Venture Capital Industry in the U.S.
More firms
More capital
Diminishing opportunities
Cut-throat competition
Higher deal prices

Potential
New Entrants

Low Barriers to Entry


Rapid Entry
Attractive Rates of Return
More global sources

Intra-Industry Rivalry

Bargaining
Power
of Suppliers
Concentration in the
hands of a few institutions
Increasing sophistication
Better information

SBU: Kleiner Perkins Caufield & Byers


Rivals: Hambrecht & Quist
Sequoia Capital
Sierra Ventures
Sequoia Capital
Arthur Rock & Co.
Asset Management Corp.

Substitute
Products
and Services

Bargaining
Power
of Buyers
Increasing sophistication
More options
Better information

Breakdown of
industry boundaries

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 Model


Education Industry: U.S. Universities
Potential
New
Entrants
Bargaining
Power
of Suppliers
Faculty
Staff
Equipment and
Service Suppliers
Alumni
Foundations
Business
Government

Foreign Universities
Distance Learning
Motorola U.
National Technical University

Intra-Industry Rivalry
Strategic Business Unit

Substitute
Products
and Services
Books and Videotapes
Computer-Based Training
Training Companies
Consulting Firms

Bargaining
Power of Buyers
Students
Parents
Business
Employers
Legislators

U.S. University Industry Structure


Intra-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.

Porter Competitive Model


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 5
Distribution
Layer 4
Application
Software
Layer 3
Operating
System
Software
Layer 2
Computing
Platforms
Layer 1
Basic
Circuitry
IBM

DEC

HP

Fujitsu

NCR
Figure 3-3

The New Computer Industry


Layer 5
Distributors

Computer
Dealers

Layer 4
Applications

Layer 3
Operating
System
Software

Layer 1
Microprocessor

Mass
Clubs
Merchandisers

Lotus 1-2-3

Spreadsheets
Word Processors
Database

Layer 2
Computer
Platforms

Super
Stores

MS DOS
Novell Netware

IBM

Compaq

Intel X86

Mail
Order

Value-add
Resellers

Microsoft Excel

Windows

Direct
Sales
Force

Other

Quattro Pro

OS/2

Banyan

Unix
IBM

Other Intel-Based PCs

Motorola

Apple
Others

Apple Macs

RISC

Other

Power PC
Figure 3-4

Computer Industry Market Segments


Supercomputers

Hardware

Mainframes

Software

Minicomputers

Services

Workstations

Telecom Networks?

Personal Computers
Peripheral Equipment

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

Compaq

Cromemco

Dell

Fortune Systems

Gateway

Wicat Systems

IBM

Kaypro

HP

Morrow Designs

NEC

Osborne Computer
Victor Technologies

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


Manufacturing Industry Value Chain

Research
and
Development

Production
Engineering
and
Manufacturing

Sales
Marketing
and
Distribution

Service

Retail Industry Value Chain

Partnering
with
Vendor

Buying

Managing
Inventory

Marketing
Distributing Operating
and
Inventory
Stores
Selling

Value Chain Things to Remember


1. Value to customer objective is not clear.
2. Relay team concept is too time consuming and doesnt
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.

SUPPORT ACTIVITIES

Generic Value Chain


FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS OUTBOUND
LOGISTICS

MARKETING
AND SALES

SERVICE

PRIMARY ACTIVITIES
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.

Figure 3-6

Property and Casualty Industry Value Chain


FIRM
INFRASTRUCTURE

-Financial Policy

HUMAN
RESOURCE
MANAGEMENT

-Regulatory Compliance

- Accounting

Agent
Training

Actuary
Training
Actuarial Methods
Investment
Practices

TECHNOLOGY
DEVELOPMENT

- Legal

Product
Development
Market Research

Claims
Training
Claims
Procedures

I/T
Communications

PROCUREMENT

Policy Rating

Underwriting
Investment

Independent
Agent Network
Billing and
Collections

Policy Sales
Policy Renewal
Agent Management
Advertising

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND
LOGISTICS

MARKETING
AND SALES

Claims Settlement
Loss Control

SERVICE

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

Figure 3-7

Technologies in the Value Chain


Information System Technology
Planning and Budgeting Technology
Office Technology

FIRM
INFRASTRUCTURE

Training Technology
Motivation Research
Information Technology

HUMAN
RESOURCE
MANAGEMENT

Product Technology
Computer-Aided Design
Pilot Plant Technology

TECHNOLOGY
DEVELOPMENT

Software Development Tools


Information Systems Technology

Information Systems Technology


Communication System Technology
Transportation System Technology

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

INBOUND
LOGISTICS

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

OPERATIONS

Transportation
Technology
Material Handling
Technology
Packaging
Technology
Communications
Technology
Information
Technology

Multi-Media
Technology
Communication
Technology
Information
Technology

Diagnostic and
Testing Technology
Communications
Technology
Information
Technology

OUTBOUND
LOGISTICS

MARKETING
AND SALES

SERVICE

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., p. 167.

Figure 3-8

Summary of Chapter 3
The Porter Competitive Model
for
Industry Structure Analysis
By Sandra Chu

Chapter Objectives
1. To identify significant forces in addition to direct competitors
and customers that impact a companys 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.

Porter Competitive Model


Potential
New Entrants

Bargaining
Power
of Suppliers

Intra-Industry
Rivalry
Strategic Business Unit

Bargaining
Power
of Buyers

Substitute
Products
and Services
Source: Michael E. Porter
Forces Governing Competition in
Industry
Harvard Business Review, Mar.-Apr. 1979

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 companys relative position
within the industry?

Porter Competitive Model


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 Strategies


Primary 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.

Porter Competitive Model


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 Questions


1. 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.