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Global Competitiveness Ranking

1. Quality of national business environment.
2. The set of institutions, market structures and economic
policies supportive of high level of prosperity.
3. Company operations and strategy ranking.

Michael Porter, Institute for Strategy and Competitiveness,

Harvard Business School

World Economic Forum web page.

1998 Rankings
1. Singapore 11. Ireland
2. Hong Kong 12. Japan
3. US 13. New Zealand
4. UK 14. Australia
5. Canada 15. Finland
6. Taiwan 16. Denmark
7. Netherlands 17. Malaysia
8. Switzerland 18. Chile
9. Norway 19. Korea
10. Luxembourg 20. Austria
Source: World Economic Forum
Global Competitiveness Ranking
1. US (2) 11. Japan (15) 21. Norway (19)
2. Finland (1) 12. Austria (13) 22. New Zealand (20)
3. UK (7) 13. Belgium (14) 23. Korea (26)
4. Germany (4) 14. Australia (9) 24. Italy (24)
5. Switzerland (5) 15. France (12) 25. Spain (23)
6. Sweden (6) 16. Taiwan (21) 26. Malaysia (37)
7. Netherlands (3) 17. Iceland (16) 27. Slovenia (32)
8. Denmark (8) 18. Israel (17) 28. Hungary (27)
9. Singapore (10) 19. Hong Kong (18) 29. South Africa (25)
10. Canada (11) 20. Ireland (22) 30. Estonia (28)
Global Competitiveness Ranking
33. Brazil (30)
37. India (36)
38. China (47)
48. Poland (42)
55. Mexico (52)
61. Philippines (53)
58. Russia (58)
60. Vietnam (62)
79. Bolivia (75)
80. Haiti
2004 Ranking
Country 2004 rank 2004 score 2003 rank
Finland 1 5.95 1
United States 2 5.82 2
Sweden 3 5.72 3
Taiwan 4 5.69 5
Denmark 5 5.66 4
Norway 6 5.56 9
Singapore 7 5.56 6
Switzerland 8 5.49 7
Japan 9 5.48 11
Iceland 10 5.44 8
Country 2004 rank 2004 score 2003 rank
United Kingdom 11 5.30 15
Netherlands 12 5.30 12
Germany 13 5.28 13
Australia 14 5.25 10
Canada 15 5.23 16
New Zealand 18 5.18 14
France 27 4.92 26
Korea 29 4.90 18
China 46 4.29 44
Italy 47 4.27 41
Mexico 48 4.17 47
India 55 4.07 56
Brazil 57 4.05 54
Poland 60 3.98 45
Indonesia 69 3.72 72
Russian Federation 70 3.68 70
Philippines 76 3.51 66
Vietnam 77 3.47 60
Kenya 78 3.45 83
Chad 104 2.50 101
Major Points
It is no longer possible for a country to insulate itself from the
rest of the world.
Within the current industrialized world there is a narrowing
of the gap between it and third world countries.
The accelerated pace of change is what disturbs the
pessimists, because they can see it happening.
It took Britain 60 years to double its output, the US 50 years
but developing countries are doubling output every 12 years.
China has actually doubled its GDP in seven years.
In many respects the developing world is unknown economic
and financial territory.
• The diamond of national advantage makes sense as a
means of understanding global economic success.
• Domestic success does prepare companies to compete
• Major European and an increasing number of Asian
countries are capable of competing on a global basis.
• The global marketplace is only going to get tougher
based on more, tougher competitors.
• The diamond can help to anticipate and understand new
Chapter 2 Summary

Business Competitive
The First of Three Perspectives:
The Business Environment

• Business Environment
• Enterprise Environment Success
• IT Environment
Important Factors to Understand the
BCE of a Company
 Defining Competitiveness and a
Competitive Model
 How a Company Gains a Competitive
 The benefits to be gained from
understanding the Competitive Advantage
of Nations concepts.
 The Company Agenda
 The Role of Government
Competitiveness: A Definition
The degree to which a nation can, under free
and fair market conditions, produce goods and
services that will meet the test of international
markets while simultaneously maintaining or
expanding the real income of its citizens.
Summary of Competitive Model
 Three primary inputs to improved domestic
– Human Resources
– Capital
– Technology
 Trade policy and new competition act as
possible barriers to go global
 Trickle down effect for increased standard
of living
How Does a Company Gain
Competitive Advantage?
 Providing value to customers is what
competitiveness is all about.

 A Good Competitor Knows:

– Its Products and Services
– Its Customers
– Its Competitors
The Diamond of National
Firm Strategy,
Chance Structure and

Factor Demand
Conditions Conditions

Related and
Supporting Government
The Competitive Advantage of
 The home nation plays a major role in the
achieving and sustaining competitive
advantage among companies
 The home nation acts a catalyst in creating
the right business competitive environment
 “Perceive a new basis for competing or find
a better means of competing in old ways”
Michael Porter
 The Company Agenda
– To Create Pressure for Innovation
– To Be Strong at Home
– To Go Global

 The Role of Government

– Should Act Like A Referee
– Should Act Like A Coach
– Create an environment that challenges
companies to compete successfully.
Clusters are Prevalent

The diamond of National Advantage

industry clusters and the presence of strong
industry rivals within the same host nation.

Kenichi Ohmae disagrees on the importance

of the role of the nation.

He believes successful companies transform

themselves into truly global firms.
Possible Exam Questions
 Define and defend the basic concepts of the
Diamond of National Advantage.

 Use the Diamond of National Advantage to

analyze a dominant industry in a specific
Chapter 3

The Porter Competitive Model

Industry Structure Analysis
Key Chapter Objectives
• Introduce the structure and use of the Porter
Competitive Model.

• Introduce the structure and use of Porter’s

Value Chain.

• Illustrate how these models can be used to

evaluate a company and its competitive ability
within an industry.

• Draw conclusions between the use of

Information Systems, and the two Porter models.
The Porter Competitive Model
• Used to understand and evaluate the structure of an
industry’s business environment, and the threats of
competition to a specific company.

• Breaks an industry into small parts to avoid defining

an industry too narrowly.

• The model was not designed to assess a companies

use of Information Systems, yet it can pinpoint strategic
areas to deploy Information Systems.
Porter Competitive Model
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

and Services

Source: Michael E. Porter

“Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
Competitive Strategies
Countering Competitive Forces
Basic Objectives

• Create effective links with consumers and

• e.g. Improving your supply chain and
locking in customers.

• Build barriers to new entrants and substitutes.

Two Strategies to Accomplish
The Basic Objectives
• Differentiation Strategy
• Provide a superior product.
• If done correctly allows for premium pricing.
• Usually more costly to implement.

• Low-Cost Strategy
• Leverage economies of scale, past experience, and
alliances to provide the cheapest prices.
• IS can play a key role.
Supporting Strategies
Augment Competitive Strategies
• Innovation – Can help contribute to product
differentiation and operational efficiency.

• Growth – Certain industries reward firms exhibiting

explosive growth (ex. Federal Express).

• Alliance – Allows strategies to be used which would be

impossible to implement alone (ex. Airlines sharing
routes to expand reach).
The Porter Value Chain

• Focuses on a companies INTERNAL operations,

specifically efficiency and added value.

• Identifies sources of competitive advantage.

• Objective:
• Maximize value adding activities.
• Minimize non-value adding activities.
Porter Value Chain

Manufacturing Industry Value Chain

Research Production Sales

and Engineering and Marketing and Service
Development Manufacturing Distribution
Value Chain & Information Systems

• Value chain breaks business operation into functional


• These pieces can be analyzed to see if IS may add


• Nearly all of the pieces can benefit from the correct use
of IS, given the necessary talent and adequate funding.
In Closing

• Porter’s models have become standard analysis tools.

• Combined they provide both external and internal


• Both must be used carefully to avoid negative results

or misdirection.
Chapter 3
Porter Competitive Model
Industry Structure Analysis
The Plan for Today
• Address the Concepts of the Porter Competitive
• Provide some industry examples using the
Competitive Model.
• Address the Value Chain conceptually and with
industry examples.
• Gain necessary understanding so can revisit each
of these using the airline industry as the example
in Chapter 4.
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
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 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
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
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 important.

• Selecting an appropriate overall approach.

• Deciding on the logical starting point.

Basic Objective 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
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

and Services

Source: Michael E. Porter

“Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
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.
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. Its product is unique or at least differentiated.
2. It has built up switching costs.
3. It provides benefits through geographic proximity to
its customers.
4. It poses a definite threat to forward integrate into
its customers’ business.
5. A long time working relationship provides unique
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 Strategies
• 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
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 • Foreign Manufacturer
• Electronic Components Potential • Established Company
• Specialty Metal Suppliers
New Entrant Entering a New Market
• Machine Tool Vendors
• Labor Unions • New Startup
• IT Vendors

Bargaining Intra-Industry Rivalry Bargaining

Power of SBU: Harley-Davidson Power of
Suppliers Rivals: Honda, BMW, Buyers
Suzuki, Yamaha
• Recreational Cyclist
• Automobiles • Young Adults
• Public Transportation Substitute • Law Enforcement
• Mopeds Product or • Military Use
• Bicycles Service • Racers
Business Strategy Model
Asks Fundamental Questions
1. What products and/or services do we intend to offer?
2. What price range of products do we intend to offer?
2. What customer targets do we intend to pursue?
3. What geographic markets do we intend to address?
4. How will we obtain products to sell to our customers?
5. How will we deal with sales to our customers?
6. What company structure do we intend to create?
7. What information systems approach will we take?
Business Strategy Model - Motorcycle Manufacturing Industry
Product Strategy

Heavyweight Off-Road Dual Purpose Road Racing Café Racer

Price Strategy
Entry Level Moderate Premium
Market Strategy
Law Enforcement Military Recreational Professional Young Adult
North American Europe Japan/Asia Latin America
Manufacturing Strategy
Vertically Integrated Vendor Emphasis 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
Business Strategy Model – Food Service Industry
Product Strategy
Limited Broad Range Wide Range of Health
Specialized of Specialized Non-specialized Conscious
Products Products Products Products

Customer Strategy
Parents Young Time Leisure Senior
Teenagers Adults with Conscious Ethnic
with Adults Citizens Focus
Kids Social Focus Adults

Store Format Strategy

Dine In Dine In Drive
Wait Service Counter Service Take Out Through
or Buffet
Vendor Strategy
Competitive Long Term Vertically
Bids Contracts Integrated

Market Strategy
Local Regional National International
Company Structure Strategy

Independent Alliances Franchises Subsidiary

Information Systems Strategy

Customer Store Product Business
Logistical Analysis
Systems Systems System Systems
Strategy Options
According to Michael Porter
Primary Strategies
1. Differentiation
2. Least Cost
Supporting Strategies
1. Innovation
2. Growth
3. Alliance
Porter Competitive Model
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
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
7. Summarize your Porter Model analysis.
Computer Industry

Why is this industry more of a challenge to

evaluate using the Porter Competitive
Old Computer Industry
Layer 5

Layer 4

Layer 3
Layer 2
Layer 1


Figure 3-3
The New Computer Industry
Layer 5 Computer Super Mass Mail Value-add Direct
Distributors Clubs Sales Other
Dealers Stores Merchandisers Order Resellers

Layer 4
•Spreadsheets Lotus 1-2-3 Microsoft Excel Quattro Pro
•Word Processors

Layer 3
Operating MS DOS Windows OS/2 Unix Apple
Novell Netware Banyan IBM Others

Layer 2
Computer IBM Compaq Other Intel-Based PCs Apple Macs Other

Layer 1
Microprocessor Intel X86 Motorola RISC Power PC

Figure 3-4
The Computer Industry
Layer 6 Direct
Sales and Computer Super Mass Mail Value-add
Distribution Stores Stores Merchandisers Order Resellers Direct

Layer 5
Desktop Suites Enterprise Resource Planning Supply Chain Management Other
•Specific Word Processors Spread Sheets Publishing Groupware Data Warehouse Other

Layer 4
Database & LAN, WAN and Internet Software Interfaces, Browsers and Search Engines
Hierarchical Database Relationship Database
Layer 3
System Windows Unix Linux Apple
Layer 2
Supercomputer Mainframe Midrange Workstation PC Handheld Device

Layer 1
Microprocessor Intel X86 Motorola RISC Power PC
The Computer (IT/IS?) Industry
as seen by IBM in 2002

1. Services
2. Applications Software
3. Middleware Software
4. Systems
The Computer Industry
IT Consulting
Systems Integration
Training and Education Services

Web Sites Personal Productivity

E-Commerce Engineering & Design Applications
Supply Chain CRM* Software
Human Resources Business Intelligence

*Customer Relationship Management

Systems Management
Application and Transaction Servers Middleware
Collaboration & Messaging Software

Operating System
Memory Networking Displays Systems
Processors Storage

Source: Who Says Elephants Can’t Dance by Louis Gerstner

Computer Industry
Multiple processor
• Processors segments in the computer
• Input/Output Devices industry.

• Storage Devices Processor companies

versus specialized
hardware companies.
Networking Equipment?
• Systems Software Hardware vendors
• Operating Systems versus independent
software companies.
• Database Systems
• Network Systems
• Utility Software
• Performance and
Security Software
• Development Software
• Programming Languages
• CASE Software
• Applications Software
Applications Software
Specific application software to do numerous things.
Running on a range of processors.
Applications suites (integrated applications) Some call
these integrated enterprise applications

Is game software from Sony a part of the computer


Is software to run numerical control machine tools part of

the computer industry?

Is software to analyze automobile smog tests part of the

computer industry?
Worldwide Computer Hardware Sales




1996 W orkstation
Personal Computer


Source: Dataquest

1993 Millions of Dollars

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000

W o r ld w id e H a r d w a r e S

T o ta l H a rd
Billions of $s

0 100 200 300 Billions of $s

Source: Dataquest
What is a PC?

1. A desktop tool—word processor, spreadsheet,

publishing tool, data store.
2. An entertainment device.
3. Communication device—email.
4. Information source—Internet sources.
5. A collaboration tool.
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
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. Communication Device--Groupware
PC Industry Change
• Atari • Dell
• Cromemco • Gateway
• Fortune Systems • IBM
• Wicat Systems • HP (Compaq)
• Kaypro • NEC
• Morrow Designs
• 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 Production Sales

and Engineering and Marketing and Service
Development Manufacturing Distribution
Retail Industry Value Chain

Partnering Marketing
Managing Distributing Operating
with Buying and
Inventory Inventory Stores
Vendor Selling
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






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 Figure 3-6
© 1985 by Michael E. Porter.
Property and Casualty Industry Value Chain
-Financial Policy -Regulatory Compliance - Legal - Accounting

Actuary Agent Claims
MANAGEMENT Training Training Training
Actuarial Methods Product
Investment Development
Practices Market Research
PROCUREMENT Communications

•Policy Rating • Underwriting •Independent •Policy Sales •Claims Settlement

• Investment Agent Network •Policy Renewal •Loss Control
•Billing and •Agent Manage-
Collections ment



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
HUMAN Training Technology
RESOURCE Motivation Research
MANAGEMENT Information Technology

Product Technology
Software Development Tools
TECHNOLOGY Computer-Aided Design Information Systems Technology
DEVELOPMENT Pilot Plant Technology
Information Systems Technology
Communication System Technology
PROCUREMENT Transportation System Technology

•Transportation •Basic Process •Transportation •Multi-Media •Diagnostic and

Technology Technology Technology Technology Testing Technology
•Material Handling •Materials •Material Handling •Communication •Communications
Technology Technology Technology Technology Technology
•Storage and •Machine Tools •Packaging •Information •Information
Preservation Technology Technology Technology Technology
Technology •Materials Handling •Communications
•Communication Technology Technology
System •Packaging •Information
Technology Technology Technology
•Testing Technology •Testing Technology
•Information •I/nformation Tech.

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 Figure 3-8
© 1985 by Michael E. Porter., p. 167.