chapter 3 porter competitive model for industry structure analysis
TRANSCRIPT
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
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
Industry Structure Analysis
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
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.
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 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
Intra-Industry Rivalry
Strategic Business Unit
BargainingPower
of Buyers
Bargaining Power
of Suppliers
Substitute Products
and Services
PotentialNew Entrants
Figure 3-1
Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979
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
Intra-Industry Rivalry
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
PotentialNew Entrants
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.
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 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
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PRIMARY ACTIVITIES
PROCUREMENT
TECHNOLOGY DEVELOPMENT
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
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY DEVELOPMENT
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
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY DEVELOPMENT
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
Industry Structure Analysis
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.
Porter Competitive Model
Intra-Industry Rivalry
Strategic Business Unit
BargainingPower
of Buyers
Bargaining Power
of Suppliers
Substitute Products
and Services
PotentialNew Entrants
Figure 3-1
Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979
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?
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 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.
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 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.