The Porter Competitive Model

for
Industry Structure Analysis
 Objectives
• Understanding of Porter Competitive Model

• How model can be used to analyze a company’s

competitive position within its environment (its
industry).

• How an IS infrastructure can influence a company’s

responsiveness to its changing business
environment.
 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.
 Porter Competitive Model
Potential
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

Substitute
Products
and Services

Source: Michael E. Porter

“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
 Objectives
of
the Strategic Business Unit

1. To create effective links with customers

and suppliers.

2. To create barriers to new entrants and

substitute product or services.
Primary and Supporting Competitive
Strategies

Primary Strategies:
• Differentiation
• Low (Least) Cost

Supporting Strategies:
• Innovation
• Growth
• Alliance
 Value Chain
• Also developed by Michael Porter but different
from the competitive model because it focuses
within the company.

• Analyzes business processes with the

objective of adding value to customers.
 Porter Value Chain

Manufacturing Industry Value Chain

Research Production Sales

and Engineering and Marketing and Service
Development Manufacturing Distribution
 Value Chain and IS
• The Value Chain can be used to determine where IS
can strengthen the internal business processes
within an organization.

• Most if not all functions need IT to contribute to the

organization’s competitive position.

• This model is essential to visualizing the activities

within business processes using IT.
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
 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 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
Potential
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

Substitute
Products
and Services

Source: Michael E. Porter

“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979 Figure 3-1
 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.
 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.
 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
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 • Foreign Manufacturer
• Electronic Components Potential • Established Company
• Specialty Metal Suppliers New Entrant Entering a New Market
• Machine Tool Vendors
Segment
• 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 - Motorcycle Manufacturing Industry
Product Strategy
Type/Purpose/Size

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 Adults Time Leisure Senior
Teenagers with Social Conscious Ethnic
with Adults Citizens Focus
Kids 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
Alliances
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
Porter Competitive Model : Analysis Tips
1. You must identify the specific market being evaluated.

2. Your analysis company is the Strategic Business Unit.

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

rivals if needed to present the best possible profile of
rivals.

4. Be sure to address the power implications of both

customers and suppliers. Power buys them what?

5. Identify buyers and suppliers by categories versus

companies.

6. Summarize your Porter Model analysis.

 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
Segment
• 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 - Motorcycle Manufacturing Industry
Product Strategy
Type/Purpose/Size

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 Adults Time Leisure Senior
Teenagers with Social Conscious Ethnic
with Adults Citizens Focus
Kids 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
Alliances
Bids Contracts Integrated

Market Strategy
Local Regional National International
 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 Computer Super Mass Mail Value-add Direct
Distributors Clubs Sales Other
Dealers Stores Merchandisers Order Resellers
Force

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

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

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

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 Internet
Sales
Distribution Stores Stores Merchandisers Order Resellers Direct
Force

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

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

Layer 1
Microprocessor Intel X86 Motorola RISC Power PC
 Computer Industry
Hardware
Multiple processor
• Processors segments in the computer
• Input/Output Devices industry.

• Storage Devices Processor companies

versus specialized
hardware companies.
Networking Equipment?
Software
• 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

industry?

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

2000

1999

1998

Supercomputer
1997
Mainframe
Midrange
1996 Workstation
Personal Computer

1995

Source: Dataquest
1994

1993 Millions of Dollars

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

 Worldwide Hardware Sales

2002
PCs
2001
Total Hardware
Billions of $s
2000

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
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. 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
SUPPORT ACTIVITIES

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

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

HUMAN
RESOURCE
Actuary Agent Claims
MANAGEMENT Training Training Training
Actuarial Methods Product
TECHNOLOGY
Claims
Investment Development
DEVELOPMENT Procedures
Practices Market Research
I/T
PROCUREMENT Communications

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

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

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

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
FIRM
Planning and Budgeting Technology
INFRASTRUCTURE
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.
Technology
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS AND SALES

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.