Central to Michael E. Porter's landmark works on Competitive Strategy (1980) and Competitive Advantage (1985) are the framework of structural analysis and the definition of an industry. According to Porter, “industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm”. He goes on to add that since forces outside the industry usually affect all firms in the industry, the key is found in the different abilities of firms to deal with them. In this context, Porter proposes the five forces that drive industry competition as bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, threat of new entrants and rivalry among existing firms. Collectively these five forces are hypothesized to determine the state of competition in the industry. Each competitive force is also hypothesized to have multiple structural determinants.
Despite the shared importance of defining the industry, Porter provides a lower scale of importance to defining the industry. Porter adopts the working definition of an industry as the group of firms producing products that are close substitutes for each other. He also observes that a great deal of attention has been directed at defining the relevant industry as a crucial step in competitive strategy formulation, and that the proper definition of the industry or industries has become an endlessly debated subject. Porter proposes that structural analysis, by focusing broadly on competition well beyond existing rivals, should reduce the need for debates on where to draw industry boundaries. He even proposes that industry definition has to do little with the choice of strategy. Porter holds that definition of the industry is not the same as definition of where the firm wants to compete (defining its business) and advocates that decoupling industry definition and that of the businesses the firm wants to be in will go a long way in eliminating needless confusion in drawing industry boundaries.
Porter’s paradox
Porter’s interesting hypotheses, however, hardly do justice to determining the central role of the industry in influencing the competitive strategy of a firm. Structural analysis is rooted in the industry whose definition itself is not rooted in any particular methodology. By providing considerable freedom for firms to draw the boundaries, Porter ensures that firms which apparently view themselves as part of an industry are, in fact, more realistically parts of different industries. This paradox is visible in multi-product industries such as automobile industry wherein each product group, trucks, buses, cars, three-wheelers, two-wheelers and tractors could each be considered as an industry based on the fact that different customers use these different product groups. There would also be a possibility of defining the industry in terms of broad factor commonalities such as four-wheelers and two-wheelers, an approach taken by the author of this blog post in conducting structural analysis for his research thesis. While strategy formulation is expected to be based on structural analysis, structural analysis is itself allowed to be based on multiple industry and market segments.
The paradox of industry definition becomes sharper if one takes into account the fast changing technological developments that are constantly redrawing product profiles, specifications and usage factors. Earlier, different methods of communication such as voice, data, print and visual used to have discrete products and services. Today, convergent products provide divergent services while the same service can be provided by different products. Industry segments and market segments appear to follow no particular pattern. At another level, the distinction between a product and its service has blurred, and the symbiosis between a product and its applications has increased enormously. The application of structural analysis, therefore, seems imperfect whichever canvas is chosen to define the industry. There seems to be a case for redrawing the parameters of structural analysis and industry definition in the current era, which has been a resultant of over three decades of profound technological changes.
Industrial digitization
Over the last three decades there has been no industry that has not been reshaped by the electronics as a broad stream of technologies. The intensity and scope of the reshaping of industries varies from reinforcement to transformation to reinvention. Reinforced industries are those which retain their basic technological characteristics and usage requirements but have deployed electronics to redefine the levels of sophistication. Transformed industries are those which have been almost threatened to extinction by digital technologies but have transformed themselves through integration of digital technologies. Reinvented industries are those which have created totally new products and services to fulfill basic requirements, some of which discovered out of their latency. A few examples in each case demonstrate the complexity of structural analysis and industry definition in the emerging scenario.
Most industries in the basic and core sectors have been substantially reinforced by the integration of electronics. Digital technologies which achieve sharper levels of measuring, computing and control have reinforced most products in basic industries to new levels of perfection. Thus, while a car remains a car even today it bears little resemblance to the previous generations in functionality, from fuel combustion to cruise control and from seating comfort to driving safety. The structural factors that defined industry competition in Porter’s model are no longer valid in their entirety. There are new factors of integration and differentiation of digital technologies that influence structural analysis and industry definition in several basic industries covering steel, engineering, mining, automobiles, housing, oil, aerospace and transportation, to quote a few.
Several industries in the consumer sectors, on the other hand, have been initially threatened by the emergence of digital technologies which promised to provide completely new ways by which products and services are designed, manufactured and delivered to consumers. Internet changed the way producers and consumers are connected. Electronic retailing made brick and mortar retailing threatened. Digital imaging made film photography obsolete. Electronic books offered a new channel of book procurement and reading. Eventually, however, conversion of digital threats into business supplements enabled several of the industries to recover and transform themselves eventually. Retail, publishing, imaging, measuring, diagnostic and several media and entertainment businesses, to quote a few, have transformed themselves to have both parallel and integrated physical and electronic business segments.
In contrast to the above two, connectivity has emerged as a new industry that not only spanned many existing industries but also created new industry and market segments. Bringing together advances in telecommunications, electronics and software, connectivity became a customer-centric, technology-driven platform for a new wave of multiple industries and multiple businesses. Information search, social networking and convergent communication have created new products and services, and an entirely new domain of applications for products and services. As a result, a new mega industry of conglomerate convergence has emerged driven by software and hardware behemoths like Microsoft, Google, Apple and Facebook. The models of structural analysis and industry definition need a total reconstruction to cater to the reinvented mega industries of the networking era.
Reconfiguring structural determinants
The aim of structural analysis is to identify the basic, underlying characteristics of an industry rooted in its economics and technology that shape the arena in which the competitive strategy of a constituent firm must be set. The basic framework of the Five Forces Structural analysis which comprises the forces of entry, rivalry, substitutes, buyers and suppliers remains valid in respect of the three new industrial typologies discussed above. However, the structural determinants vary significantly as a group when compared to the classic Porter delineation, and also across each of the three industrial typologies. While Porter considers that environmental changes, especially the short term ones, do not impact firms differentially, and hence are not relevant for structural analysis or industry definition, the changes especially in terms of emerging markets and technological openness are so transformational that Porter’s 1980 thesis would need to be revisited.
Threat of entry
The first competitive force is the threat of new entrants to an industry. The threat is moderated by the barriers to entry that are present in an industry and countered by the reaction from existing competitors that the entrant can expect. According to Porter, there are six major sources of barriers to industry: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels and government policy. Major changes that have taken place in industrial outsourcing to emerging markets over the last three decades have altered the impact of the first three sources of entry barriers, namely, scale, differentiation and capital. Design and manufacturing is no longer a first world monopoly; it is a comparative advantage of rapidly emerging markets such as China and India. The wide development of the Internet has altered the dynamics of switching costs and distribution channels. Reformist government policies have facilitated rather than prohibited globalization.
The only proprietary advantage that any firm can retain as an entry barrier in the changed environment, across all industries, is the control over electronics and digitization. In transformed industries the sway over Internet adds to the control while in reinvented industries operating systems hold the key. Clearly, entry barriers that are based on the old age manufacturing technology have given way to different entry barriers that are based on a new range of communication, networking and automation technologies. In the past, pioneer had experience on its side as an ethereal barrier. Received wisdom teaches us that experience leads to better learning and hence better throughput as well as better costing. As industries get reshaped based on new technologies, pioneer has the advantage of first market formation but also the risk of followers gaining from the subsequent perfection of the pioneer’s technology. Followers have been able to develop new overlays for the pioneer’s technology to reduce the first incumbent’s advantage. Electronics, telecommunications and systems software have the feature of multiple generations of technology leading to multiple experience curves. Proprietary development of multiple generations of technology is currently the only sustainable entry barrier.
Intensity of rivalry
The second entry barrier relates to the intensity of rivalry among existing competitors. Intensity of competition in the past was essentially in terms of price competition. Price competition in the past essentially operated independent of specifications, with value getting induced by virtue of lower price, and price being a function of the lower margins that a firm was able to afford at the minimum. Today, price competition is more sophisticated; it is in terms of the range of products that a firm is able to operate at different specifications and price points. Porter’s theory on intensity of rivalry holds that numerous or equally balanced competitors, slow industrial growth, high fixed or storage costs, lack of differentiation or switching costs, large capacity increments, diverse competitors, high strategic stakes and high exit barriers, either individually or in combinations, add to the intensity of rivalry in an industry.
Today, these parameters do not operate the way Porter envisaged. The canvas for industry rivalry has shifted to the emerging markets. Slow growth, induced partly by economic deceleration, has prompted firms in advanced countries to seek low cost products and services from the emerging markets, through collaborative arrangements, joint ventures or wholly owned subsidiaries. At the same time, the opening up and growth of the emerging markets has prompted firms in advanced countries to seek a renewed and expanded presence in such markets for customer access. All this has led to an intense rivalry among national and foreign firms for talent that can provide the competitive advantage. The focus has shifted from formulating competitive strategy to realizing it through appropriate talent in the emerging markets. The new three industrial typologies represent a new battle ground for heightened rivalry in both advanced and emerging markets with interconnectivity of factor and customer inputs.
Pressure from substitute products
The third competitive force relates to the pressure from substitute products. Porter hypothesized rightly that all firms in an industry compete, in a broad sense, with industries producing substitute products. As an example, Porter cites the examples of sugar and sugar substitutes. Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry. In Porter’s 1980 analysis, this third competitive force of substitute products received a rather perfunctory treatment compared to the first competitive force of entry or the second one of rivalry. In the contemporary world of technological convergence, however, the competitive force of substitute products is, in fact, the most intense competitive force. And, it works both ways in terms of unexpected substitutability as well as non-substitutability, challenging traditional structural analysis.
In the infrastructure space of basic industries, hydro power, thermal power and nuclear power could be seen as being perfect substitutes. In the post-Fukushima tsunami world, nuclear energy has ceased to be a perfect substitute for the other sources of power, at least in Japan and Germany. Renewable energy or green energy development have not, at the same time, lived up to the expectations of substitution; adequate governmental incentives could alter the picture. The structural determinants for the competitive force of substitute products must, therefore, now include government policy. On the other hand, certain other segments of the new generation industries offer the paradox of product convergence and usage divergence. The continuous emergence of laptops, notebooks, net books, smart phones, and lately tablets demonstrates how connectivity gets functionalized in multiple manners even as all the functionalities are integrated technologically. Product substitution or service substitution needs to be a mega competitive force in any revised model of structural analysis.
Bargaining power of buyers
Bargaining power of buyers is the fourth competitive force. Buyers or customers are considered to be the basic enabler for formation of an industry. Porter, however, takes a slightly contrarian view stating that buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other – all at the expense of industry profitability. This view is not only contrarian but also uncharitable. The reality seems to be that buyers of the day are ever eager to expend much of their valuable resources, time or money, to lap up an ever increasing array of products and services that are being churned out by fiercely competing firms. Buyer groups, especially those backed by governments and large user organizations such as electricity boards and hospitals, are no doubt more powerful than ever. Part of the enhanced power is due to technology, with e-auctions and e-bids setting up the stage for enhanced and invisible competition.
Porter’s model needs to consider that the buyer power in today’s world is scaled up by the firms themselves; an unending quest for market share and an unceasing wave of technological developments are now combining to prompt buyers to demand better features. Market segmentation is inescapable in any industry today to minimize the impact of buyer power. Firms need to recognize that as their products create new user segments, the balance of power gets constantly shifted. Latest technologies create products and services that shift customers from existing products and services and that attract new customers. Buyer power in respect of such products and services enhances only when new generations of products and services are created. Clearly, buyer power is not a static competitive force in today’s industrial scenario. Its dynamism is triggered by the rate of technological change.
Bargaining power of suppliers
Porter’s model considers the bargaining power of suppliers as the fifth competitive force. Porter states that suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services. Porter’s hypothesis on bargaining power of suppliers is rooted in classic industrial economics and does not recognize either the new platforms of supplier power or the collaborative nuances of contemporary supply chain management. Newer platforms of commodity and metal exchanges have emerged as new instruments that drive up or drive down product prices. Control over product prices has gone out of control of suppliers, given the shared intent to benefit from market expansion that competitive products can help achieve. Both end-users and suppliers are now waking up to the advantages of strategic collaboration to ensure continued supply of low cost-high quality components and materials.
The new model of supply chain is insensitive to scale but sensitive to technology. The fact that vendors of the day supply millions of components to new products does not mean that such suppliers can automatically dictate higher prices. Similarly, equipment makers are no longer viewing multi-sourcing as a means to reduce supplier power. Wise manufacturers realize today that their vendors need scale not merely to sustain themselves but more importantly to drive down costs and enhance quality. At the same time, the complex interrelationships of owned and licensed patents as well as cross-supply of designs and components or assemblies are causing supplier power to be muted in the face of advantages of joint development of industries and markets. The model of the Japanese auto makers working with their component and material manufacturers to optimize technologies is now more universal.
Competitive strategy
Porter summarizes his thesis on the structural analysis of industries by stating that once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm would be in a position to formulate its competitive strategy. According to Porter, an effective competitive strategy takes offensive or defensive action in order to create a defendable position against the five competitive forces. Elaborating, Porter states that this would involve positioning the firm for the best defense, influencing the balance of forces through strategic moves, or anticipating change and responding with an appropriate strategy. In summary, Porter proposes a relatively static structural analysis of the industry to lead to a dynamic strategy formulation by the firm.
As this blog post demonstrates, the issue with Porter’s framework in the contemporary world is that the industries are getting reshaped by new technological trends at a far greater pace than in the past, and the sources of organic (or, in-house) competitive advantage are far fewer than those obtained in the past. While the five competitive forces remain valid, their structural determinants have changed significantly over the last three decades. There is a need for more dynamic models of structural analysis that are customized to reinforced, transformed and reinvented industries identified in this post with more flexible definition of industry and more perceptive identification of competitive forces and sources of competitive advantage, developed essentially on technological dimensions.
Posted by Dr CB Rao on July 24, 2011
Despite the shared importance of defining the industry, Porter provides a lower scale of importance to defining the industry. Porter adopts the working definition of an industry as the group of firms producing products that are close substitutes for each other. He also observes that a great deal of attention has been directed at defining the relevant industry as a crucial step in competitive strategy formulation, and that the proper definition of the industry or industries has become an endlessly debated subject. Porter proposes that structural analysis, by focusing broadly on competition well beyond existing rivals, should reduce the need for debates on where to draw industry boundaries. He even proposes that industry definition has to do little with the choice of strategy. Porter holds that definition of the industry is not the same as definition of where the firm wants to compete (defining its business) and advocates that decoupling industry definition and that of the businesses the firm wants to be in will go a long way in eliminating needless confusion in drawing industry boundaries.
Porter’s paradox
Porter’s interesting hypotheses, however, hardly do justice to determining the central role of the industry in influencing the competitive strategy of a firm. Structural analysis is rooted in the industry whose definition itself is not rooted in any particular methodology. By providing considerable freedom for firms to draw the boundaries, Porter ensures that firms which apparently view themselves as part of an industry are, in fact, more realistically parts of different industries. This paradox is visible in multi-product industries such as automobile industry wherein each product group, trucks, buses, cars, three-wheelers, two-wheelers and tractors could each be considered as an industry based on the fact that different customers use these different product groups. There would also be a possibility of defining the industry in terms of broad factor commonalities such as four-wheelers and two-wheelers, an approach taken by the author of this blog post in conducting structural analysis for his research thesis. While strategy formulation is expected to be based on structural analysis, structural analysis is itself allowed to be based on multiple industry and market segments.
The paradox of industry definition becomes sharper if one takes into account the fast changing technological developments that are constantly redrawing product profiles, specifications and usage factors. Earlier, different methods of communication such as voice, data, print and visual used to have discrete products and services. Today, convergent products provide divergent services while the same service can be provided by different products. Industry segments and market segments appear to follow no particular pattern. At another level, the distinction between a product and its service has blurred, and the symbiosis between a product and its applications has increased enormously. The application of structural analysis, therefore, seems imperfect whichever canvas is chosen to define the industry. There seems to be a case for redrawing the parameters of structural analysis and industry definition in the current era, which has been a resultant of over three decades of profound technological changes.
Industrial digitization
Over the last three decades there has been no industry that has not been reshaped by the electronics as a broad stream of technologies. The intensity and scope of the reshaping of industries varies from reinforcement to transformation to reinvention. Reinforced industries are those which retain their basic technological characteristics and usage requirements but have deployed electronics to redefine the levels of sophistication. Transformed industries are those which have been almost threatened to extinction by digital technologies but have transformed themselves through integration of digital technologies. Reinvented industries are those which have created totally new products and services to fulfill basic requirements, some of which discovered out of their latency. A few examples in each case demonstrate the complexity of structural analysis and industry definition in the emerging scenario.
Most industries in the basic and core sectors have been substantially reinforced by the integration of electronics. Digital technologies which achieve sharper levels of measuring, computing and control have reinforced most products in basic industries to new levels of perfection. Thus, while a car remains a car even today it bears little resemblance to the previous generations in functionality, from fuel combustion to cruise control and from seating comfort to driving safety. The structural factors that defined industry competition in Porter’s model are no longer valid in their entirety. There are new factors of integration and differentiation of digital technologies that influence structural analysis and industry definition in several basic industries covering steel, engineering, mining, automobiles, housing, oil, aerospace and transportation, to quote a few.
Several industries in the consumer sectors, on the other hand, have been initially threatened by the emergence of digital technologies which promised to provide completely new ways by which products and services are designed, manufactured and delivered to consumers. Internet changed the way producers and consumers are connected. Electronic retailing made brick and mortar retailing threatened. Digital imaging made film photography obsolete. Electronic books offered a new channel of book procurement and reading. Eventually, however, conversion of digital threats into business supplements enabled several of the industries to recover and transform themselves eventually. Retail, publishing, imaging, measuring, diagnostic and several media and entertainment businesses, to quote a few, have transformed themselves to have both parallel and integrated physical and electronic business segments.
In contrast to the above two, connectivity has emerged as a new industry that not only spanned many existing industries but also created new industry and market segments. Bringing together advances in telecommunications, electronics and software, connectivity became a customer-centric, technology-driven platform for a new wave of multiple industries and multiple businesses. Information search, social networking and convergent communication have created new products and services, and an entirely new domain of applications for products and services. As a result, a new mega industry of conglomerate convergence has emerged driven by software and hardware behemoths like Microsoft, Google, Apple and Facebook. The models of structural analysis and industry definition need a total reconstruction to cater to the reinvented mega industries of the networking era.
Reconfiguring structural determinants
The aim of structural analysis is to identify the basic, underlying characteristics of an industry rooted in its economics and technology that shape the arena in which the competitive strategy of a constituent firm must be set. The basic framework of the Five Forces Structural analysis which comprises the forces of entry, rivalry, substitutes, buyers and suppliers remains valid in respect of the three new industrial typologies discussed above. However, the structural determinants vary significantly as a group when compared to the classic Porter delineation, and also across each of the three industrial typologies. While Porter considers that environmental changes, especially the short term ones, do not impact firms differentially, and hence are not relevant for structural analysis or industry definition, the changes especially in terms of emerging markets and technological openness are so transformational that Porter’s 1980 thesis would need to be revisited.
Threat of entry
The first competitive force is the threat of new entrants to an industry. The threat is moderated by the barriers to entry that are present in an industry and countered by the reaction from existing competitors that the entrant can expect. According to Porter, there are six major sources of barriers to industry: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels and government policy. Major changes that have taken place in industrial outsourcing to emerging markets over the last three decades have altered the impact of the first three sources of entry barriers, namely, scale, differentiation and capital. Design and manufacturing is no longer a first world monopoly; it is a comparative advantage of rapidly emerging markets such as China and India. The wide development of the Internet has altered the dynamics of switching costs and distribution channels. Reformist government policies have facilitated rather than prohibited globalization.
The only proprietary advantage that any firm can retain as an entry barrier in the changed environment, across all industries, is the control over electronics and digitization. In transformed industries the sway over Internet adds to the control while in reinvented industries operating systems hold the key. Clearly, entry barriers that are based on the old age manufacturing technology have given way to different entry barriers that are based on a new range of communication, networking and automation technologies. In the past, pioneer had experience on its side as an ethereal barrier. Received wisdom teaches us that experience leads to better learning and hence better throughput as well as better costing. As industries get reshaped based on new technologies, pioneer has the advantage of first market formation but also the risk of followers gaining from the subsequent perfection of the pioneer’s technology. Followers have been able to develop new overlays for the pioneer’s technology to reduce the first incumbent’s advantage. Electronics, telecommunications and systems software have the feature of multiple generations of technology leading to multiple experience curves. Proprietary development of multiple generations of technology is currently the only sustainable entry barrier.
Intensity of rivalry
The second entry barrier relates to the intensity of rivalry among existing competitors. Intensity of competition in the past was essentially in terms of price competition. Price competition in the past essentially operated independent of specifications, with value getting induced by virtue of lower price, and price being a function of the lower margins that a firm was able to afford at the minimum. Today, price competition is more sophisticated; it is in terms of the range of products that a firm is able to operate at different specifications and price points. Porter’s theory on intensity of rivalry holds that numerous or equally balanced competitors, slow industrial growth, high fixed or storage costs, lack of differentiation or switching costs, large capacity increments, diverse competitors, high strategic stakes and high exit barriers, either individually or in combinations, add to the intensity of rivalry in an industry.
Today, these parameters do not operate the way Porter envisaged. The canvas for industry rivalry has shifted to the emerging markets. Slow growth, induced partly by economic deceleration, has prompted firms in advanced countries to seek low cost products and services from the emerging markets, through collaborative arrangements, joint ventures or wholly owned subsidiaries. At the same time, the opening up and growth of the emerging markets has prompted firms in advanced countries to seek a renewed and expanded presence in such markets for customer access. All this has led to an intense rivalry among national and foreign firms for talent that can provide the competitive advantage. The focus has shifted from formulating competitive strategy to realizing it through appropriate talent in the emerging markets. The new three industrial typologies represent a new battle ground for heightened rivalry in both advanced and emerging markets with interconnectivity of factor and customer inputs.
Pressure from substitute products
The third competitive force relates to the pressure from substitute products. Porter hypothesized rightly that all firms in an industry compete, in a broad sense, with industries producing substitute products. As an example, Porter cites the examples of sugar and sugar substitutes. Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry. In Porter’s 1980 analysis, this third competitive force of substitute products received a rather perfunctory treatment compared to the first competitive force of entry or the second one of rivalry. In the contemporary world of technological convergence, however, the competitive force of substitute products is, in fact, the most intense competitive force. And, it works both ways in terms of unexpected substitutability as well as non-substitutability, challenging traditional structural analysis.
In the infrastructure space of basic industries, hydro power, thermal power and nuclear power could be seen as being perfect substitutes. In the post-Fukushima tsunami world, nuclear energy has ceased to be a perfect substitute for the other sources of power, at least in Japan and Germany. Renewable energy or green energy development have not, at the same time, lived up to the expectations of substitution; adequate governmental incentives could alter the picture. The structural determinants for the competitive force of substitute products must, therefore, now include government policy. On the other hand, certain other segments of the new generation industries offer the paradox of product convergence and usage divergence. The continuous emergence of laptops, notebooks, net books, smart phones, and lately tablets demonstrates how connectivity gets functionalized in multiple manners even as all the functionalities are integrated technologically. Product substitution or service substitution needs to be a mega competitive force in any revised model of structural analysis.
Bargaining power of buyers
Bargaining power of buyers is the fourth competitive force. Buyers or customers are considered to be the basic enabler for formation of an industry. Porter, however, takes a slightly contrarian view stating that buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other – all at the expense of industry profitability. This view is not only contrarian but also uncharitable. The reality seems to be that buyers of the day are ever eager to expend much of their valuable resources, time or money, to lap up an ever increasing array of products and services that are being churned out by fiercely competing firms. Buyer groups, especially those backed by governments and large user organizations such as electricity boards and hospitals, are no doubt more powerful than ever. Part of the enhanced power is due to technology, with e-auctions and e-bids setting up the stage for enhanced and invisible competition.
Porter’s model needs to consider that the buyer power in today’s world is scaled up by the firms themselves; an unending quest for market share and an unceasing wave of technological developments are now combining to prompt buyers to demand better features. Market segmentation is inescapable in any industry today to minimize the impact of buyer power. Firms need to recognize that as their products create new user segments, the balance of power gets constantly shifted. Latest technologies create products and services that shift customers from existing products and services and that attract new customers. Buyer power in respect of such products and services enhances only when new generations of products and services are created. Clearly, buyer power is not a static competitive force in today’s industrial scenario. Its dynamism is triggered by the rate of technological change.
Bargaining power of suppliers
Porter’s model considers the bargaining power of suppliers as the fifth competitive force. Porter states that suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services. Porter’s hypothesis on bargaining power of suppliers is rooted in classic industrial economics and does not recognize either the new platforms of supplier power or the collaborative nuances of contemporary supply chain management. Newer platforms of commodity and metal exchanges have emerged as new instruments that drive up or drive down product prices. Control over product prices has gone out of control of suppliers, given the shared intent to benefit from market expansion that competitive products can help achieve. Both end-users and suppliers are now waking up to the advantages of strategic collaboration to ensure continued supply of low cost-high quality components and materials.
The new model of supply chain is insensitive to scale but sensitive to technology. The fact that vendors of the day supply millions of components to new products does not mean that such suppliers can automatically dictate higher prices. Similarly, equipment makers are no longer viewing multi-sourcing as a means to reduce supplier power. Wise manufacturers realize today that their vendors need scale not merely to sustain themselves but more importantly to drive down costs and enhance quality. At the same time, the complex interrelationships of owned and licensed patents as well as cross-supply of designs and components or assemblies are causing supplier power to be muted in the face of advantages of joint development of industries and markets. The model of the Japanese auto makers working with their component and material manufacturers to optimize technologies is now more universal.
Competitive strategy
Porter summarizes his thesis on the structural analysis of industries by stating that once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm would be in a position to formulate its competitive strategy. According to Porter, an effective competitive strategy takes offensive or defensive action in order to create a defendable position against the five competitive forces. Elaborating, Porter states that this would involve positioning the firm for the best defense, influencing the balance of forces through strategic moves, or anticipating change and responding with an appropriate strategy. In summary, Porter proposes a relatively static structural analysis of the industry to lead to a dynamic strategy formulation by the firm.
As this blog post demonstrates, the issue with Porter’s framework in the contemporary world is that the industries are getting reshaped by new technological trends at a far greater pace than in the past, and the sources of organic (or, in-house) competitive advantage are far fewer than those obtained in the past. While the five competitive forces remain valid, their structural determinants have changed significantly over the last three decades. There is a need for more dynamic models of structural analysis that are customized to reinforced, transformed and reinvented industries identified in this post with more flexible definition of industry and more perceptive identification of competitive forces and sources of competitive advantage, developed essentially on technological dimensions.
Posted by Dr CB Rao on July 24, 2011
1 comment:
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