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Lesson#39
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PORTERS MODEL OF COMPETITIVE RIVALRY
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Porter’s Model helps a firm to identify threats to its
competitive position and to devise plans including the
use of IT and e-commerce to protect or enhance that position.
Porter identified five forces of competitive
rivalry described as under:
Threat of potential/new entrants to the sector
Threat of substitute product or service in the existing trade
Bargaining power of the buyers
Bargaining power of the suppliers
Competition between existing players
These five forces are also shown in Fig. 1 below:
Competitive
rivalry among
existing players
Threat of
potential
entrants
Bargaining
power of
suppliers
Bargaining
power of
buyers
Threat
Of
substitution
Fig. 1
Threat of new entrants
This threat relates to the ease with which a new company or a
company in different product area can enter a
given trade sector. Typically, barriers to entry are capital,
knowledge or skill. IT/EC can be a barrier for new
entrants, for instance, where competing businesses have heavily
invested in EDI and are using the same,
their investment would act as a barrier for new businesses to
enter that trade sector. Conversely,
advancements in technology have given rise to new ideas
providing opportunity to new entrants without
any need to build the IT infrastructure or make heavy investment
to compete existing players. For example,
to start online banking a company does not require heavy
investment in constructing buildings (branch
offices), hiring staff etc. as required in traditional banking.
Rather, making use of internet technology
coupled with a sound marketing plan, unique online banking
services can be initiated.
Threat of substitution
This threat arises when a new product is available that provides
the same function as existing
product/service. For example, cotton fiber was, in the past,
replaced by synthetic fiber, and glass bottles
were substituted by plastic ones. This threat got materialized
in case of music shops in physical world when
due to the advent of e-commerce; music became available in
downloadable format through the artist’s
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website. The site, in fact, had provided a substitute
distribution channel. Another example is that of online
banking which substituted traditional banking in physical world.
Bargaining power of buyers
The cost of producing and distributing a product should be less
than the price it can bring in the market in
order to be profitable. Number of competitors and the supply of
a product are the two major factors that
determine bargaining power of the buyers. A buyer is in a strong
position to bargain for low price if there
are many competitors and/or the supply of the product in the
market is in surplus. Note that with the help
of e-commerce, low production cost, more inventory control and
quick response time can be achieved.
Besides, direct sale to the customers is also possible that cuts
the cost of involving intermediaries.
Therefore, a business using IT/EC can reduce the overall
production cost and afford to keep the price of
the product relatively low.
Bargaining power of suppliers
Businesses try to find more favorable terms from their own
suppliers. If supply of raw material is plentiful
and/or there are many suppliers, the supply can be procured at a
low price. Otherwise, position is more
favorable to the supplier having more bargaining power. Ability
to trade electronically is a factor in the
quality of service and may be a requirement of the buying
organization. Accordingly, bargaining power of a
supplier is reduced if it is not electronically enabled.
Competition between existing players
Competition among businesses is to get more buyers and trade at
a price that produces an acceptable profit.
If there are many players of the same size, capacity and
strategy having little difference between their
product/service, then there is fierce competition among them as
regards the price of the product/service.
Even a small change in the price of the product/service can be
crucial for the business. Again, the use of
EC can cause a significant difference by reducing
administration/transaction cost, increasing efficiency of
supply chain, improving product quality and customer service.
The five force analysis determines attractiveness of the
industry whether to enter that industry as a business
or not.
Strategic Planning Cycle
E-business competitive strategy is normally formed and
implemented according to a planning cycle which is
called strategic planning cycle.
There are four stages in this planning cycle as shown in Fig. 2
below:
Strategic Planning Cycle
Industry and
Competitive
Analysis
Strategy
Formulation
Implementation
Performance
Assessment or
Strategy
Reassessment
Fig. 2
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Industry and competitive analysis
It aims at identifying those factors on which the success of an
EC project or business would depend. One
way of doing that is to carry out SWOT analysis and study your
business as well as the business of your
competitors. Analysis of online competitor businesses is
relatively easy since they are just a few clicks away
on the web.
Strategy formulation
Based upon this study of internal and external business
environment and in light of a company’s strengths
and weaknesses, a competitive business strategy is formed. It
may be a strategy of cost leadership, product
differentiation or focus. One can also identify ways how
information technology can be used to
implement/enforce such strategy.
Implementation
In the implementation stage, you build a plan to identify steps
needed to put the strategy into action and
practically take those steps. For example, where your strategy
is to pursue differentiation in terms of quality
of service by using/arranging a web-based call centre through
which the customers can immediately register
their complaints; then you will have to select appropriate
individuals who are suitable for the job in the
implementation stage. Creating a web team and defining the role/
responsibility of each member of the
team is a critical component of implementation stage. For
example, you define that this person would be
the team leader; this would be in the technical staff (web
master etc.) or the management staff. Note that
involvement of key persons from marketing, accounting, finance,
human resource, IT, customer relations
etc. will be important in decision marking as to how a
particular implementation plan can be executed. A
strategic plan can be at times initially implemented in terms of
a pilot project before launching it to a full
scale. For example, an automobile manufacturer in America had
implemented a plan/scheme which allowed
the potential customers to have scheduled test drives before
buying a particular car. Initially, this scheme
was introduced to four American states but later it was
implemented all over the country. Another point is
to consider whether you should build your own infrastructure for
execution or outsource the task of
execution of a strategic plan. For example, where a strategic
plan requires a particular web design, you can
either mange your own team of web designers or outsource this
task to an outside firm having expertise in
this area.
Strategy assessment
Results of implementation plan are monitored and assessed so
that any corrective measures or expansion
plan can take place. Basically, you want to assess whether your
strategy has delivered what it was supposed
to deliver; whether your strategy is still viable/workable in
the ever changing environment. In strategy
assessment phase, you can learn from your mistakes and do your
future planning. In case your EC project
has been a failure, you can identity the problems and try to
remove them. Some of the corrective measures
can be to property train your web team, establish or review your
security or privacy policy, review or
reassess your web design content, reconsider your marketing plan
etc. For the strategy assessment, you can
conduct surveys, collect information and receive feedback from
different groups of people so that you have
solid input from people coming from a variety of background.
Sometimes, you have to entirety give up a
particular strategy you followed and formulate a new strategy or
set of strategies in light of the company’s
main objective or its mission.
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