The Changing Competitive Advantage: ‘Porter in the Digital Age’

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Table of Contents

Porter’s Five Forces
The influences of the Digital Age on Porter’s Forces
Reviewing the Five Forces in the Digital Age
Conclusion
Reference List

Every organization has a primary duty of maintaining competiveness. Towards realizing the goal, each organization devises an information system strategy that specifies the path to be used in acquiring, deploying and supporting its Information System (IS). Primarily, the strategy aims at balancing business needs existing information, emerging opportunities and competing efficiently within the global digital economy using collaborative and partnership approaches.

The necessity for an information system strategy depends upon the size and nature of business. Larger businesses source for more information content and as such, the product value chain is greater which needs a wider enterprise information systems strategy (Porter 1998).

As the paper proceeds, it becomes evident that developments in information technology have narrowed the requirements of organizations based on size or nature of organizations.

The Five Forces Model advanced by Michael Porter is significant in analyzing market forces and competition. This view holds as the traditional competition matrix, the Virtual Value Chain and the Value Chain models support the model.

However, the progress in information technology has led to a paradigm shift in economics. As it emerges, the validity of Porter’s Five Forces in the Digital Age is questionable. In order to get a clear picture regarding this assertion, it is important to understand the five forces in relation to organizational aspects of businesses.

Porter’s Five Forces

Porter’s Five Forces Model is an important framework that offers an analytical platform that is useful in gauging competition and thus is useful in the adoption of business strategies. The model focuses on five distinct forces which when viewed collectively influence profitability and competition in the long-term.

The notion that Porter’s model has held much influence than any other model in the latter half of the 20^th century remains debatable.

Although all the five forces as advanced by Porter are relevant, the weight of each force differs based on the industry under review. However, as indicated earlier, viewed together, the five forces determine profitability within industries in the long-term. This follows from the idea that the weight of each force holds a separate function within the industry structure.

Together, the forcers influence competitiveness, investment choices, product prices, market share, profit margins, etc. In order to understand the relevance of the model, it is important to comprehend the dynamics that characterize the five forces. It is held that Porter’s model revolves around the conception of power within associations of the five forces.

The first force under review is the “industry competitors”. It is guaranteed that rivalries always develop among companies as they compete for market control (Porter 1998). Companies employ various approaches towards achieving this goal although the results vary. Methods used include advertising, introduction of new products, offering warranties, extending customer services, lowering of prices, etc.

All these measures are devised in order to outdo competitors. Based on the views of Porter, factors such as balanced companies, high fixed costs, absence of product differentiation, slow growth rates, price reductions, many competitors, overcapacity, etc helps increase the intensity of rivalry within industries.

As an illustration, in 1993, Ford Escort was forced to scale down prices in order to check the influence of Japanese cars. This exemplifies market rivalry.

Secondly, the “pressure from substitute products” force shapes the direction an industry takes (Porter 1998). Competition among industries naturally leads to the production of substitute products. Such developments however place limits on the level of profits that industries are able to make. Clearly, it is true that substitute products hold the potential of replacing other products.

Consequently, the goods have an effect of lowering prices of related products. As the prices go down, it is also worth to note that the industry players loose out, as profits dwindle with time. Porter illustrates this point using the example of how security brokers face competition from the money markets, the real estate market, insurance, etc.

Thirdly, the “bargaining power of suppliers” is an important force in Porter’s model. The role of suppliers in any industry is indisputable. To begin with, the suppliers have a direct influence on the prices of goods within an industry (Porter 1998). In addition, the suppliers have the potential of affecting the quality of the goods produced since they determine the quality of the supplies on offer.

The influence of suppliers on an industry becomes worse when a small group of companies dominates the supply channels. Moreover, if the supplies are used in producing essential products and have no substitutes then the situation becomes bizarre. The supply of labor is also influential on the position of suppliers. Although, several factors are out of the grasp of industry, companies can reign on the power of suppliers.

The fourth force is based on the “bargaining clout of buyers”. The significance of the power of the buyers is critical in the business world. Buyers hold the potential of pushing prices down (Porter 1998). The buyers also have the power to demand high quality products and services. This illustrates the power of consumers since it forces industry players to look for ways of pleasing them.

In the end, the power of consumers puts one competitor against another and this paves way for the customer to benefit from high quality products at reasonable prices. Such may also force industries to make losses as firms scramble to gain a larger market share.

However, buyers are able to exert influence when they buy large volumes, products are standardized within the industry, there is perfect mobility of products, there is a possibility for backward integration and the products are cost sensitive.

It seems that buyers wield power over industries where conditions allow for perfect competition. It is worth noting however that the bargaining power of buyers is not static as it shifts over time, hence companies have the opportunity to gain advantage by altering their competitive strategy.

“Potential entrants” rounds off the forces of Porter. The possibility of entry into an industry depends upon the barriers to enter an industry (Porter 1998). Based on the views of Porter, there are six barriers to entry, economies of scale, product differentiation, capital requirements, switching costs, distribution channels access and cost disadvantages.

Economies of scale imply that the unit cost of production declines, an element, which forces new entrants to commence business with large-scale production but face the risk of adverse reactions from the firms already in the industry. If a firm enters at a small-scale level, the risks are even bigger as it cannot compete effectively.

Regarding product differentiation, it is clear that in any industry, there are existing brands, which dominate the market. It is thus appears that it is difficult to enter a market and begin from scratch. Referring to capital requirements, it is evident that the start-up costs are high and thus prohibitive of new entries.

Switching costs also deter buyers from swapping one product for others and thus undermine companies from entering new markets based on the unlikely acceptance of new products. It should also be noted that product distribution is important. New entrants do not have the same access to distribution channels as existing firms do. Thus, the need to establish distribution channels is also prohibitive.

Finally, concerning cost disadvantages, it is worth noting that existing firms have access to raw materials, superior technologies, favorable markets, etc. This places such firms ahead and forces new entrants to work harder.

The influences of the Digital Age on Porter’s Forces

An information systems strategy helps by providing quality, relevant and timely information that a business requires to make decisions (Kim, et al 2004). It aids an organization in understanding its environment and is thus a useful element in taking vantage points in business. Secondly, Information Systems facilitate the management of information (Tapscott 1997).

It is evident that businesses require collecting and managing data since such is a valued organizational resource useful in decision-making. This point underscores the worth of having an IT department in an organization to help in the collection and storage of data.

Thirdly, it is understandable that organizations require software, hardware and other communication technologies policies necessary to deliver important information to business. This development has altered how business is conducted.

It is equally important to note that traditionally, IS focused on the internal processes of an organization (Kim, et al 2004). In this regard, aspects such as cost reduction, localization of benefits, seeking internal solutions to problems, technology-based development, limited exploitation and definition of total systems were the core areas under consideration.

On the other hand, strategic IS has evolved since its primary focus is on the external aspects of business. As a result, suppliers, customers and competition are major components that are considered.

Referring to Strategic IS, value addition, sharing of benefits based on strategic alliances, pursuit of customer needs, incremental development and exploitation of customer information becomes of critical vale. In addition to the point raised above, the shift in focus has contributed to alterations regarding how business is carried out.

Reviewing the Five Forces in the Digital Age

The digital world has witnessed a shift of power to consumers. Equally noticeable is the fact that information systems speed up competition, lowers transaction costs, reduces the effect of national and geographical boundaries and helps in the creation of networks through partnering and integration (Kim, et al 2004). The rapid evolution of the conduct of business is attributable to the progress made in Information systems.

By way of illustration, it is no longer possible to horde products in one location by expecting to sell them exorbitantly since individual consumers have ready access to information regarding product availability. Moreover, the unlimited ability to source for products from diverse places further compounds the issue.

The internet has unprecedented impact on the five forces presented by Porter. Regarding the barriers to entry, the internet has reduced them significantly. As an illustration, the need for sales personnel is no longer relevant in business. This is because, a business only needs to post information online or using other channels and customers are able to access it.

However, there is a question of targeting which may remain unanswered by this approach. It is thus important to establish if the targeted market segment is reachable using the advertising channel used. Additionally, access to distribution channels and tangible assets is no longer mandatory.

Additionally, it is difficult to keep online information away from the reach of new entrants. It is thus little surprising that new entrants continue to enter markets at an alarming rate.

Focusing on the force of bargaining power of customers, it is evident that the internet has increased the power of consumers since they are able to procure goods from many points at any time (Kim, et al 2004).

However, such can also give powers to suppliers. Contrary to increasing the power of consumers, the internet offers channels for suppliers to contact the end users and thus contributes towards reducing the leverage traditionally held by companies. Thus, this is valuable in reducing the power of companies, as they are no longer in positions of taking advantage of the masses by surcharging them.

The idea of contact between suppliers and end users is also positive since it is likely to reduce costs associated with use of intermediaries in business. The digital age also gives all organizations equal access to suppliers. As such, entry is easy and this shifts the power base to suppliers.

Based on the rivalry amongst companies, the internet has contributed towards the reduction of differences among competitors (Kim, et al 2004). Instead, the rivalry shifts to pricing.

On the same issue, the information technology age has led to the widening of the geographic market and in the process increased the number of competing parties. It is also discernable that information technology has played a role in the lowering of the variable costs against the fixed costs and thereby increased pressure on prices.

Based on the threat of substitutes force, it is observable that the information age has facilitated the possibility of industries operating more efficiently. Despite the improvement on efficiency, it is clear that proliferation of internet mechanisms creates several new substitute threats. The presence of substitutes increases competition and thus plays a role in making markets more efficient and responsive to needs of consumers.

The bargaining power of channels and users also reflects mixed outcomes based on developments in information technology. As an illustration, information technology facilitates the removal of powerful channels and thus lowers the traditional bargaining power of such channels. On the converse, power shifts to consumers as switching costs become minimal.

Conclusion

The Five Forces Model advanced by Michael Porter proves to be a significant analytical tool in business in regards to market forces and competition. However, the time at which, the approach was developed may explain why it may no longer provide an accurate view on competition and market forces. It is evident that the developments of the Digital Age have had significant effects on the five forces proposed by Porter.

More specifically, those barriers to entry listed by Porter no longer hold in the Digital Age. As a result, competition has intensified and consumers relatively hold more power against business organizations.

In the Digital Age, businesses are more focused on Strategic IS as they believe that such aspects as value addition, benefits sharing and strategic alliances are crucial to success as opposed to concentrating on internal processes. It is thus reasonable to conclude that in the Digital Age, suppliers, consumers and competition have risen to the center of business.

Reference List

Kim, E, et al 2004, The Applicability of Porter’s Generic Strategies in the Digital Age, Journal of Management, 30 (5), p.569-589.

Porter, M E 1998, Michael Porter on Competition, Harvard Business School Press, Boston, MA.

Tapscott, D 1997, Strategy in the new economy, Strategy & Leadership, 25 (6), p.8.

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