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
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Bargaining
Power
of Buyers
SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
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
© 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 Professional
Understands 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 Approach
1. 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
Google
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
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Figure 3-1
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.
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.
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 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
• Electronic Components
• Specialty Metal Suppliers
• Machine Tool Vendors
• Labor Unions
• IT Vendors
Bargaining
Power of
Suppliers
• Automobiles
• Public Transportation
• Mopeds
• Bicycles
• Foreign Manufacturer
Potential
New Entrant
Intra-Industry Rivalry
SBU: Harley-Davidson
Rivals: Honda, BMW,
Suzuki, Yamaha
Substitute
Product or
Service
• Established Company
Entering a New Market
Segment
• New Startup
Bargaining
Power of
Buyers
• Recreational Cyclist
• Young Adults
• Law Enforcement
• Military Use
• 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
Law Enforcement
Moderate
Market Strategy
Premium
Military Recreational Professional Young Adult
North American
Europe
Japan/Asia
Manufacturing Strategy
Vertically Integrated
Vendor Emphasis
Latin America
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
Porter Competitive Model Analysis
for the San Francisco Giants
New Entrants
Suppliers
Intra-Industry
Rivalry
SBU: SF Giants
Substitute Products and Services
Buyers
Porter Competitive Model Analysis for the San Francisco Giants
Bay Area Market
New Entrants
•Arena Football League
•Canadian Football
•Professional Hockey
•Professional Soccer
•Sumo Tournaments
Suppliers
•Players Union
•City of SF
•Transportation Services
•Food Service
•Sovereigns
•Police and Sanitation
Service
•Utilities
•Stadium Employees
Buyers
•Die Hard Giants Fans
•Die Hard Baseball Fans
Intra-Industry Rivalry
•Fair Weather Baseball Fans
SBU: SF Giants
•Non-baseball Fans
•Rivals: Oakland A’s
•Out of Town Visitors
•Minor League Baseball
•Opposing Team Fans
•S.F. 49ers
•Age Group Segments
•Golden State Warriors
•Groups Versus Individuals
•College Athletic Events
•Corporate Sponsors
•High School Athletic Events
•Sports Writers and Media
•Movies, Stage Plays, etc.
Outlets
•General Travel and Travel Packages
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
Porter Competitive Model
Venture Capital Industry in the U.S.
•More firms
•More capital
•Diminishing opportunities
•Cut-throat competition
•Higher deal prices
Potential
New Entrants
• Low Barriers to Entry
• Rapid Entry
• Attractive Rates of Return
• More global sources
Intra-Industry Rivalry
Bargaining
Power
of Suppliers
• Concentration in the
hands of a few institutions
• Increasing sophistication
• Better information
SBU: Kleiner Perkins Caufield & Byers
Rivals: Hambrecht & Quist
Sequoia Capital
Sierra Ventures
Sequoia Capital
Arthur Rock & Co.
Asset Management Corp.
Substitute
Products
and Services
Bargaining
Power
of Buyers
• Increasing sophistication
• More options
• Better information
• Breakdown of
industry boundaries
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 Model
Education Industry: U.S. Universities
Potential
New Entrants
Bargaining
Power
of Suppliers
• Faculty
• Staff
• Equipment and
Service Suppliers
• Alumni
• Foundations
• Business
• Government
• Foreign Universities
• Distance Learning
• Motorola U.
• National Technical University
Intra-Industry Rivalry
Strategic Business Unit
Substitute
Products
and Services
• Books and Videotapes
• Computer-Based Training
• Training Companies
• Consulting Firms
Bargaining
Power of Buyers
• Students
• Parents
• Business
• Employers
• Legislators
U.S. University Industry Structure
Intra-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 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
Distributors
Computer
Dealers
Super
Stores
Mass
Clubs
Merchandisers
Mail
Order
Value-add
Resellers
Direct
Sales
Force
Other
Layer 4
Applications
Lotus 1-2-3
•Spreadsheets
•Word Processors
•Database
Layer 3
Operating
System
Software
Layer 2
Computer
Platforms
Layer 1
Microprocessor
MS DOS
Novell Netware
IBM
Compaq
Intel X86
Microsoft Excel
Windows
Quattro Pro
OS/2
Banyan
Unix
IBM
Other Intel-Based PCs
Motorola
Apple
Others
Apple Macs
RISC
Other
Power PC
Figure 3-4
Computer Industry Market Segments
•Supercomputers
•Hardware
•Mainframes
•Software
•Minicomputers
•Services
•Workstations
•Telecom Networks?
•Personal Computers
•Peripheral Equipment
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
• Compaq
• Cromemco
• Dell
• Fortune Systems
• Gateway
• Wicat Systems
• IBM
• Kaypro
• HP
• Morrow Designs
• NEC
• 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
and
Development
Production
Engineering
and
Manufacturing
Sales
Marketing
and
Distribution
Service
Retail Industry Value Chain
Partnering
with
Vendor
Managing
Buying
Inventory
Distributing Operating
Inventory
Stores
Marketing
and
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.
SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
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
© 1985 by Michael E. Porter.
Figure 3-6
Property and Casualty Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy
HUMAN
RESOURCE
MANAGEMENT
-Regulatory Compliance
- Accounting
Agent
Training
Actuary
Training
Actuarial Methods
Investment
Practices
TECHNOLOGY
DEVELOPMENT
- Legal
Product
Development
Market Research
Claims
Training
Claims
Procedures
I/T
Communications
PROCUREMENT
•Policy Rating
• Underwriting
• Investment
•Independent
Agent Network
•Billing and
Collections
•Policy Sales
•Policy Renewal
•Agent Management
•Advertising
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
•Claims Settlement
•Loss Control
SERVICE
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
Planning and Budgeting Technology
Office Technology
FIRM
INFRASTRUCTURE
Training Technology
Motivation Research
Information Technology
HUMAN
RESOURCE
MANAGEMENT
Product Technology
Computer-Aided Design
Pilot Plant Technology
TECHNOLOGY
DEVELOPMENT
Software Development Tools
Information Systems Technology
Information Systems Technology
Communication System Technology
Transportation System Technology
PROCUREMENT
•Transportation
Technology
•Material Handling
Technology
•Storage and
Preservation
Technology
•Communication
System
Technology
•Testing Technology
•Information
Technology
INBOUND
LOGISTICS
•Basic Process
Technology
•Materials
Technology
•Machine Tools
Technology
•Materials Handling
Technology
•Packaging
Technology
•Testing Technology
•I/nformation Tech.
OPERATIONS
•Transportation
Technology
•Material Handling
Technology
•Packaging
Technology
•Communications
Technology
•Information
Technology
•Multi-Media
Technology
•Communication
Technology
•Information
Technology
•Diagnostic and
Testing Technology
•Communications
Technology
•Information
Technology
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
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., p. 167.
Figure 3-8
Summary of Chapter 3
The Porter Competitive Model
for
Industry Structure Analysis
By Sandra Chu
Chapter Objectives
1. 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
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Figure 3-1
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 Strategies
Primary 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 Questions
1. 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.