The Five Competitive Forces that Shape Strategy

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The Five Competitive Forces that Shape Strategy
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• Michael Porters classical theory of strategy
  formulation
• Original HBR article in 1979
• Simple, powerful description of five forces
• Five forces analysis in practice
• Five forces distinguished from contemporary
  factors (e.g. the internet)
• What can we learn from this article?
• How economic value is created and claimed by
  participants in a business network or industry
• How IT might change the relative strength of each
  force

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HOW CAN INFORMATION RESOURCES BE USED
STRATEGICALLY?
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The Strategic Landscape

• Managers confront elements that influence the
  competitive environment.
• Slim tolerance for error.
• An approach to evaluating the strategic landscape
  is helpful in determining strategic
  opportunities.

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Porters Five Forces Model of Competitive
Advantage

1. Threat of New Entrants new firms that may enter
   a companys market.
2. Bargaining Power of Buyers the ability of buyers
   to use their market power to decrease a firms
   competitive position.
3. Bargaining Power of Suppliers the ability of
   suppliers of the inputs of a product or service
   to lower a firms competitive position.
4. Threat of Substitutes providers of equivalent or
   superior alternative products.
5. Industry Competitors current competitors for the
   same product.

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Competitive Forces with Potential Strategic Use
of Information Resources
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Application of 5 Forces Model
Competitive Force IT Influence on Competitive Force
Threat of New Entrants Can be lowered if there are barriers to entry. Sometimes IS can be used to create barriers to entry
Bargaining Power of Buyers Can be high if its easy to switch. Switching costs are increased by giving buyers things they value in exchange such as lower costs or useful information
Bargaining Power of Suppliers Force is strongest when there are few firms to choose from, quality of inputs is crucial or the volume of purchases is insignificant to the supplier
Threat of Substitute Products Depends on buyers willingness to substitute and the level of switching costs buyers face
Industrial Competitors Rivalry is high when it is expensive to leave an industry, the industrys growth rate is declining, or products have lost differentiation
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The Five Forces Model and IS

• The Five Forces Model provides a way to think
  about how information resources can create
  competitive advantage.
• Using Porters Model, general managers can
• Identify key sources of competition they face
• Identify uses of information resources to enhance
  their competitive position against competitive
  threats
• Consider likely changes in competitive threats
  over time

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