Porter Models Text Box: Figure 2: Porter's Competitive Force Middlware introduced by Michael Porter first in 1980 and then later in 1985 [Porter 1980, Porter 1985]. The first model, known as the competitive force model is used most heavily. Porter's basic idea is that companies must contend with five competitive forces: threat of new entrants, bargaining powers of customers and buyers, buying power of suppliers, substitutes for your products and services, and the intensity of rivalry among competitors (see Figure 2). He then proposes three strategies to succeed: differentiate your products and services, be the lowest cost provider, and find a niche. Five years after this very simple yet elegant model, Porter proposed a Value Chain model suggesting that to be successful, companies must add value at every step of creation, development, sale, and after-sale. This model also became very popular.
Let us use the following examples to illustrate the Porter's Competitive Force Model.
The US Post Office Services, circa 1980, had no competition. Federal express was a new market entrant that came up with the overnight delivery services and became a competitor to the Post Office Services. Other entrants such as UPS also became competitors to the Post Office Services. While positioning to compete with the new entrants, the Post Offices had to face a substitute service -- the e-mail. As we all know, e-mail is a substitute for paper mail and even telephone calls. Thus the new entrants and the substitute services cannot be ignored.
Randy McNally has been printing maps until 1916 and has been the leader in maps ever since. The company publishes a very successful Rand McNally Road Atlas that has sold 150 million copies. However, as the digital economy developed at the beginning of the 1990s, Rand McNally's management did not understand the full impact of the new Internet and other computer-related developments. In particular, new startups such as MapQuest came out of nowhere and became a chief competitor in the new on-line map environment. New management was brought in to create a web site (RandMcNally.com) to put Rand McNally maps and address-to-address driving directions on the Web. Despite several attempts at gaining the online map and end-to-end directions business, Rand McNally has a long way to go to catch up to its more digital-savvy competitors. Thus new entrants such as MapQuest armed with substitute products (online maps) and additional services (e.g., online directions) have successfully competed with a market leader. Obviously, the changes in customer attitudes (many customers are comfortable with the idea of printing maps and directions online) have helped the new entrants.
Companies need to continuously watch out for new entrants and substitute products and themselves develop new products to stay in business. While developing strategies, the following few principles are worth keeping in mind (see [Kalakota 2000] for an expanded discussion of these and other related principles):
Books such as the following: [Kalakota 2000, Sawhney 2001, Whyte 2001].
Porter, M., "Competitive Advantage: Creating and Sustaining Superior Performance", Free Press, 1998.
Sawhney, M., et al, "The Seven Steps to Nirvana: Strategic Insights into e-business Transformation", McGraw-Hill Professional Publishing, 2001.
Whyte, W., and Whyte; B., "Enabling e-Business - Integrating Technologies, Architectures & Applications", John Wiley & Sons; 2001.
Journals/magazines such as Journal of Business Strategy, Harvard Business Review, Sloan Management Review, the CIO Magazine, and Information Week should be consulted for detailed insights.
Consulting firms such as IDC (www.IDC.com) have published a series of reports on e-business strategies.