Porter’s Competitive Forces Model

Information systems facilitate to provide accurate and timely information to management for the purpose of decision making and thus it is known as information management system. The purpose of information system is to deliver relevant and accurate information to managers so that it enables them to formulate business strategies. Thus, information system plays an important role in formulating business strategies. Further it also helps management in successful implementation of such strategies. The coordination of information system results and business strategies is a continuous process and facilitates information system structure to constantly remain appropriate for the objectives and goals of any organisation. This paper contains models and frameworks that help the management to formulate strategic plans and policies. Porter’s five forces model and value chain model are widely considered frameworks to achieve organisational objectives. Further, this paper also includes the concept of information system and synergies in developing core competences of an organisation (Wabwoba & Ikoha, 2011).

Porter’s Five Forces Framework was introduced by Michael E. Porter in 1980 in his book “competitive strategy: techniques for analysing industries and competitors”. It is an important instrument for examining organisational and structural competitive advantages of an industry (Huggins & Izushi, 2011).

According to this framework, there are five forces that form or shape every industry and market. These five forces decide the strength of rivals hence attractiveness and profitability of an industry. Porter’s Model is based on the vision that a business strategy should face the threats and opportunities existing in the external environment. It also supports examination of functional forces in industry. After applying Five Forces Analyses, management can take decision about the impact and exploitation of particular features of their industry (D’aveni, et al., 2010).

Five competitive forces can be described as follows:

1. Bargaining power of suppliers
2. Bargaining power of consumers
3. Threat of new entrants
4. Threat of substitutes
5. Competitive rivalry

Bargaining power of suppliers:

According to porter’s five forces, supplier power is concerned with the pressure that suppliers can exercise in market by price rising, quality dropping and reducing the accessibility of their products. Supplier power is one of the main aspects that frame the competitive environment and structure of any business industry. Powerful sellers can force to follow their conditions related to price, quantity and quality. But if there are a number of suppliers available in the market, then the power of controlling the market is weaker (Academy, 2018).

Bargaining power of customers: In five forces, bargaining power of customers is related to the pressure that consumers can make on the industry for receiving products and services of high quality at low price. According to Porter’s model, analysis of industry is conduct form the print of view of seller, while analysing the buyer’s power to influence the industry. High bargaining power of customers can affect the profitability of the industry by exercising their necessities in terms of quality, price and service. Selection of consumers is important because an industry should try to avoid the condition of dependence. Generally, bargaining power of customers is inversely comparative to the bargaining power of suppliers (Dictionary, 2018).

Bargaining Power of Suppliers

Threat of new entrants:

According to Porter’s Five Forces, threat of entries of new suppliers is related to the new entrants challenging to existing suppliers in the industry. Since a profit making business industry always attracts more suppliers for making more profit. Entering new competitors will result in increase in production sources and capacity without increase customer demand. Accordingly profitability of all suppliers will get affected. Therefore it is necessary to create hurdles to prevent the competitors from entering into the market. The new entrants are either new suppliers or old one who aim at diversifying their business activities. The hurdles can be in from of legal or industrial factors. Entry of new suppliers also depends upon the size of target market and control of pre-established firms, technical advancements, availability of raw material and labour, customer preferences and cultural obstacles (Martin, 2014).

Threat of substitutes: Substitute product is referred as the product offering similar or equivalent benefits to the consumers. This threat is a type of high risk which a company may face because of replacement by substitutes. Level of threat is always high for generic and identical products in comparison to more exclusive products. A company having a number of substitutes pursue a little control over its prices, and bargaining power of customer tends to become high because they have various options to make purchase (Wilkinson, 2013).

Competitive rivalry:

According to Porter’s Model, strength of rivalry affects the competitiveness of an industry and impacts the capability of existing business firms to attain profitability. High strength of rivalry can be reason for increasing competitiveness of an industry so as to decrease the profit making possibilities for established firms. The rivalry between organisations is responsible to determine the attractiveness of a business industry. In conclusion, it is the study and analyses of number of products, strengths, weaknesses, brands, market shares, competitors and their strategies (Tavitiyaman, et al., 2011).

Application of Porter’s Five Forces Model:

The effect of five forces can be analysed in different way according to the business industry. Every firm enjoys different type of market conditions including consumer’s effect, suppliers control, availability of material, transportation and other factors. Thus it becomes difficult to develop this theory separately for different industries. Despite of type of industry, there are mainly two or three factors that are mainly caused to formulating all strategies. But it is not that easy to analyse those factors by applying simple business practices. Applying five forces model, management of a firm can analyse the factors that affect its micro environment. During application of five forces model, first step is to find out the facts like whether bargaining power of suppliers is high or low as it has inverse effect on the bargaining power of consumers. Another fact is to be identified that is there are any chances of new entrants into the marker. It directly depends upon the pricing factors. After analysing all the factors, management need to know the required functions to formulate the organisational strategy. However it is difficult to frame strategy for all functional areas if business has diversified its functions, but in case business is functioning in one category only, then this is the best approach to apply.

Bargaining Power of Customers

Michael Porter was the first person who used the term ‘Value Chain’ in 1985, in his book named as “Competitive Advantage: Creating and sustaining superior performance”. It defines the functions that an organisation undertakes and associates them to the competitive position of organisations. It also explains the chain of activities and functions that an organisation undertakes with the help of its employees to provide timely goods and services to consumers. Such functions include marketing, designing, distribution and support services to consumers (Cambridge, 2018).

In Value chain model, Porter separated the activities as primary activities and support or secondary activities. Primary functions can divides into five categories: operations, inbound logistics, outbound logistics, sales and marketing, and service. All primary activities are directly related to support or secondary activities in order to increase their efficiency or effectiveness. Support activities are divided into four main categories: procurement, infrastructure, human resource management and technology development (Cattaneo, et al., 2010).

Use of value chain in information system:

Information system is required to be used at each level of value chain to enhance the efficiency of operations, increase profit margins, reducing cost and built a smooth relationship with suppliers and customers. Information system can also be used by the organisations to examine the process of performing value adding functions at various levels of the chain. Effective management of information system can develop the relationship and connection with customers which is known as customer relationship management system. It is also helpful in establishing relationship with suppliers by supply chain management system. Implication of information system can support businesses in setting up benchmarks in the firm and recognise best track of the particular business industry (Laudon & Laudon, 2016).

Value Web and its relation with value chain:

Value Web Model is a group of autonomous organisations using extremely harmonized information technology to organise value chains for production of goods and providing services to consumers. It is more customer oriented model than value chain and works effectively. Value Web model referred as networking system that can coordinate the process of business such as suppliers, customers and trading associates among diversified organisations in carious related industries. The significance of value web models is that it can help management to assess the extra costs involve in web that can be reduced by changing in one of the processes of web. By comparing the web model of competitors, management can also find the links where more efficiency is needed.

Threat of New Entrants

Role of value webs in identifying opportunities for strategic information systems:

Value Web Models enable business organisations to discover opportunities for providing strategic data. It considers the firm as a chain of functions that increase value to services and products. Information system facilitates the adaptive and stretchy value webs to make changes in demand and supply. Relationships with customers and suppliers can be pushed in reaction to changes in market conditions. Firms can concentrate and utilise their time on customers and market by enhancing their value web management so as to make immediate decision  which may result in delivery of products and services on time. It becomes possible to establish and operate value web with the help of information system (Almarri & Gardiner, 2014).

Impact of internet on competitive forces and competitive advantage:

The impact of internet is no more hidden to any industry as internet is the reason because of which some business industries have been destroyed. Internet has created a new market for all type of businesses and these businesses are growing rapidly than other offline business. Because of internet, customers have more power to influence the market, as they can access a variety of products and suppliers, and can also differentiate the products and services. Internet technology is based on global standards that can be used by any business firm and thus it becomes easy to new entrants to enter into target market. Competitive advantage contains the situation which facilitates a company to produce goods and services at lower prices with more attractive features than other organisations. These attractive features and changes enable the firm to generate high sales or profit margins in comparison to its rival firms. Competitive advantage includes variety of features named as cost structure, quality and branding of product, distribution network and customer service. Internet contributes in generating competitive advantage for any business in various markets where the business operated its functions and activities. The bargaining power of suppliers has decreased due to the increase in influence of consumers (Williams & Siegel, 2011).

Information system is a controlled system for organisation, collection, storage and communication of confidential information. It is the learning of corresponding networks that can be used by people and organisations to collect, create, clean, process, generate and distribute information. It can also be understand as a group of mechanisms that cooperate and work together to generate information. Information system has a vital significance in promoting synergies and core competences. Synergy refers to use of capabilities and systems of more than one organisation, without being tangibly together at same location. It is only possible with the use of information system. Information system allows the companies to use core business capabilities of one another and thus helps in increasing core competences collectively. Information system works through the management information system (MIS) to improve the performance of organisations and its employees (Techtarget, 2017).

Threat of Substitutes

Promoting synergies and core competences in enhancing competitive advantages:

The concept of synergies can be described as when performance and value of two organisations is collectively higher than their individual results. The term ‘synergy’ is most commonly used in the relation of acquisitions and mergers. Main use of information technology system in the context of synergy is to join the operations of two individual businesses so that productivity of both can be increased and they can work as a whole. By using synergies and its techniques, performance and central core competences of all business units will develop. The information system promotes the sharing of information and help workers become alert of fresh and external material information (Keiser & Garner, 2012).

Benefits of using network economics:

Network economics relates to business economics and is also known as Netromix refers to numerous professionals who work with one another to develop workable technologies and products. Network economics enable a large number of organisations to participate in business network at the same time. As a result of it, each participating firm has greater value because it can connect to a number of people at the same time. Technological advancement over internet makes it easy for organisations to explore new ideas to network. In present scenario, technology has reached to an extent where internet websites are playing important role in increasing consumer base and their loyalty. It is also helpful in establishing faith among suppliers, firms and their business partners. In a network or virtual firm, information system and its functions enable large network business models to take benefit of economies and works (Knieps, 2014).

Virtual company and its benefits:

Virtual Company is also referred as virtual business organisation which facilitates people to link their ideas and assets by using networks. Virtual organisation enables the people to produce and distribute services and products not only in limited traditional market boundaries but also in to international market. By using virtual company benefits companies can use capabilities of one another without facing each other tangibly. This approach is most suitable when an organisation finds it inexpensive to acquire services, products and capacities from an outside vendor. Virtual company benefits are also helpful when a company having insufficient resources and lack of time, wants to diversify its business or explore its business into new market (Karin, et al., 2016).

Disruptive technology creating strategic opportunities:

Disruptive technology is widely used term in business management and administration. It relates innovations that generate new frameworks and value networks in the market and automatically disrupts existing value network in the market. It includes displacing well known and market leading organisations, alliances and products. It is considered as most effective and innovative business idea in present market conditions. According to this concept, every innovation is disruptive in practice, even if it is revolutionary for a particular period of time. When market situations change quickly, organisations try to find their previous approaches that have been proved beneficial in past but not appropriate for present market conditions. In this situation, management assumes that positive reactions to disruptive technology change are largely depends upon luck. But in reality, it is quite easy to frame strategies to grab best opportunities arising in the competition. Thus, disruptive technology affects the businesses and industries, their products, services and business models. Switching to disruptive technology enables the organisation to diversify their business area where these technologies can be used to make more profit. It also enables organisations to deliver theirs products and services to consumers on time with the help of adopted changes in strategies (Lauer & D’Agostino, 2013).

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