The Internet has changed some of the bases from which Michael Porter started in 1980 when he published the 5 Forces that intervene the success or failure of a sector or a company.
Throughout these last years, Porter has been modifying and nuancing the 5 forces. In this article we will see how they have evolved to adapt to the new times.
What are Porter's 5 forces?
In 1980 Michael Porter developed this method of analysis in order to discover what factors determine the profitability of an industrial sector and its companies. For Porter, there are 5 different types of forces that mark the success or failure of a sector or a company:
1. The rivalry between competitors
2. The threat of new market participants
3. The threat of products that substitute ours
4. The bargaining power of the buyers
5. The bargaining power of the suppliers
When is Porter's 5 forces analysis used?
1. When you want to develop a competitive advantage over your rivals.
2. When you want to better understand the dynamics that influence your industry and / or what is your position in it.
3. When you analyze your strategic position and look for initiatives that are disruptive and make you improve it. But the Internet has changed some of the bases from which Porter started in 1980 for each of the 5 factors. Porter himself, over the years, has been modifying and adapting them to today's world.
In this article we will analyze the 5 forces and we will see how the Internet has changed the rules of the game and what we must consider if we want to continue using this type of analysis.
1. The rivalry between competitors:
Porter focuses his recommendations on developing differences between our products and those of the competition, to avoid falling into competing for price, a strategy that would ultimately affect the profitability of both companies. # But the Internet has really allowed to reduce costs in companies whose costs are related to communication, receiving information or concluding transactions. So a large part of the companies that have known how to take advantage of the advantages of the Internet and the technology associated with the network, end up being able to offer lower prices and therefore, competing for price in their market. Before the same product, with two different prices,Customer loyalty only influences the small amount of price difference the customer will tolerate before leaving us and going to the competition. The Internet allows rivalry to be for a price, without leading to a war where there is no winner.
- The Internet has also caused a large number of products to appear on the market that were previously only intended for a local market, so that although our product was unique in our market, now identical products appear to ours… so again we end up competing for price The relationship between competitors has radically changed with the globalization of the markets.
The local clusters specialized in the production of a certain product or service, make the relationship between competing companies collaborative, with objectives with a view to jointly developing technologies, research that will increase the productivity and innovation of the companies that participate in the cluster. Silicon Valley and Hollywood are the most famous clusters, but there are hundreds of thousands of local clusters that have radically changed the relationship between competitors.
There is information about the effect of local clusters on the relationship between competitors in various articles published by Michael Porter himself. At the end of the article we quote one of them.
2. The threat of new participants:
The threat of new entrants entering our Market is greater, when entry barriers are low, when companies participating in a market do not want to fight against new players, and when a new player has high expectations of earnings if he enters that market. So Porter advocates increasing barriers to entry in a market. Their recommendations are as follows:
Take advantage of economies of scale to lower costs
Create differentiated products and patent them.
Developing the company's brand image, so that it is more difficult for customers to change brands.
Close access to distribution channels.
Have restrictions for new players, dictated by government institutions.
- This model is valid for static markets. The Internet has fostered a multitude of dynamic markets that do not allow Porter's recommendations to be applied. The consolidation of the dot-com companies surviving the crash of 2000/2001 has changed business models and value chains. The dot-coms have destroyed links in the chain and have created new competitive scenarios in which they have been murderous applications of many services offered until now only by the offline world (example: online job boards, the websites of classifieds for sale and purchase)., online auctions, etc.) Network externalities, on the other hand, lead to the creation of natural monopolies since they generate positive feedback processes that make each new user of a service more valuable to the next user.
3. The threats of the appearance of substitute products:
Porter considers one product to be a substitute for another, only if he replaces a product from a different industrial sector than his own. For example, the price of aluminum beverage cans is a function of fluctuations in the price of glass bottles and plastic bottles. They are substitute bases, but they are not rivals that come from the aluminum packaging industry.
- Technology increasingly allows the generation of new businesses that until now were unthinkable.
The radical technological changes we are undergoing do not allow any kind of prediction or prior analysis to be made on this point. For example, let's think about the bandwidth market: we have connections via telephone cable, via satellite, via electrical network, etc…. all appeared and deployed in a relatively short space of time. It is difficult to foresee and counteract the effects of this type of product. The user will change as soon as they perceive that the cost of the new product is lower or when they obtain new functionalities.
- The Internet also enables other ways to satisfy needs and functions, thus creating new and unimaginable substitutes.
4. The bargaining power of the buyers:
For Porter, this threat must be neutralized with an appropriate strategy that pursues this end.
- The truth is that thanks to the Internet, customers have more and more power. Although seen from the point of view of the traditional company this is not exactly positive:
Internet increases information about products and the reality of the market.
It increases the bargaining power because it provides more direct routes to the customer and eliminates links in the distribution of products.
It provides an excellent framework to unite consumers and take pressure against certain companies when customers are dissatisfied.
To better understand this point, I recommend reading the summary of Philip Kotler's conference at the World Forum on Marketing and Sales (Barcelona 2004): The 10 principles of "New Marketing"
5. The bargaining power of suppliers:
Porter focuses the analysis of this point by stressing that the power of suppliers depends on their importance (think of suppliers that hold the market captive eg: Telefónica, Microsoft, etc.)
- The current trend is to treat suppliers as partners of the company, and share with them the ultimate goal of meeting the needs of our customers. The customer-supplier relationship is changing.
Although everything nuanced in the comments to the 5 forces points to the fact that the Internet has forced companies to compete for price, the Internet has also led some of them to achieve great successes in their differentiation strategies. These companies are companies that are strong in:
Scientific investigation.
Talented and creative product development teams.
Sales teams with great communication skills and perception of the needs of a changing market.
Brand image that transmits innovation and quality
But the risks associated with differentiation have also been magnified by the Internet:
The imitation of our products by third parties who have not invested in R&D.
The changing and unpredictable taste of customers.
So as a culmination to the article I would say that the Internet has made the analysis of Porter's 5 forces, even being valid in our days, is much more complex than it was and with many more variables to consider.
Interesting Links:
Michael Porter's article about Local Clusters.
Harvard Business Review: Local Clusters
www.isc.hbs.edu/competitiveness-economic-development/frameworks-and-key-concepts/Pages/default.aspx
Summary article from Philip Kotler's conference on New Marketing and increased consumer power. Philip Kotler: the 10 principles of "New Marketing"
