You are here

Porter and competitive advantage

11 May, 2016 - 11:43

In Business models and marketing: an overview, you were introduced to the ideas of Professor Michael Porter, whose ideas on how to achieve a competitive advantage, first introduced in the 1980s have stood the test of time. Recall that Porter’s model consisted of three main categories:

  • The Five Forces Model
  • Three Generic Strategies
  • The Value Chain

In this section we will discuss how the creative use of information technology and communications technologies (IS) can help organizations gain a competitive advantage. These ideas were first expressed in two separate Harvard Business Review articles. 1 

Use IS to alter the five forces in your favor. The five forces are illustrated in Figure 10.2.

Figure 10.2 Porter’s Five Forces Model Source  

Buyer power can be reduced by using IS in ways that tend to restrict buyers’ choices. A good example is the frequent flyer programs that are offered by most commercial airlines around the world. When they enroll in the program, air travelers are awarded “miles” for every flight they take on, for example, British Airways. Their accumulated miles are maintained by a computer system. Travelers can obtain tickets for free flights once as certain number of miles has been accumulated in their account. This encourages travelers to always use the same airline so they can qualify for rewards more quickly. Frequent flyer programs, of course, have to keep track of a lot of information on the activities of thousands of travelers and would not be possible to manage without computer systems. An airline without a frequent flyer program is at a competitive disadvantage to airlines which have them.

Supplier power is high when a business must rely on just a few suppliers. For example, if there is just one store in a town which stocks office supplies, businesses have nowhere else to buy supplies they need and may be forced to pay higher than normal prices. On the other hand, if a local business is connected to the Internet, it can choose from many other suppliers and possibly find cheaper prices, even when the cost of shipping is considered.

The threat of new entrants can be reduced when IS is used to erect “entry barriers”. Entry barriers are offerings that a business must make available to its customers if it expects to do business in a certain sector simply because most or all of its competitors offer a certain feature to their customers. An example is ATM machines offered by banks. ATM machines would not be possible without the use of computers and communications networks. If you had to choose between a bank that offered ATM machines and one that did not, which one would you choose? Most likely the one with ATM machines. ATM machines are a barrier to enter the banking sector in a particular locale.

The threat of substitute products can usually be reduced by using IS to bind customers more closely to a business and create what is called “switching costs”. This means that the IS systems offered by a business are so appreciated by the customer that customers are reluctant to switch to a substitute product. For example, there are many free open content software products that equally competitive with the costly brands. Zoho, Google Docs, Thinkfree, are examples. One of the reasons many PC users do not switch to them is that they would have to learn how to use a new package. Even though the free packages are easy to learn, there is a switching cost involved that binds users to Microsoft Office: The time it would take to learn even a relatively simple package is enough of an obstacle to many users that they conclude that switching is not worth the effort.

The Intensity of Intra-Industry Competition can often be increased by IS-enabled innovations. For example, the global reach of the Internet means that competitors for many products and services can be located anywhere in the world. For example, tax accounting specialists may now find themselves competing with accounting specialists in low-cost countries. This is becoming a common practice as companies conclude that IS makes it possible for many forms of knowledge work to be performed anywhere in the world.

Use IS to reinforce your basic strategic positioning.

Figure 10.3 Porter’s three generic strategies.

Porter suggests that a business cannot be all things to all people. It must choose between three generic strategies As illustrated in Figure 10.3, a business can choose to be a cost leader, it can pursue a differentiated strategy for which consumers are willing to pay more, or it can target a segment of the market with either a low-cost or a differentiated strategy. For example, if we consider brands of automobiles, the Tata targets a broad market for low-priced cars, and the Subaru targets a broad differentiated market for low-priced allwheel drive cars. The Mazda Miata targets a segmented market for low-priced sports cars, while Rolls Royce targets a segmented (high-priced) market for sedans.

Information systems can assist a business in implementing one of Porter’s three generic strategies by using IS to create operational efficiencies, thus lowering manufacturing costs, for example. Also, IS can create a differentiated model by having a website that permits customers to design a personalized version of an automobile and order it online, much the same way that we can buy personal computers online.

Figure 10.4 Porter's value chain
Source: http://kookyplan.pbwiki/f/

As discussed in Business models and marketing: an overview, the Value Chain is a graphical representation of the processes (or activities) involved in most organizations. Analysts use the value chain framework to look for ways to streamline costly activities or add value to certain activities through the use of IS. As just one example, an organization could use IS to outsource a call center service to a lower cost location or, it could use IS to provide a well-designed website to offer a differentiated experience to customers who need to contact the organization, and embody a personalized call center service for issues that cannot be resolved by the customer just by using website features.