Porter’s approach to strategic analysis has been found to be seriously deficient for determining sustainable business advantage. From an IS management perspective, critically discuss the shortcomings of Porter’s approach and how it might be extended to guide firms operating in contemporary online settings.
In the past decade, it is evidenced that the rise of information technology, particularly the proliferation of Internet usages around the globe, had changed the industry structure and business landscape beyond recognition (Silbiger, 2005). Thus, the traditional business and strategy frameworks may no longer be relevant or valid in the new economy. In this paper, two widely popular strategic analytical frameworks, namely the Porter Five Forces and Porter Generic Strategies Frameworks will be discussed. The shortcomings of these theoretical frameworks in the new information era will be outlined and presented. Later, suggestions on how to improve these models are also presented. It is important to be aware of the deficiencies of these models in analyzing businesses and industries in the new era, as the rise of information technology and information system (“IT/ IS”) had effectively shape new business environment around the globe.
The theoretical framework of Porter Five Forces Model is presented in Figure 1 below. Generally, such a model is widely used to analyze the competitive forces within an industry. It is useful to understand a particular industry structure a firm is operating in. In this model, there are a total of five competitive forces to be considered and analyzed by management, namely: (a) rivalry among existing competitors, (b) threats of new entrants, (c) threats of substitutes, (d) bargaining power of suppliers, and (e) bargaining power of buyer. According to the theory, by analyzing these five competitive forces, a business or firm can understand the relevant forces that are affecting the profitability or growth of the firm. Once identified, managers can then make relevant changes to influence the competitive forces, or to formulate strategies that mitigate the threats from these forces in the industry landscape.
Figure 1: Porter Five Forces Framework
Source: Porter (1980).
Today, it is not hard to observe that industry structures are being changed fundamentally due to the transformation of companies, markets and industries from physical to e-commerce (Downes & Mui, 1998). However, Porter Five Forces was created and published as early as in the 1970s. At that particular time, information system, or more generally, the rise of internet is not something observed by the researchers. As such, the model has not been created to cater for the changes of technological factors, particularly in the field of information technology that could affect businesses and industry landscape significantly.
Such a view in also shared by Harvard professor Michael Porter; whereby he later argued that the emergence of information technology had affected industry competition in several manners. Firstly, IT/ IS had change the structure of an industry. Secondly, firms can now employ the advancement of IT/ IS to create competitive advantages, and thirdly, the rise of IT/ IS has been creating a lot of new businesses (Reimann, 1988).
Besides, the view that an industry landscape is only affected by five competitive forces is simply not sufficient to characterize and model the actual business environment happening in the new economy. In the new economy, IT/ IS applications and the usage of these infrastructure are becoming more common. New forces are beginning to affect the competitive structure of an industry. For example, the ability to utilize IT/ IS applications, as well as the adoption of IT/ IS by competitors, suppliers and buyers are significantly affecting the industry landscape of a company. The ability to collect, interpret and act on new information collected is becoming a more powerful forces to be watched by companies in any industry (King, 1984).
As illustrated above, the traditional Porter Five Forces has many limitations and shortcomings. Nonetheless, this doesn’t means that the model can longer be used to analyze the industry landscape for a business. Improvement to the models can be made. Analysts can make special adjustment when using the model and some of the necessary adjustments or awareness to be noted is presented in the following paragraphs.
Understand the importance of information technology. Firstly, it is critical for managers or analysts to be aware that new forces such as the rise and proliferation of IT/ IS infrastructure and applications are changing the industry structure. Most of the time, those who able to utilize the IT/ IS applications or innovations effectively can reap huge rewards. The existing industry structure can now change at a fast pace, and business environment is becoming much more dynamics. In such a situation, even those firms that were previously facing adverse industry structure can outperform other businesses when the firm able to leverage on the capabilities and advantages offered by IT/ IS applications and network.
Understand that we are entering new information and knowledge-based economy. It is also critical for managers to understand that we are entering the information era (Fleisher et. al., 2003). Under this new economy, those factors contributing to successes of the traditional firms may no longer be relevant. Increasingly, business performance will be dependent on the human capital, ability to collect, interpret and assimilate new information and knowledge, and capabilities to turn knowledge into useful strategies in the marketplace.
Porter Five Forces should never be used in isolation. Besides, it is also important to avoid using the Porter Five Forces model in isolation, as the model no longer able to capture the important forces or factors that will affect or is affecting business or industry landscape. At best, the framework should be combined with other models, such as the PESTLE framework, to perform better analysis on the macro-environment facing a business. For this, PESTLE framework is a good supplement to the Porter Five Forces framework because it analyze other critical external factors affecting a fimr, such as the political, social and cultural, economic, technological (i.e., IT/ IS and etc.), legal and environmental factors.
New framework to be used. As discussed before, it should be acknowledged that the business landscape today is no longer as static as argued by the traditional Porter Five Forces Framework. There are effectively three new forces to be considered under the current business environment that should be incorporated to the original Porter Five Forces model. As shown in Figure 2 below, Downes & Mui (1998) argued that the three new forces to be included are: (a) globalization, (b) deregulation and (c) digitization. For this, digitization is referring to the emerging trends of computer and communication technologies, that responsible for the transformation of physical to virtual businesses around the globe.
Figure 2: The New Forces
Source: Downes & Mui (1998).
As shown in Figure 3 below, Porter (1980) had effectively separated several strategic directions possibly to be implemented by a firm to gain competitive advantage in the marketplace into two main categories, namely: (a) unique services or products, and (b) lowest costs offerings to consumers. Generally speaking, according to the framework, firm can achieve competitive advantages by having a differentiation (i.e., usually unique, high perceived quality and better offerings to marketplace) or low cost strategies (i.e., selling at the lowest price to drive out competitors) (Silbiger, 2005). As will be discussed, such a framework has many deficiencies in the new business environment. The discussion of the shortcomings of this model will be presented in the following section.
Figure 3: Porter Generic Strategic Framework
Source: Adapted from Porter (1980).
According to the framework proposed by Porter, there are three generic strategies that can be utilized by a firm to achieve competitive advantage, namely – low cost, differentiation, and focus. However, that is purely a simplistic view, and in many cases, may not reflect the real scenario happening in business environment in the new information era.
According to the framework, it is argued that companies that pursue a low cost leadership strategy should not pursue a differentiation strategy at the same time, as that would means the companies will ‘stuck in the middle’. However, as argued by Roberts, Brown, and Pirani (1990), the mutual exclusivity of low cost leadership and differentiation strategy may no longer be true in the new marketplace. A firm can continuous differentiate its products or services offering while at the same time lower the cost true investment in IT/ IS applications and infrastructure. In some industry, it is possible that some companies able to deliver differentiated, high quality products and services to customers at a lower price when compared to the low-cost oriented competitors. Some companies able to perform so include: Southwest Airlines, Tesco, Wal-Mart, Toyota, Honda and many others.
Apart from that, the framework is relatively silent on how the arrival of information era had impacted upon the formation and execution of strategic directions by firms. That means firms that are pursuing generic strategies may be affected by the emergence of new IT/ IS technology to a different degree. According to King (1984), competitive advantage can also be attained through effective use of information. Thus, it is apparent that formulation f strategies should not be confined to three categories of generic strategies. A more comprehensive model may be required (Remark: will be discussed in next section below).
Besides, according to the generic strategic framework, the strategy for a low-cost leadership is primarily to be achieved by economies of scale. However, in the new information era, low cost leadership can also be achieved by the new business model, or the use of virtual firms to lower the pricing of products or services delivered to the marketplace (Bryson, 2005). This means information technologies are changing the way businesses compete, and will affect or determine how a firm can achieve competitive advantage in the new economy.
As it is observed that firms that achieve competitive advantage in the new economy under the information era no longer relied on two simplistic strategies (i.e., either differentiation or low cost leadership), strategists may need to adopt new mindset in crafting creative and innovative strategies in order to achieve competitive advantage for a firm. Strategists are now required to understand how IT/ IS applications of the trends related to IT/ IS can shape or affect the firm. Often, the many powerful IT/ IS applications can possibly be used to shape new core competencies, and subsequently the competitive advantage for a firm. As shown in Figure 4 below, a new framework on how firm can achieve competitive advantage on the new economy is presented. Such a framework can substitute the traditional Porter Generic Strategies model, that are no longer comprehensive and accurate in advising how a firm can attain competitive advantage in the new information era.
Figure 4: New Building Blocks of Competitive Advantage
Source: Louvieris (2011)
To conclude, it is shown that traditionally popular strategic analysis framework may no longer be sufficient to model the new changing business environment, due to the rise of information technologies and proliferation of Internet around the globe. Readers should be aware of the shortcomings of these popularly used models, and can adopt the suggested strategic analysis framework suggested in this paper to perform more accurate analysis on businesses and industries in the new era of information age.
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