Porter’s Competitive Model
Porter’s competitive model or theory was developed by Michael Porter of the Harvard business School in 1979.its a theoretical model that explain how companies and corporation can develop competitive strategies in business to promote their sales and hence make more profits. It has also been used to explain how information technology can be used to enhance the profitable operations of the companies. This theory works on the principles of five key forces that a firm can rely on to increase their attractiveness and of their products in the market. These five forces are divided into three as external forces and the other two as internal business threats (Porter, 1998).
This theory works on the basis of defining the two internal forces as micro- environment factors that are too related to the profitable operation of the business internally that they determine how much to make at the end. On the other side he defines the external forces as the macro-environment factors of the business. These five major forces includes; threat of entry of new competitors in the market environment, The purchasing and bargaining power of the suppliers in the market, the threats of the already existing firms in the working industry, the powers of the buyers in the market and lastly the products threat of the product to have a close substitute.
Threat of the entry of new competitors in the market is a force that can easily adversely ruin the profitability position of a company in a given product production line. The competitors may come up with a variety of new products in the market, which are of high quality. As a result, the consumers are attracted to the new products which are of high quality and hence affect the old company. Moreover, firms in the market can engage in price war where a given firm can decide to lower the price of its product to attract more customers thus making more profit than they do in future. This type of competition emanates from the outside the industry hence Porter classified this strategy as an external force (Hax, 2009).
Secondly, Porters came up with a purchasing and bargaining power of the suppliers as the second external force. This force recognizes the threat that a firm can face out of the suppliers bargaining power in the market. If a firm is a supplier of a given item and it uses poor strategies in promoting its products, there is a likely hood that its market share will be taken by the rival firms and hence supply zero, hence bargaining power of the firm with the competitive market environment determines the amount of profit to make.
In addition to that, the model expounds the threat that can also be posed by already existing firms in the industry, where the firms can decide to form cartels in the market as a way of barring entry of new firms in the industry. Porter defined this strategy in the model as a way that can reduce the profit level and attractiveness of the firms in the market. He noted out, firm a planning to exploit consumers on the base of the prices uses the force.
More over the model works based on explaining the threat that a firm can face if its product has a close substitute in the market. Substitutability of a products make the elasticity of the product demand be high, hence a slight products price increase lead to a great change in the demand of product. The mode states further that, the consumer’s shifts to the lower priced product and of high quality hence low profit level of the company. Lastly and not the least, the model, gives another internal force threat of the powers of the buyers in the market. If the consumers have own trade association, this can be a threat to the company’s profitability strategies as they can influence the prices of the products rendering the firm face difficulties (Porter, 1998).
The porters competitive model, defines competitive advantages that a firm can use to promote its attractiveness in the market. Porters indentified competitive advantages as the key to any growth of any company and a cure to the five threats or forces described above. He defines competitive advantages as the development strategies that a firm can use to promote its profitability level and to increase its products attractiveness in the market. A company, for example use of internet, mainly embeds the strategies on the use information systems. Companies that used information technologies in their production sectors have achieved great competitive advantages over their rivals (Kossowski, 2007).
Four competitive strategies that affect the Encyclopedia Britannica Company
Encyclopedia Britannica had been identified for many years as the most attractive and best trade name for the company for many years. However, in 1997, the company suffered a great loss due to stiff competition from new product market rival that in the same year it was liquidated due to heavy financial losses and debts, they had faced. The company had only one option of applying Information Technology based competitive strategies to beat the rivals. In the following year the company’s stakeholders, opted to revive the company. Luckily, Microsoft can come to an agreement with the company to develop the CD-ROMS system to use in storage and sale of their products. However, the information system development was not an easy task, as it needed one thousand million dollars to develop. The company had to pay the amount and get the IT services, as this will promote sale of their product through the internet. The company on the other hand, had also to distribute the cost to its clients or the customers.
Upon revival of the company and full integration of the IT services to its various branches, the company had an easy time than its rivals in tapping all the customers in the market. However, this was faced by other unknown challenges like high cost and demand of highly trained IT staffs. These challenges made the company to harness new competitive strategies in the business field to reduce the competition. The new strategies absorbed by the company were highly facilitated in operation by the information system. Information systems such as internet services and web sites enabled their customers worldwide to search their products and consume them in their own destinations without incurring transport costs. The Britannica Encyclopedia Company reveals that it has obtained a large share in the market industry and thus has a higher competitive advantage than its competitors have (Harmon, 2007).
These competitive advantages when combined with the activities of the company in the market led to several generic competitive advantages that the firm can use and have a high profitability level over its competitors. The use of the web sites such as the Amazon.Com came into full use by the company and as a result, the company expanded the sale of its books and other documentaries in over 57 countries. In addition to that, the company collaborated with the Dell computer company and they established the customized consumer services where they can be served online by electronic retailers, a process called e- commerce. Due to this innovation advantage, the Britannica Company takes pride of being listed as the largest supplier of online library services where over 10 billion people in the world can assess the library service information.
There are four main competitive advantages that, the Britannica Encyclopedia Company has been using to increase its profitability level and market share over its competitors. The competitive strategies are said to have reduced the costs and time wastage for both the company and the consumers of its library service. The consumers in recent years narrates how convenient, the companies services are due to use of internet and website services. These competitive strategies are;
Customer orientation strategy
Under the customer orientation strategy, the consumer is termed as the queen or the king of the market, while company as its servant. The company has an obligation of ensuring that the consumer is happy and thus buys the product. Through, Information services such as web site and internet services, Britannica Company achieve this strategy, by creating Radio shack online services where the customers access the information of the wide varieties of the company’s products. The web site created enabled scholars and other clients of the company to view books and journal through the Amazon.com and to order a book they want online before it’s delivered to them.
Lock in customer and supplier strategy.
This strategy entails use of incentives and other cheap services to lure the consumers and suppliers and to show them economically no need of going to shop in your competitors’ room. The web sites created by the Company such as www. Amazon.com displayed cheaper books online compared to the rivals. Secondly, the displayed items marketed at an offer price thus making the company attract more customers to its products. In addition to that, the company stocked their online markets with wide varieties of items that were colorful, making them see no need to leave the company. The company promoted interorganization information system that enhanced Electronic Procurement of the company’s products through Electronic retailers. Customers were discouraged from visiting the company’s rival products through home delivery of the products.
Cost leadership strategy
The cost leadership strategy advocates a company to be the lowest cost service provider or goods producer. The strategy was fulfilled through a company harnessing new lower cost based production methods through extensive IT service researches. The Britannica Encyclopedia company used these strategy in coming up with new lower cost products. Extensive researches were carried out which enabled the company to produce and sell cheaply, its products. Through on-line services, the company ordered supplies easily and sell them still at ease. The information collected enabled it to classify its consumers preferences in the order at which they arises. Eventually, the company obtained economies of scale in production both in marketing and production.
Through this strategy, a company decides to be unique from its rivals in various ways such as product or service delivery, costs, marketing and even in IT services. In order for any company to achieve these issues, it must carry extensive researches on the market performance and have well designed and strong information system. The Britannica Encyclopedia Company used web site services and other internet services such as online retailers to achieve the strategy. First, through the web site, it was possible to advertise the products online and thus attract more customers worldwide. The products sold were of different colors quality, quantity and size. This enabled the customers to find it better to buy from the company. Moreover, the company used the product differentiation with different brands in the market to make it possible not to have inferior products circulated.
In conclusion, it is quite essential for any company to integrate information system in the various sectors of production. The existence of good IT system in the company will enable it have an added competitive advantage over its rival products company, either through quality, quantity, cost or even in distribution of the information.AS a result, the company achieves high profit and moreover, retain the market. Information system enables the company also to acquire more information about the products from the consumers and thus improve the products quality. Lastly and not the least, the information system enables the management of the company in making strong key decisions capable of eliminating the five key threats such as substitutes and suppliers discontents (Daft, 2010).