The Five Competitive Forces

Technology with Integrity

By Tim Torian and Vineet Nanda, Torian Group, Inc.

Every business faces competition. Good businesses are aware of the competitive forces in their marketplace, and position themselves to take full advantage of their strengths and their competitor’s weaknesses.  Technology can sometimes be a key tool in maintaining competitive advantage.

Michael Porter described a concept that has become known as the "five forces model" to help understand how competition affects your business. This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed.  

Porters five forces model can be used to compare the impact of competitive forces on your own organization with their impact on competitors. Competitors may have different options to react to changes in competitive forces – each business has a different combination of resources and competences. Let’s use an example of my cousin who has very good mechanical skills and several years of experience fixing his and his friends old cars.  He and a friend with similar skills have decided to open an auto-repair shop. Using Porters five forces, let us do a quick analysis of each of the five competitive forces the entrepreneurs are likely to encounter in their new business and how computers can help them in their businesses.

Competitive intensity: A larger number of firms increases rivalry because more firms compete for the same customers and resources.  This is our traditional concept of competition.
In pursuing an advantage over rivals, you can choose from several competitive moves like changing prices - raising or lowering prices to gain a temporary advantage, improving product differentiation. A company can also improve features or service, implementing innovations in the manufacturing process and in the product itself.  Some industries can use a distribution channel that is novel or difficult to clone. To fully understand your direct competition you need information. Benefits are increased when businesses use computers not just to automate, but also to transform or inform an organization via the web.  Our auto repair shop will use computers to track key performance metrics which allow them to adjust their prices and still make money. They will also use the internet to gather market data, track industry trends, and keep an eye on their local competition. If we publish all the skills and services that our company offers on a company website, we can increase our reach in the marketplace. Once an electronic link is established customers can communicate or check the status of their car using their computers.  Perhaps we could set up cameras in the shop, and allow customers to see the work being done. This will add value to the business and save a lot of time for us and the customers as well.

Threat Of Substitutes: In Porter's model, substitute products refer to products in other industries. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives.
The competition engendered by a Threat of Substitute comes from products outside the industry. Although some people might take the bus or buy another car, there is no substitute for good mechanical skills and experience in an auto-repair shop.  Keeping an eye on industry trends will help spot innovations that could affect your industry.

Buyer Power: Under such market conditions in which there are many suppliers and one buyer, the buyer sets the price. Buyers are powerful if buyers purchase a significant proportion of your product or service, or if it is standardized or regulated.  Under these conditions it might be possible to become a preferred vendor by becoming more integrated with the buyer by automating the ordering and payment processes, and allowing the buyer partial access to your internal systems (an extranet). This is sometimes called supply chain management. 
Our auto shop has a diversity of customers.

Supplier Power: Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. Information technology can change the nature of the relationship and balance of power among buyers and suppliers. This is the mirror of buyer power. In many industries suppliers offer technical links to their internal network which can give the buyer competitive advantage. Many industries have electronic pricing and ordering systems, which can be linked right into the business.  Our auto shop will take advantage of the parts database and a local branch of an auto parts distributor. The orders will automatically be generated based on diagnosis, and parts will be delivered the same day.

Barriers to Entry: Barriers reduce the rate of entry of new firms, thus maintaining a level of profit for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. New entrants like our auto shop will have to attract customers away from established businesses.  To the extent that technology is being used already in the industry, it establishes a baseline of competency and efficiency which must be met to be competitive.  Technology can often allow smaller companies to compete with much larger more established companies by evening out the playing field.  For the auto shop, it will give us diagnostic and parts resources which are fully competitive with larger shops, and enhance our ability to contact potential customers

How does your company measure up against the five forces?  In the business of doing business, it is easy to lose perspective. Reviewing your position can help you take full advantage of your unique capabilities and market position. 

Tim Torian teaches computer networking at the College of Sequoias, and has owned and managed several businesses. He is president of Torian Group, Inc. which provides a full range of Technology Consulting services to local business, including computer services, networking, and custom software development.

Vineet Nanda has a Masters degree in Information Systems, is a Microsoft Certified Systems Engineer, and Sun Certified Java Programmer. She works as a developer and trainer for Torian Group. They can be reached at (559) 733-1940 or on the web at http://www.toriangroup.com