Page 116 - Using MIS

84 Chapter 3 Strategy and Information Systems
Figure 3-2
Porter’s Five Forces Model of • Bargaining power of customers
Industry Structure • Threat of substitutions
Source: Based on Michael E. Porter, • Bargaining power of suppliers
Competitive Advantage: Creating
and Sustaining Superior Performance • Threat of new entrants
(The Free Press, a Division of Simon • Rivalry
& Schuster Adult Publishing Group).
Copyright © 1985, 1998 by Michael
E. Porter.

Q2 What Five Forces Determine Industry Structure?

Organizational strategy begins with an assessment of the fundamental characteristics and structure
1
of an industry. One model used to assess an industry structure is Porter’s five forces model, sum-
marized in Figure 3-2. According to this model, five competitive forces determine industry profit-
ability: bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat
of new entrants, and rivalry among existing firms. The intensity of each of the five forces determines
the characteristics of the industry, how profitable it is, and how sustainable that profitability will be.
To understand this model, consider the strong and weak examples for each of the forces
in Figure 3-3. A good check on your understanding is to see if you can think of different forces
of each category in Figure 3-3. Also, take a particular industry—say, auto repair—and consider
how these five forces determine the competitive landscape of that industry.
Jason is concerned that 3D printing may place AllRoad Parts at a competitive disadvantage.
Figure 3-4 shows the team’s analysis of the new competitive landscape. The larger customers
from whom the company receives two-thirds of its revenue (major bike shops, motorcycle deal-
ers, Jeep and other customization shops) will gain considerable force power if they can make
parts themselves using 3D printing. The threat of new entrants from existing, local manufactur-
ers is also strong. The other forces are not as worrisome to AllRoad. In most cases, there aren’t
any substitute repair parts, and, given the reality of 3D printing, AllRoad Parts’ suppliers are

Force Example of Strong Force Example of Weak Force
Bargaining power of Toyota’s purchase of auto Your power over the procedures
customers paint (because Toyota is a huge and policies of your university
customer that will purchase
paint in large volume)
Threat of substitutions Frequent traveler’s choice Patients using the only drug
of auto rental eective for their type of cancer
Bargaining power of New car dealers (because they Grain farmers in a surplus year
suppliers control what the “true price” of a (an oversupply makes the
vehicle is and the customer product less valuable and less
cannot reliably verify the profitable)
accuracy of that price)
Threat of new Corner latte stand (because it is Professional football team
entrants an easy business to replicate) (because the number of teams is
tightly controlled by the NFL)
Rivalry Used car dealers (because there Google or Bing (expensive to
are many to choose from) develop and market a search
Figure 3-3 engine)
Examples of Five Forces

1 Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free
Press, 1980).