What’s Happening?!
Broadband Internet access has grown from 6% to 31% in three
years.
Jobless claims fell last week to the lowest level since Nov. 30
John Rodrigues reports that he is getting job interviews.
GM reported record 4th quarter earnings.
First ISMA meeting on Tuesday – Speaker is JP LeBlanc
from Borland. Time and place yet to be determined.
Chapter 2 Summary
Business Competitive Environment
Review of Objectives
To clearly understand competition:
 Definition of Competitiveness
 Competitive Advantage
 Global Competition
Role of the nation:
 Role of government within a nation.
Definition of Competitiveness


Objective of a business is to make a profit.
Profit based on providing value to customers.
How can a business assure value to customers?
A good competitor knows:
 Which products and services it offers.
 Who its customers are.
 Who its competitors are.
Competitive Advantage
To assure positioning for profit, a company must
maintain competitive advantage.
 Methods that are achievable and sustainable.
 Work smarter.
 Assess whether Information Systems are
appropriate to gaining a competitive advantage?
 Focus on three primary inputs: HR , Capital,
Technology.
Global Competition
The Global Market will come to you if you
don’t go to it.
 By staying in your home country, you
assume a defensive position.
 There are advantages and disadvantages to
going global. These need to be considered
carefully.
Role of the Nation
Study states that increased competitiveness
of the Nation will stimulate the economy.
 6 recommended steps to stay competitive.
 Only companies can sustain and achieve
competitive advantage.
 Government should serve as a catalyst and a
challenger.

Competitiveness: A Link to National Goals
Human
Resources
Capital
Technology
Trade
Policy
Improved
Domestic
Performance
New
Competition
Decreased
Budget
Deficit
Increased
World Market
Competitiveness
Reduced
Trade
Deficit
Stronger
National
Security
More and
Better Jobs
Increased
Standard of
Living
Figure 2-1
Possible Exam Questions
1.
What are some ways that governments
serve as a catalyst and challenger to the
competitiveness of its companies?
2.
Why has competitiveness become the
important topic that it is?
Chapter 3 Introduction
The Porter Competitive Model
for Industry Structure Analysis
Key Chapter Objectives
Basic understanding of Porter Competitive
Model
 How the model can be used to analyze a
company’s competitive position within its
environment (its industry).
 How IS infrastructure can influences a
companies responsiveness to its changing
business environment.

The Porter Competitive Model
Used to understand and evaluate the
structure of an industry’s business
environment and the threats of
competition to a specific company.
Porter Competitive Model
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Figure 3-1
Two Strategic Objectives

Create effective links with customers and
suppliers

Create barriers to new entrants and substitute
products
Primary and Supporting Strategies
Differentiation Strategy (Primary)
 Low Cost Strategy (Primary)
 Innovation (Supporting)
 Growth (Supporting)
 Alliance (Supporting)

Value Chain

Developed by Michael Porter but different
from competitive model because it focuses
within the company.

Analyzes the cross-functional flow of
products or services within an organization
that add value to customers.
SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
© 1985 by Michael E. Porter.
Figure 3-6
Value Chain and IS
The Value Chain can be used to determine
where IS can strengthen the flow of primary
and support activities within an
organization.
 Every segment of an organization needs IT
and IS to be competitive. So this model is
essential to visualizing the flow of activities
within segments through the use of IS and
IT.

Chapter 3
Porter Competitive Model
for
Industry Structure Analysis
ATP Research
1. Value Line
2. Company web page and annual report.
3. Internet search engines:
Google
Ask Jeeves
4. Library reference documents
5. Jack Callon and his documents
The Plan for Today
• Address the Concepts of the Porter
Competitive Model.
• Provide some industry examples using the
Competitive Model.
• Address the Value Chain conceptually and
with industry examples.
• Revisit each of these using the Airline
Industry as the example in Chapter 4.
Awareness of competitive forces can
help a company stake out a position
in its industry that is less vulnerable
to attack.
Michael E. Porter
Competitive Strategy
Porter Competitive Model
• Was not developed for IS use.
• Breaks an industry into logical parts,
analyzes them and puts them back together.
• Avoids viewing the industry too narrowly.
• Provides an understanding of the structure
of an industry’s business environment.
• Provides an understanding of competitive
threats into an industry.
Two Key Questions
1. How structurally attractive is
the industry?
2. What is the company’s relative
position within the industry?
Why Do You Care?
The collective strength of the industry forces
determines the ultimate profit potential of an
industry.
The strongest competitive forces are of greatest
importance in formulating competitive strategies.
Every industry has an underlying structure, or a
set of fundamental economic and technical
characteristics that gives rise to these competitive
forces.
Why Do You Care?
This view of competition pertains to industries
selling products and those dealing in services.
A few characteristics are often key to the strength
of each competitive force.
Key Industry Analysis Factors
• Collecting the data.
• Determining which data is important.
• Selecting an appropriate overall approach.
• Deciding on the logical starting point.
Basic Objectives of the SBU
1. To create effective links with
buyers and suppliers.
2. To build barriers to new entrants
and substitute products.
Porter Competitive Model
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Figure 3-1
Rivalry Likelihood
• Profit margins.
• Industry growth rate and potential.
• A lack of capacity to satisfy the market.
• Fixed costs.
• Competitor concentration and balance.
• Diversity of competitors.
• Existing brand identity.
• Switching costs.
• Exit barriers.
A Buyer Has Power If:
1. It has large, concentrated buying power that enables
it to gain volume discounts and/or special
terms or services.
2. What it is buying is standard or undifferentiated and
there are multiple alternative sources.
3. It earns low profit margins so it has great incentive
to lower its purchasing costs.
4. It has a strong potential to backward integrate.
5. The product is unimportant to the quality of the
buyers’ products or services.
A Supplier Has Power If:
1. There is domination of supply by a few companies.
2. Its product is unique or at least differentiated.
3. It has built up switching costs.
4. It provides benefits through geographic proximity to
its customers.
5. It poses a definite threat to forward integrate into
its customers’ business.
6. A long time working relationship provides unique
capabilities.
Definitions
New Entrant:
An existing company or a startup that has not
previously competed with the SBU in its
geographic market. It can also be an existing
company that through a shift in business strategy
begins to compete with the SBU.
Substitute Product or Service:
An alternative to doing business with the SBU. This
depends on the willingness of the buyers to
substitute, the relative price/performance of the
substitute and/or the level of the switching cost.
Possible Barriers to Entry
• Economies of scale.
• Strong, established cost advantages.
• Strong, established brands.
• Proprietary product differences.
• Major switching costs.
• Limited or restrained access to distribution.
• Large capital expenditure requirements.
• Government policy.
• Definite strong competitor retaliation.
Substitute Threats
• Buyer propensity to substitute.
• Relative price/performance of substitutes.
• Switching costs.
Competitive Strategies
• What is driving competition in my current or
future industry?
• What are my current or future competitors
likely to do and how will we respond?
• How can we best posture ourselves to achieve
and sustain a competitive advantage?
Strategy Options
According to Michael Porter
Primary Strategies
1. Differentiation
2. Least Cost
Supporting Strategies
1. Innovation
2. Growth
3. Alliance
Can Information Systems:
1. Build barriers to prevent a company from entering
an industry?
2. Build in costs that would make it difficult for a
customer to switch to another supplier?
3. Change the basis for competition within the
industry?
4. Change the balance of power in the relationship
that a company has with customers or suppliers?
5. Provide the basis for new products and services,
new markets or other new business opportunities?
Porter Competitive Model
Heavyweight Motorcycle Manufacturing Industry
North American Market
• Parts Manufacturers
• Electronic Components
• Specialty Metal Suppliers
• Machine Tool Vendors
• Labor Unions
• IT Vendors
Bargaining
Power of
Suppliers
• Automobiles
• Public Transportation
• Mopeds
• Bicycles
• Foreign Manufacturer
Potential
New Entrant
Intra-Industry Rivalry
SBU: Harley-Davidson
Rivals: Honda, BMW,
Suzuki, Yamaha
Substitute
Product or
Service
• Established Company
Entering a New Market
Segment
• New Startup
Bargaining
Power of
Buyers
• Recreational Cyclist
• Young Adults
• Law Enforcement
• Military Use
• Racers
Business Strategy Model - Motorcycle Manufacturing Industry
Product Strategy
Type/Purpose/Size
Heavyweight Off-Road Dual Purpose Road Racing Café Racer
Price Strategy
Entry Level
Law Enforcement
Moderate
Market Strategy
Premium
Military Recreational Professional Young Adult
North American
Europe
Japan/Asia
Manufacturing Strategy
Vertically Integrated
Vendor Emphasis
Latin America
Outsource
Sales/Distribution Strategy
Distributors
Independent Dealers
Franchised Dealers
Company Structure
Independent
Alliances
Joint Ventures/Subsidiaries
Information Systems
Engineering
Product Design
Manufacturing
Sales/Distribution
Business
Business Strategy Model – Food Service Industry
Product Strategy
Limited
Specialized
Products
Broad Range
of Specialized
Products
Wide Range of
Non-specialized
Products
Health
Conscious
Products
Customer Strategy
Young Adults
Parents
Teenagers with Social
with
Focus
Kids
Time
Conscious
Adults
Leisure
Adults
Senior
Citizens
Store Format Strategy
Dine In
Wait Service
Dine In
Counter Service
or Buffet
Take Out
Drive
Through
Vendor Strategy
Competitive
Bids
Long Term
Contracts
Alliances
Vertically
Integrated
Market Strategy
Local
Regional
National
International
Ethnic
Focus
Company Structure Strategy
Independent
Alliances
Franchises
Subsidiary
Information Systems Strategy
Customer
Systems
Store
Logistical
Systems
Product
Analysis
System
Business
Systems
Porter Competitive Model Analysis
for the San Francisco 49ers
New Entrants
Suppliers
Intra-Industry
Rivalry
SBU: SF Giants
Substitute Products and Services
Buyers
Porter Competitive Model Analysis for the San Francisco 49ers
Bay Area Market
New Entrants
•Canadian Football
•Professional Hockey
•Professional Soccer
•Sumo Tournaments
Suppliers
Buyers
•Players Union
•City of SF
•Transportation Services
•Food Service
•Sovereigns
•Police and Sanitation
Service
•Utilities
•Stadium Employees
•Die Hard 49er Fans
•Die Hard Football Fans
Intra-Industry Rivalry
•Fair Weather Football Fans
SBU: SF 49ers
•Non-football Fans
•Rivals: Oakland Raiders
•Out of Town Visitors
•Arena Football
•Opposing Team Fans
•S.F. 49ers
•Age Group Segments
•Golden State Warriors
•Groups Versus Individuals
•College Athletic Events
•Corporate Sponsors
•High School Athletic Events
•Sports Writers and Media
•Movies, Stage Plays, etc.
Outlets
•General Travel and Travel Packages
Substitute Products and Services
•Televised Football Games - Free or Cable Service at Home
•Televised Games at Sports Bars
• Radio Broadcasts of Football Games
• Rotisserie Leagues, Trading Cards, Memorabilia
Porter Competitive Model
Tips
1. To incorrectly define the industry can cause major
problems in doing Section I of the analysis term paper.
2. You must identify the specific market being evaluated.
3. Your analysis company is the Strategic Business Unit.
4. Identify rivals by name for majors, by category for minor
rivals if needed to present the best possible profile of
rivals.
Porter Competitive Model
5. Be sure to address the power implications of both
customers and suppliers. Power buys them what?
6. Identify buyers and suppliers by categories versus
companies.
7. Summarize your Porter Model analysis.
Computer Industry
Why is this industry more of a challenge to
evaluate using the Porter Competitive
Model?
Old Computer Industry
Layer 5
Distribution
Layer 4
Application
Software
Layer 3
Operating
System
Software
Layer 2
Computing
Platforms
Layer 1
Basic
Circuitry
IBM
DEC
HP
Fujitsu
NCR
Figure 3-3
The New Computer Industry
Layer 5
Distributors
Computer
Dealers
Super
Stores
Mass
Clubs
Merchandisers
Mail
Order
Value-add
Resellers
Direct
Sales
Force
Other
Layer 4
Applications
Lotus 1-2-3
•Spreadsheets
•Word Processors
•Database
Layer 3
Operating
System
Software
Layer 2
Computer
Platforms
Layer 1
Microprocessor
MS DOS
Novell Netware
IBM
Compaq
Intel X86
Microsoft Excel
Windows
Quattro Pro
OS/2
Banyan
Unix
IBM
Other Intel-Based PCs
Motorola
Apple
Others
Apple Macs
RISC
Other
Power PC
Figure 3-4
The Computer Industry
Layer 6
Sales and
Distribution
Layer 5
Application
Software
•Enterprise
•Specific
Layer 4
Database &
Networking
Software
Layer 3
Operating
System
Software
Layer 2
Computer
Hardware
Platforms
Layer 1
Microprocessor
Computer
Stores
Super
Stores
Mass
Mail
Merchandisers Order
Value-add
Resellers
Direct
Sales
Force
Internet
Direct
Desktop Suites Enterprise Resource Planning Supply Chain Management Other
Word Processors Spread Sheets Publishing Groupware Data Warehouse Other
LAN, WAN and Internet Software Interfaces, Browsers and Search Engines
Hierarchical Database
Windows
Unix
Relationship Database
Linux
Supercomputer Mainframe Midrange Workstation PC
Intel X86
Motorola
Apple
Handheld Device
RISC
Power PC
Computer Industry
Hardware
• Processors
• Input/Output Devices
• Storage Devices
Networking Equipment?
Multiple processor
segments in the computer
industry.
Processor companies
versus specialized
hardware companies.
Software
• Systems Software
• Operating Systems
• Database Systems
• Network Systems
• Utility Software
• Performance and
Security Software
• Development Software
• Programming Languages
• CASE Software
• Applications Software
Hardware vendors
versus independent
software companies.
Applications Software
Specific application software to do numerous things.
Running on a range of processors.
Applications suites (integrated applications) Some call
these integrated enterprise applications
Is game software from Sony a part of the computer
industry?
Is software to run numerical control machine tools part of
the computer industry?
Is software to analyze automobile smog tests part of the
computer industry?
Worldwide Computer Hardware Sales
2000
1999
1998
Supercomputer
1997
Mainframe
Midrange
Workstation
1996
Personal Computer
1995
Source: Dataquest
1994
Millions of Dollars
1993
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Worldwide Hardware Sales
2002
PCs
Total Hardware
2001
Billions of $s
2000
0
100
200
300
Billions of $s
Source: Dataquest
What is a PC?
1. A desktop tool—word processor, spreadsheet,
publishing tool, data store.
2. An entertainment device.
3. Communication device—email.
4. Information source—Internet sources.
5. A collaboration tool.
PC Industry Segment
1. Passed $100 billion in sales in the first ten years.
2. Growth and competition was based on industry standards
like never before.
3. This has spawned thousands of niche companies.
4. The PC has fundamentally restructured the Computer
Industry.
5. Industry pioneers believe the revolution is no more than
half over.
Change Relative to Selling PCs
1. Languages
2. Application Packages
3. Connectivity and Compatibility
4. Multimedia
5. Communication Device--Groupware
PC Industry Change
• Atari
• Dell
• Cromemco
• Gateway
• Fortune Systems
• IBM
• Wicat Systems
• HP (Compaq)
• Kaypro
• NEC
• Morrow Designs
• Osborne Computer
• Victor Technologies
The Future Computer Industry
1. Traditional US Companies (large).
2. Asian Electronic Companies.
3. The New Strategy Companies.
Why has the US continued to be the world leader in
the computer industry?
Porter Value Chain
Basic Concept:
1. Deals with core business processes.
2. Enables tracking a new idea to create a new
product and/or service from origination all the
way to customer satisfaction.
Porter Value Chain
Manufacturing Industry Value Chain
Research
and
Development
Production
Engineering
and
Manufacturing
Sales
Marketing
and
Distribution
Service
Retail Industry Value Chain
Partnering
with
Vendor
Managing
Buying
Inventory
Distributing Operating
Inventory
Stores
Marketing
and
Selling
Value Chain Things to Remember
1. Value to customer objective is not clear.
2. Relay team concept is too time consuming and doesn’t
work in the current competitive environment.
3. Maximize the value-add activities and eliminate as
much as possible the things that do not add value.
4. Make sure that each step in the overall process (each
function) does things consistent with the overall
objective of value to customer.
SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
© 1985 by Michael E. Porter.
Figure 3-6
Property and Casualty Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy
HUMAN
RESOURCE
MANAGEMENT
-Regulatory Compliance
- Accounting
Agent
Training
Actuary
Training
Actuarial Methods
Investment
Practices
TECHNOLOGY
DEVELOPMENT
- Legal
Product
Development
Market Research
Claims
Training
Claims
Procedures
I/T
Communications
PROCUREMENT
•Policy Rating
• Underwriting
• Investment
•Independent
Agent Network
•Billing and
Collections
•Policy Sales
•Policy Renewal
•Agent Management
•Advertising
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
•Claims Settlement
•Loss Control
SERVICE
Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining
Superior Performance, copyright 1985 by Michael E. Porter.
Figure 3-7
Technologies in the Value Chain
Information System Technology
Planning and Budgeting Technology
Office Technology
FIRM
INFRASTRUCTURE
Training Technology
Motivation Research
Information Technology
HUMAN
RESOURCE
MANAGEMENT
Product Technology
Computer-Aided Design
Pilot Plant Technology
TECHNOLOGY
DEVELOPMENT
Software Development Tools
Information Systems Technology
Information Systems Technology
Communication System Technology
Transportation System Technology
PROCUREMENT
•Transportation
Technology
•Material Handling
Technology
•Storage and
Preservation
Technology
•Communication
System
Technology
•Testing Technology
•Information
Technology
INBOUND
LOGISTICS
•Basic Process
Technology
•Materials
Technology
•Machine Tools
Technology
•Materials Handling
Technology
•Packaging
Technology
•Testing Technology
•I/nformation Tech.
OPERATIONS
•Transportation
Technology
•Material Handling
Technology
•Packaging
Technology
•Communications
Technology
•Information
Technology
•Multi-Media
Technology
•Communication
Technology
•Information
Technology
•Diagnostic and
Testing Technology
•Communications
Technology
•Information
Technology
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
© 1985 by Michael E. Porter., p. 167.
Figure 3-8
Business Awareness Questionnaire
2. The world’s largest corporation based on annual revenue is
Wal-Mart.
3. CTO – Chief Technical Officer
CFO – Chief Financial Officer
CMO – Chief Marketing Officer
CIO – Chief Information Officer
COO – Chief Operating Officer
CEO – Chief Executive Officer
4. Large number of well known business success books.
5. Business Week, Fortune, Forbes, The Economist,
Harvard Business Review
Information Week, Datamation, Computer World
A. Larry Ellison – Oracle
B. Scott McNealy – Sun Microsystems
C. John Chambers – Cisco Systems
D. Carly Fiorina – Hewlett-Packard
E. Craig Barrett – Intel Corp.
F. Steve Balmer – Microsoft
G. Jeff Bezos – Amazon.com
A. Sam Walton – Wal-Mart Stores
B. Fred Smith – Federal Express
C. Gordon Moore – Intel Corp.
D. Herb Kelleher – Southwest Airlines
E. David Filo – Yahoo!
F. George Zimmer – Men’s Wearhouse
A. Michael Porter – Business Competitiveness
B. Michael Hammer – Process Reengineering
C. W. Edwards Demming – Total Quality Management
D. Tom Peters – Managing by Walking Around
E. Warren Bennis – Business Leadership
Significant Business Events During 2000:
1. Enron collapse
2. HP-Compaq merger
3. United Airlines bankruptcy
4. Survival of Amazon.com and continued success of eBay.
1. Amazon.com is definitely the standard by which eCommerce companies are compared. eBay is uniquely
profitable as an Internet company.
2. NASDAQ lists more than technology companies.
3. The News, Life, Sports and Weather is a description of
USA Today and not the Wall Street Journal.
4. Japan, not Germany, is the world’s second largest
economy.
5. Saturn is owned by GM and not Ford.
6. Burn rate is the rate at which a startup uses up its cash
position on a daily or weekly basis.
7. A balance sheet indicates assets and liabilities. The profit
and loss statement indicates profit.
8. A general sentiment is that established companies with a
solid brick and mortar foundation can move to the Internet
with a winning approach.
9. The big three of the airline industry are American, United
and Delta—not Northwest.
1. To start a new business requires: E. all of the above.
2. Of the factors in question 1, not having sufficient
operating capital is the cause of most business failures.
3. Never listed as first on the Fortune Most Admired List
are Cisco Systems, Intel and Wal-Mart Stores.
4. Industries that have dominated the least admired list are
the Savings and Loan Industry and the Airline Industry.
5. A money source for a startup that is not realistic in most
cases is commercial banks.
6. IPO stands for initial public offering.
7. Marketing is determining what to sell and sales is
selling what you have.
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Ch 3 - Porter Competitive Model