In the article called “How competitive forces shape strategy”, Michael Porter writes about his most recognisable structural analysis of industries. The model is combined of five main points, called forces: the threat of new entrants, the bargaining power of suppliers and buyers, the threat of substitutes and the intensity of the rivalry between competitors in the industry (Porter, 1979, p. 141). The main point of the analysis is to assess the intensity of competitive forces in the economic sector or market segment and to estimate whether the industry is profitable. The understanding and application of the model are essential for the managers or people who want to set up a new business. To gain profits and a competitive advantage they must understand the external opportunities and threats, imposed by other firms the industry (p. 137).
By the way of example, external analysis of the environment is crucial for companies. Many factors make up each of the Porter’s forces, but focusing only on the threat of new entrants and bargaining power of buyers one can observe that these elements may still be up to date in the modern concept of running an online company. The author of the article lists six entry barriers: economies of scale, which may be the biggest boundary, require producing on a large scale or facing cost disadvantages; product differentiation – requires the entrants to create an original product; capital requirements – enormous amount of money, required to invest in new technologies, marketing, and inventory; cost disadvantage independent of scale – some companies achieve cost advantages which potential rivals cannot observe; access to distribution channels – companies must have the ability to create a unique product that will be able to displace others in the wholesale or retail channels; government policies – regulations that may reduce the area of the company’s operations (p.183). Bargaining power of buyers is a capability that customers can possess to impact the way companies operate. Having low switching costs, low brand loyalty, many available substitutes, and undifferentiated products make the buyer power strong (p. 140). In this essay, I will discuss whether these two of Porter’s forces can nowadays be applied when it comes to the biggest internet companies, such as Facebook, Uber, eBay, etc.
On the example of Facebook, the biggest social media network (Clement, 2019) one can state that observing the external environment is the key. The threat of new entrants is comparatively low. Companies that want to compete in the social media industry must possess huge capital resources. Investing in new technologies to create a network that meets users’ expectations requires huge financial outlays in the era of unlimited access to information. Companies with limited resources are less likely to survive the rivalry on the market. Facebook gathers an immense amount of data from millions of people around the world, thus governments and legal institutions impose regulations regarding its storage and usage.
Another factor to consider is the question of buyers’ power. Thanks to the analysis of the industry strategists can assess how original their product is from the perspective of customers. Facebook connects people from different parts of the world in terms of seconds. Switching costs for Facebook users are moderately high, as many find it hard to communicate with all the acquaintances through other social media platforms. Awareness of customers’ habits, their use of substitutes and ability to adapt to them grants managers the possibility of being more efficient. Analysing the strength of this force allows the company to gain greater competitive advantage and above-average returns.
Even though the Porter’s five forces analysis is a tool that covers many aspects of the external analysis, it is not perfect. The author developed the model in times without internet access. In the article, he describes features that are most relevant to the companies operating in the physical market. The concept of Facebook is entirely digital, and therefore the strategists cannot use the analysis in every aspect.
To conclude, it can be said that the sector analysis method based on the Porter’s five forces model is continually relevant and useful to digital companies, even though it is not ideal. Managers can use the tool to boost or sustain the competitive advantage over the rivals. Analysis of the industry helps companies to make their products unique, and due to this – increase profitability.
2019-9-29-1569793683