“The goal of strategy development is to adapt to a competitive environment. However, there is still a very narrow view of competition. At the same time, intensive competition in the industry cannot be regarded either as a coincidence or as a failure” (Michael Porter, 2008)
Competitive analysis of the industry by Michael Porter helps to determine the intensity and severity of competitive forces in the industry, to find a position in which the company will be maximally protected from the influence of competitive forces and will be able to exert influence on them.
The golden rule of the theory of the five forces of competition of Michael Porter is the following: the weaker the influence of competitive forces, the more opportunities for obtaining a high profit in the industry is the company.
Despite the changes in the last 30 years, in my opinion, the Porter's five forces are still applicable to Internet companies.
Michael Porter, using five structural units specific to each industry (Competitive Rivalry, Bargaining Power Of Customers/Suppliers, Threat Of New Entrants, Threat Of Substitute Products) described ways of forming a competitive advantage and long-term profitability of the goods, as well as the ways in which the company can maintain its profitability and remain competitive in the long run.
First of all, Threat of New Entrants. Why are new entrants dangerous? Usually new entrants bring new production capacities, new technologies, which can change consumer behavior, set new standards for existing players. The strength of the influence of new players depends on the entrance barriers of the industry and the speed of influence of existing market players. Therefore, when working with new players, it is important to properly build output barriers. Porter identifies six main factors that affect the strength of entry barriers in the industry: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, government policy. Interestingly, the e-commerce market is characterized by low barriers to entry, so it is relatively easy for new entrants to enter the market and sell their products. However, it is difficult for new entrants to gain brand recognition, attain high ranking on search engines. New entrants require essential marketing budgets to compete on a big scale and this restricts entry of new entrants to an extent. Thus, threat of new entrants is medium.
Second of all, Bargaining Power of Buyers. Buyers can influence the competitiveness of a company's products on the market, as in fact they are consumers of the finished product and ensure the existence of the market by satisfying their needs. The company in the development of the strategy should choose those buyers who are the least influential in the market. Consumers can toughen competition through the presentation of higher requirements to the quality of goods, to the level of service, to exert pressure on the price level. The higher requirements for the finished product make the industry's producers raise the quality of the product produced by increasing costs (better raw materials, additional service conditions, etc.) and, consequently, to reduce their profit level. The large competition in the e-commerce market allows the buyers to win as companies have to keep their prices in check to attract customers. Buyers can choose from a wide range of offline as well as online players. A large number of companies have entered the e-commerce space with relatively niche product offerings. Since customers demand not only low prices, but also a large range of services and products, their bargaining power is huge for e-commerce industry.
Taken all arguments under consideration, we can see that Porter's recommendations for strategists are still applicable to internet companies.
Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Special Issue on HBS Centennial. Harvard Business Review 86, no. 1 (January 2008): 78–93.
...(download the rest of the essay above)