The Force of Strategy
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Globalization and information technologies have caused profound shifts in the nature and structure of competitive markets. Under the influence of the new global forces, companies have become particularly thorough in the development and implementation of their strategies. Information technologies have played one of the major roles in the emergence of new market relations. To a large extent, they have altered the competitive balance in most, if not all, global markets. As a result, large and small companies had to reconsider their earlier approaches to strategy building. Under the impact of IT, even Porter’s five forces look different, as information technologies have changed every aspect of organizations’ strategic performance. However, IT can be equally beneficial and threatening to organizations’ competitive advantage. Thus, the chief task facing today’s companies is to ensure that information technologies benefit them and facilitate the creation of a sustainable competitive advantage.
IT and Porter’s Five Forces
The development of Porter’s Five Forces framework has become a landmark in the evolution of the entire organization science. According to Porter (2008), competition for profits cannot be limited to established industry rivals. Suppliers, customers, substitute products and potential entrants shape the competitive environment and predetermine the competitive position of each market player (Porter, 2008). Recently, the sixth force has become a new but extremely powerful player in all markets: information technologies (IT) have greatly influenced the nature of Porter’s five forces and their implications for businesses. Porter (2008) says that the underlying profitability drivers are the same for all industries, and it is possible to assume that IT has the potential to become another driver underlying organizations’ strategic failures and successes.
Everything begins with the threat to entry – the threat of new entrants and their desire to conquer a market share (Porter, 2008). Information technologies and the extent to which they are used in the industry establish a new criterion of efficiency and competency, and it is the criterion new entrants must meet in order to enter the market (Torian & Nanda, 2010). IT can equally facilitate or impede the decision to enter a new market, turning into an unachievable barrier for those, who lack necessary IT resources and infrastructure. At the same time, IT reduces the significance of scale economies and incumbents’ size. Proprietary technology can become a serious incumbency factor that gives smaller firms a stronger competitive advantage against their larger rivals (Porter, 2008).
IT also impacts the power of suppliers. IT can shift the balance of power between suppliers and buyers (Torian & Nanda, 2010). Technologies can speed up the supply of goods and services, while making them more diverse and even unique. However, more often than not, it is the buyer who sets the price and defines the quality criteria of the product and service. Torian and Nanda (2010) are right that the number of businesses continues to increase, while the number of buyers remains almost constant. Technologies provide buyers with easier access to information about products and services, their range, diversity, and quality features. Still, suppliers have an opportunity to interfere with this buyer-supplier balance and gain a competitive advantage by adjusting their internal systems to meet buyers’ technological demands.
IT greatly influences the threat of substitutes and the intensity of competition among existing rivals. Even when the threat of substitutes is high, IT can distance the company from these substitutes and helps retain high profitability and effective performance (Porter, 2008). IT also influences the degree to which companies compete within one industry. When Porter (2008) writes that the intensity of rivalry is the highest with numerous competitors, slow industry growth, and high exit barriers, he seems to forget that the presence or absence of IT and free access to information can also result in more intensive competition among existing firms.
IT and Competitive Advantage: Risks and Opportunities
As mentioned earlier, IT can be equally beneficial and damaging to firms’ competitive advantage. The five areas where IT can help companies strengthen their competitive advantage are actually the five areas indicated in Porter’s Five Forces model: current competitors, new entrants, product substitutes, buyers’ and suppliers’ bargaining power. Rothaermel (2008) speaks about the importance of technological innovation, and information technologies can help (a) create new products to offset the existing competitors; (b) diversify the existing products to promote growth, raise new barriers to entry and make such entry difficult or impossible; (c) lower the costs of product substitutes and facilitate switching to these new products; (d) develop alliances to reduce buyers’ bargaining power; and (e) develop sophisticated information systems to develop and sustain more effective relationships with suppliers. A common scenario is when companies use IT to reduce the costs of their business decisions and processes, thus lowering the price of their goods and services. This, in turn, attracts new customers and helps businesses expand their market presence.
At the same time, the use of IT can become a risky endeavor. First, IT leads to the growing number of competitors: the more organizations leverage IT for their competitive advantage the stronger they become in their fight with the existing rivals. This is why Porter and Millar (1985) write that the information revolution changes industry structure and, as a result, competition rules. Second, IT reduces or eliminates entry barriers, as more companies are willing to use technologies to enter the market, instead of traditional sales representatives. Third, new products and services created with the help of IT also increase the risks of new product substitutes. Fourth, IT has the potential to shift the bargaining power to customers, as the number of competitors and the range of products available in the market also increase. Fifth, companies can face difficulties managing their relationships with suppliers, who can also obtain more power under the influence of the Internet and other technology-related supply channels. For example, IT can enable customers to specify the details and parts they would like to use and manage the assembly and delivery of their customized products. This is how IT threatens the competitive advantage of other companies working in the same industry. This system expands the range of products available to customers and increases the risks of substitutes, thus reducing the competitive advantage of firms that do not have such systems.
IT can be equally beneficial and damaging to companies’ competitive advantage. IT has become an essential element of Porter’s Five Forces model, altering the balance of competitive forces in the market and making companies stronger in their strategies. IT can enable companies to win another market share or, on the contrary, raise new barriers to market entry. Consequently, the chief task facing today’s companies is to ensure that information technologies benefit them and facilitate the creation of a sustainable competitive advantage.
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