IT Strategy

Five Competitive Forces That Shape Strategy

January 8, 2008 by Raj Sheelvant

Michael Porter’s ground breaking HBR article in 1979 on Five Competitive Forces called “How Competitive Forces Shape Strategy” has been revised by the author after about three decades. His new work not only updates and extends but also reaffirms his findings. You can find the article in its entirety here. You can also listen to an interview with Michael Porter. A link to his interview is here.

In my view Michael Porter drives home an important point in his interview. Rivalry with the competitors does not need to be zero sum game. Most of the competition is focused on price and market segment gain. This invariable accelerates the move towards the commoditization of the product. This in the short run appears good for the consumers (because they get a good price) but in the long run its bad for them (because they will be left with no choice as many of the competitors will be driven away by the intense competition and the product will be a commodity product). This is the kind of environment when any competitive advantage is meaningless because the competition will imitate it eventually. That’s the assumption Nicholas Carr makes in his argument for “IT Doesn’t Matter”. BTW, he has written a new book The Big Switch (I have not read it yet but will read it soon). In a commoditized world, where perfect market is at work, price is the only tangible factor that balances supply and demand. Hence no need for IT to pursue differentiation.

According to Porter it does not have to be that way. So instead of mindless competition based on the price, multiple rivals can be successful by competing on different aspects of customer needs. This is the big take away from the revised Michael Porter’s Five Competitive Forces article. He calls this new competitive model as positive sum game where firms compete based on their core competency not to gain market share but to carve out a niche. Consumers will be willing to pay a price premium to get that level of ‘customized’ product/service. This is how everyone wins. In this scenario the business process which is based on firm’s core competency is going to be different for different competitors. And IT can play a major role in automating those core business processes. Positive sum competition is the basic assumption where IT can and will Matter.

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