Digital Transformation view of Porter's Model

Introduction

Why is digital business is able to disrupt business models and traditional notions of industry competition? A useful way to analyze the situation is exploring how digital business is impacting Porter’s model of the five forces of industry competition: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors.

In this article I won't explain in detail the Five Forces Model, although you'll find it at the articles on the references. We will focus here exclusively on how Digital Transformation and Open Economy are impacting on it.

Five Forces Porter Model

Once it is crystal clear to your organisation that its next steps will be directed towards Digital Economy, the following question you need to answer is: what concrete outcomes do you want to achieve with this Digital Transformation, taking into consideration their impact on the wider business strategy of your organisation?

Answering this question suggests taking a really close look at your competitive environment, in the sense that Michael E. Porter states in his Five Forces Model, which I’ve attempted to summarise in the picture below:

Figure 1 Michael Porter's Five Forces Model shift in Digital Economy

The entry of new competitors

?Essentially, what is the likelihood of new competitors?entering the market to offer a variation of the same product??When an industry has a high level of profitability, the threat of new entrants is also high, and their impact is to drive down profit levels. Points to consider in analyzing this force are the barriers to entry,?brand equity, product differentiation, industry profitability and economies of scale.

There’s no doubt that digital business is changing the nature of competition. Today, it’s not just traditional industry competitors you need to worry about, but new entrants from outside your industry, equipped with new digitally based business models and value propositions.?

This is often tech giants and startups that have envisioned and built a new business model from the ground up, powered by a?new platform ecosystem for digital business. They’re leveraging the familiar social, mobile, analytics and cloud technologies, but are often adding in personas and context, intelligent automation, the Internet of Things, and cybersecurity to further enhance the value proposition of their platform.

Why can new entrants move in so easily? Digital business changes the rules by lowering the traditional barriers to entry. A digitally based business model requires far less capital and can bring large economies of scale for example.

The threat of substitutes

The threat of substitutes has to do with the threat of substitute products or services. A substitute in this case is a product or offering that may be of a different type of category but can be used instead of an existing product. Elements to consider in the threat of substitutes includes the cost, availability and difficulty of switching, the perception of quality degradation in switching and the level of differentiation with a product to encourage switching.

In terms of digital business, this can come from a purely digital substitute or a hybrid digital/physical substitute. Taxi services, such as?Uber?for example, provide a hybrid model via a digital app for consumers and taxi drivers, coupled with the physical taxis. Additionally, and the due to its orientation towards Sharing Economy, Uber didn’t need to buy cars to compete with the taxi companies.

Digital services wrapped around a physical product are another example and can range from one extreme such as the industrial Internet to another such as home automation technologies or personal fitness products. In addition, the long-term revenue stream from the digital services may be worth far more than the one time sale of the physical product.

The threat of substitutes is high in many industries since switching costs are low and buyer propensity to substitute is high. In the taxi services example, customers can easily switch from traditional models to the new model simply by installing an app on their smartphone. Propensity to switch from the traditional model is high due to consumer wait times for taxis, lack of visibility into taxi location and so on.?

The bargaining power of buyers

This is about the ability of customers to put the business under pressure. Perhaps the strongest of the five forces impacting industry competition is the bargaining power of buyers since the biggest driver of digital business comes from the needs and expectations of consumers and customers themselves. Points to consider include the?presence of bargaining leverage, customer price sensitivity and the availability of information to customers.

This bargaining power lays out a?new set of expectations for the digital customer experience?and necessitates continual corporate innovation across business models, processes, operations, products and services.

Customers and consumers have amassed far more bargaining power today due to instant access to information, insights from social media including access to reviews and feedback, low switching costs via digital channels, price sensitivity, access to substitute products and services with greater ease of use and convenience, as well as increased industry competitiveness as a result of the other forces.

The bargaining power of suppliers

Suppliers?can still hold much power in some industries, e.g., some commodities and high-tech components, however, the global marketplace and innovation have made the supply chain less relevant than it was thirty years ago.

Suppliers can accelerate or slow down the adoption of a digitally based business model based upon how it impacts their own situation. Those pursuing digital models themselves, such as the use of APIs to streamline their ability to form new partnerships and manage existing ones, may help accelerate your own model.

Those who are suppliers to the traditional models, and who question or are still determining their new role in the digital equivalent, may use their bargaining power to slow down or dispute the validity or legality of the new model.

Good examples are the legal and business?issues surfacing around the digital-sharing economy?(i.e. ride-sharing, room-sharing etc.) where suppliers and other constituents work to ensure the business model and process innovations still adhere to established rules, regulations, privacy, security and safety. This is a positive and needed development since, coupled with bargaining power of buyers, it can help to keep new models “honest” in terms of how they operate.

The rivalry among the existing competitors

Finally, this speaks to the level of advertising spend in the industry, the ability to consider competitors within a given strategy and the creation of a competitive advantage through innovation.

Being an established?industry competitor?is less likely to be a safeguard than it was in the past.?Existing competitors are all trying to understand the disruptions occurring, and prepare their response. The responses can range all the way from defensive to offensive measures, and even a first-mover attack. However, in the Digital Economy it is needed to consider not only those that have traditionally been our competitors, but also those firms that our audience think are competitors.

In general, the rivalry will be heating up because entry and exit barriers are going down due to the comparative low-cost of digital business models, and in many cases new entrants do not even need to own physical assets or infrastructure. In particular, the “platform” model is seeing considerable success in the marketplace by simply connecting stakeholders and applying a set of peripheral services to enhance the customer experience.

By doing so, platform operators are moving to the forefront of service delivery and getting closer to the customer without even owning assets or employees working in that particular industry.

Conclusion

Overall, as you prepare your various digital business initiatives, the five forces framework can be a useful way to think about the various headwinds and tailwinds acting on your envisioned model and how various constituents may react. In combination with the usual value chain analysis, it can help to inform your strategy and provide some useful insights into what you may encounter along the way.

References

• "To APIfy or not to APIfy, that's the question", last accessed 08/07/2022
• "Episode 78: Applying Porter’s 5 Forces To Digital Strategy", last accessed 08/07/2022
• "Porter's Five Forces, Digital Transformation and Competitiveness: Finding New Paradigms", last accessed 08/07/2022
• "Shifting Forces: Competitive Strategy in the Digital Age", last accessed 08/07/2022