Suitability and further development of Porter's Five Forces model against the background of digital transformation

LIST OF ABBREVIATIONS

LIST OF TABLES

1. INTRODUCTION

2. THEORETICAL BASICS
2.1 Presentation of the 5-force model
2.2 Individual components of the model and their current state of development
2.3 Interpretative explanations of the model
2.4 Critical remarks on the model

3. THE PRACTICAL APPLICATION OF THE MODEL
3.1 Initial situation and problem description
3.2 Analysis procedure
3.2.1 Industry definition
3.2.2 5-Force Analysis for the Industry

4. CONCLUSION AND OUTLOOK

BIBLIOGRAPHY

LIST OF ABBREVIATIONS

Abbildung in dieser Leseprobe nicht enthalten

LIST OF TABLES

Table 1: Evaluation of the competitive forces

Table 2 Summary of the 5-force analysis

1. INTRODUCTION

This thesis deals with the task of testing the applicability of the 5-force model against the background of the new challenges of digital change. The digital transformation can be understood as a new transformational effect of information and communication technology¹, which stands for the current fundamental change in economy and society. It is a symbol of all social, political, economic and ecological upheavals resulting from the predominance of digitization and networking². The digital transformation brings many changes, including an in­creased intensity of environmental monitoring, broadening of planning horizons, new distribution channels to customers and partners, entry into global markets, high complexity of relationships, innovation pressure on companies, platform formations, new directions such as open innovation and co-creation. One of the most important consequences of digital change for a company is a significant intensity of global competition. In order to be able to take advantage of the opportunities of change, the strategic orientation of companies must be seen as safeguarding their existence. An established model for strategic competition analysis is Porter's 5-force con­cept. The question arises, however, to what extent it can be applied in a modern way. According to some authors³, the 5-force model can be used optimally with additions. The description of the practical approach of the model can be found in Schneider⁴ (not detailed enough) and Paul⁵ (without reference to current developments). This paper is dedicated to practical application, focusing on the specifics of digital change, which have not been sufficiently explored so far. After the introduction in chapter 1, chapter 2 provides the basics of the model and its individual components, as well as critical points. In chapter 3 the model is elaborated on an exemplary case. The conclusion of the work in chapter 4 summarizes the results and provides suggestions for further research. It should be noted that it is not possible to work out a basically optimal and fixed solution, since the procedure is strongly influenced by situational peculiarities and selection of the industry. Nevertheless, the aim is to present the results in a way that is suitable for application.

2. THEORETICAL BASICS

2.1 Presentation of the 5-force model

Porter's competitive analysis identifies five fundamental competitive forces that determine the relative attractiveness of an industry and enables a company to make strategic decisions regarding the most defendable and economically advantageous positioning. Industry attractiveness is a key determinant of the profitability of a company⁶. The overall strength of the five competitive forces is different in each industry and can change as it develops⁷. At this point, it is critical to note that the boundaries of an industry are difficult to define. Porter⁸ considers an industry to be a group of companies that produce the same or similar products that are close substitutes for each other. Chapter 3.2.1 deals with the blurring of industry boundaries due to the increased dynamics in the practical approach. According to Porter,⁹ a company is able to shift the rules of competition and influence the attractiveness of an industry through successful strategies. A strategy is not only a distant vision, but a specific profile of the activities of a company that differentiate it from its competitors.¹⁰ The strategic steps to achieve a defensible position are based on finding a placement with a weak effect of all forces, influencing the balance of competitive forces by means of offensive measures, exploiting the change by considering the industry developments and their effects on the industry forces.

2.2 Individual components of the model and their current state of development

The strength of the structural component of competition in the industry increases when many and/or equally strong competitors face each other in the fight for market share in a stagnating market. In particular, the high barriers to exit and the high fixed costs contribute to the strong competition. Such markets are characterized by a high pressure to react, which is particularly intensified by technological change. The intensity of competition depends on the interplay of structural factors: numerous or equally equipped competitors, slow growth in the industry, high fixed and storage costs, lack of differentiation or conversion costs, large capacity expansions, heterogeneous competitors, high strategic stakes, high exit barriers¹¹. The current development tendency refers to the increasing role of cooperations in order to avoid marketing strategies that can only be implemented at the expense of competitors in the case of strong rivalry. The heterogeneous competition is caused by the change of the rules of the game. Game Changers bring distruptive innovations to the market that are based on significant changes in the business model. This increases the potential for conflict in the industry. The strong power of suppliers manifests itself in price increases and quality reductions. The danger is particularly high with high degree of concentration of the group of suppliers, absence of spare products, unimportance of the industry of the customer for suppliers, high importance degree of the products for the buyer, product differentiation or installation of the conversion costs, threat of the forward integration¹². The current developments within this component are shifting towards outsourcing and crowdsourcing, strong position of Google and Facebook in online marketing, tendency towards purchasing cooperations. Porter¹³ also views workers as suppliers who, if highly skilled, can put pressure on wages and affect industry profitability. In particular, the power of outsourcers must be considered, which has increased dramatically in the digital world. With the strong power of the customers, pressure is exerted on sales prices, higher quality or better performance is demanded. The factors that increase power are strong customer concentration or a large share of total sales, A-products, product standardization, low conversion costs, low profits, importance of products to the customer, threat of backward or partial integration, market transparency¹⁴. With the progress of the digital transformation, the level of information of the customers has increased very strongly. The power of the end customer has increased through greater transparency. Suppliers can reach new customers more easily by using the Internet. E­commerce is changing the structure of the retail trade, many SMEs are merging into networks. The entry of new competitors into the market brings with it a redistribution of capacity in the industry with increased costs and reduced profits for established competitors. The risk of market entry depends on the level of entry barriers and the expected reactions of established competitors. Porter identifies economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, size-independent cost disadvantages, government policies¹⁵. These barrier origins are taking on new characteristics under the influence of the digital transformation. A high capital requirement for the start-up no longer plays a significant role. Often, the costs of the transition are related to building a customer base and access to customer data (e.g. SAP in the B2B sector and Apple equipment in the B2C sector). The sales channels are more often represented by the platforms that allow even niche providers to enter international markets. With an attractive price-performance position, replacement products limit the profit potential of the industry. The propensity to buy substitutes, relative price position and performance of substitutes contribute to increasing pressure. The current trend is to replace physical products with immaterial ones. Digital distribution channels are replacing the traditional ones. The trend towards a sharing economy is reinforced by the use of digital technologies. A future development is the shift of consumer decisions to artificial intelligence.

2.3 Interpretative explanations of the model

Porter's original model from 1979 has been subject to critical considerations over time, some of which are discussed in section 2.4. In later publications, Porter¹⁶ affirms the contemporary application of his model and comments on the points of criticism. Only the five forces are decisive for competition in the industry. These forces are in turn influenced by various industry attributes, including the influences of complementary products, government regulation, technology and innovation, and industry growth. These factors have no direct influence on industry profitability, so additional model extensions are not necessary. It is further emphasized that the industry differences are irrelevant for medium and long-term profitability. This depends exclusively on the market structure, which is reflected in the 5 forces. For the component "Threat of new competitors" Porter goes into greater depth on the basics of market entry barriers: corporate economies of scale, customer economies of scale, switching costs, capital resources, other inherent advantages, access to distribution channels, government regulations. As a supplement to the component "competition in the industry", it is pointed out that the strength of rivalry depends not only on the intensity of competition, but above all on the level (price models, services, product features) at which this competition is carried out. Porter cites the influence of the state on competition as an important factor influencing the attractiveness of substitute products or changes in competitive structures. Finally, Porter confirms his model as being resistant to influence in its structure and long-term oriented.

2.4 Critical remarks on the model

Meffert¹⁷ provides arguments of various authors as a critique of the concept. The market-oriented view to explain the success of a company with a given market structure and homogeneity of all companies in an industry is questioned. According to Reisinger,¹⁸ the model is poorly founded in theory. From Bresser's point of view¹⁹, among other things, the diversity of variables with their impact on sectoral profitability is not clarified and cognitive processes are neglected. Müller- Stewens²⁰ points to the difficulty of defining industries, the static character of the model and questions the influence of the industry on the profitability of companies. ten Have²¹ criticizes the overemphasis on external forces and the exclusion of the company's countermeasures. Reiss²² points out, among other things, the networking deficits in the form of alliances and cooperations and the neglect of the "Blue Ocean" approach. Downes²³ elaborates 3 forces (globalization, digitalization, deregulation), which are to represent Porter's model as outdated. Scharper²⁴ remarks that the model does not provide a general statement on the attractiveness of an industry and serves more as a basis for strategic considerations. Some authors²⁵ elaborate various model additions that are not discussed in detail.

3. THE PRACTICAL APPLICATION OF THE MODEL

3.1 Initial situation and problem description

The following data are used for this work: For a software vendor, a competitive analysis using the 5-force model is to be applied to check the strategic orientation. This raises questions about the practical use of the model, taking into account the dynamic environment, changes in industry boundaries and the influence of various factors on competitive forces. The following goal is derived from the described situation: On the basis of an exemplary case, the 5-force model for the software industry will be tested for its practical applicability under the current situation. In practical application, the 5-force model will be applied for various strategic purposes (including the establishment of new businesses, entry into new markets, change of strategy, change of business model), which require the company's position in an industry as a determining factor. The results of this work are important because the current knowledge of the competitive position has a direct impact on the future development of the company. This elaboration should lead to a learning cycle with continuous improvement of the application of the 5-force model. Changes to the process itself or to the instruments used are conceivable.

3.2 Analysis procedure

The analysis is conducted with the involvement of external industry experts. In view of the fact that the industry is very dynamic, it was decided to update the analysis carried out annually. For this purpose, research in accessible databases on trends, developments and expert statements are analyzed at regular intervals. A complete new compilation of the industry analysis (incl. industry definition) is to be carried out periodically in 3 year intervals. First the industry is delim­ited. It is decided to stick to the five original forces and not to integrate any model additions. The complementary markets are already considered in the sector delineation, while governmental influences are considered as an impact factor. The five forces are drawn up on the basis of a checklist, the industry-relevant points are analyzed and weighted. From the results, an overall assessment of the attractiveness of the industry is formed.

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¹ Cf. Lemke (2017), p.193

² Cf. Lemke (2017), p.193

³ Reisinger et al (2013), pp. 63-64; Reiss (2014), pp. 35 ff; Schneider et al (2014), pp. 2 ff

⁴ Cf. Schneider et al.(2014), p.4 ff

⁵ Cf. Paul et al. (2014), p.121 ff

⁶ See Porter (2014), p.24

⁷ Cf. Porter (2014), p.25

⁸ See Porter (2013), p.39

⁹ See Porter (2014), p.28

¹⁰ See Porter (2014), p.14

¹¹ Porter (2013), p.54 ff

¹² Cf. Porter (2013), p.65 ff

¹³ Porter (2013), p.66

¹⁴ See Porter (2013), p. 62 ff

¹⁵ Cf. Porter (2013), p.41 ff

¹⁶ See Porter (2015); Porter (2013)

¹⁷ Meffert (2008), p.5

¹⁸ Reisinger at al. (2013), p.62

¹⁹ Cf. Bresser (2010), p.46 ff

²⁰ Müller-Stewens et al. (2016), p.173 ff

²¹ ten Have et al (2010), p.268

²² Rice (2014), p.35 ff

²³ Downes et al. (2000), 64 ff

²⁴ Scharper (2016), p.69

²⁵ Reisinger (2013), p.63 ff; Reiss (2014), p.36 ff; Schneider et al. (2014), p.10