When you say the phrase “competitive advantage” in a room full of MBAs or anyone who has completed a strategic management or marketing course, you will be hard-pressed to find a single person who doesn’t immediately think of Porter’s Five Forces. Devised in 1979 by Michael E. Porter, the model was designed to identify and analyze five competitive forces that shape every industry and helps determine an industry’s weaknesses and strengths.
These five forces are separated by direction, with two vertical forces; Bargaining Power of Buyers and Bargaining Power of Suppliers, and the horizontal forces; Threat of New Entrants, Threat of Substitutes, and Industry Rivalry.
Ultimately, this model is a useful start for an organization looking to identify the competitive nature of their industry and then develop a roadmap to a sustainable competitive advantage within it.
While an old model, the sentiment still rings (generally) true in modern businesses looking to make a qualitative evaluation of their organization’s strategic position. But, where (and how) does information come into play? And, how does it play into unlocking a competitive advantage? Well, let’s jump forward a few years (not all the way… we have a stop to make first).
In 1985, six years after the publication of the five forces model, Porter returned with a new article in the HBR, “How information gives you competitive advantage”. In it, he posits that information technology will become a force of competitive advantage because it:
- Changes industry structure and, in so doing, alters the rules of competition
- Gives companies new ways to outperform their rivals
- Spawns whole new businesses, often from within a company’s existing operations
Now, why are we spouting on about a model and an article that has been around for over four decades? Because, as Porter states in the 1985 article, information plays a significant role in an organization’s ability to respond to the forces and shift its competitive position. So, let’s take a look at these forces in the context of today and see where information can have a true impact in providing a sustainable competitive advantage.
When looking at rivalry, first of all you should ask yourself, how many direct competitors do you have in your industry? Is the competition between each of these fierce?
You may think that the level of rivalry within your industry is out of your hands, but the way in which you respond to it is not. However, to ensure you’re responding to competitive pressures, opportunities and threats effectively, you must have confidence in your understanding of the competitive environment. Competitive intelligence plays an enormous role in this, but there are two primary challenges faced by these teams in the ‘Age of Information’ – too much information, too often.
The amount and frequency of information make it difficult for businesses to effectively monitor, analyze and respond to their competitive landscape. But this is where technology offers a solution. By combining the latest innovations in information management technology such as machine learning, natural language processing, and semantic search, you can effectively remove the mundane from the task, freeing your teams up to focus on what matters – the analysis! Spending more time on the analysis ensures that, regardless of the level of industry rivalry, you are making the decisions necessary to differentiate yourself from your competition, with confidence.
Bargaining power of suppliers
When it comes to thinking about your suppliers, many will believe it is them who hold the power – but is this true? Take pricing, for instance, do your suppliers determine the price of the raw materials, or do you? Have you alternative suppliers available? How robust is your supply chain? How much do you even know about your supply chain? Access to the right information at the right time plays a critical role in answering or providing an ability to turn these forces into opportunities for organizations.
The COVID-19 pandemic highlights the fragility of supply chains and the critical nature of information flows between suppliers for responding to large market disturbances. When the global demand for medicine, medical devices, and PPE skyrocketed, supply chains were unable to keep pace.
The pandemic caused a unique and largely unpredictable situation, but serves as an example of how little information there is within organizations surrounding the intricacies and bottlenecks in their supply chain. While the bargaining power of suppliers is a critical force in determining a competitive advantage, oftentimes that power exists as a result of misinformation or unexplored opportunities on the part of the organization. Remember when KFC changed suppliers in the UK? Probably one of the greatest examples of supply chain mismanagement in the last decade – and lead to one of the best apologies of all time.
With the right information, at the right time, industries (and individual businesses) are able to get a full understanding of their supply chain; foresee where potential bottlenecks are, investigate alternative supply lines, improve communications between ‘links’ in the chain, and ultimately, avoid any unnecessary inefficiencies or costs (or chicken shortages) for their organization.
Bargaining power of buyers
Now take a look at your customers… how much do they determine the price of your product? And, what options do you have to change their buying behaviors?
But before attempting to change a consumer’s buying behavior, you must first understand it and the context within which it exists. Need proof? Enter Project Japan – a meticulous and extremely well-executed integrated marketing campaign by the Norwegian government that focused on the people of Japan during the 1980’s. Having invested heavily in salmon farming, Norway was accumulating massive stocks of the fish with few options for global export. The price was plummeting as supply was well in excess of demand. Realizing the need for a new market for the product, Norway began looking abroad.
It took them 10 years of information gathering, consumer influencing, and consistent campaigning before the Japanese people were willing to integrate salmon into their culturally-significant cuisine, but eventually, the campaigners were so successful at influencing buyer behavior that demand outstripped their ability to supply, driving the price of salmon through the ceiling.
The point? With the right information, something as seeming unyielding as consumer behavior can be influenced to produce a unique and sustainable competitive advantage. Now, there are obvious limitations to this. You couldn’t sell a tube of toothpaste for $1000, but with the right branding and positioning, driven by the right market intelligence, you could for $100 (trust us, we looked it up). It’s about truly understanding your customers, how you relate to them, and where you can impact your (perceived) value in line with their demands. This stems from your ability to monitor and understand consumer trends, how they view your brand (in isolation and alongside your competitors), and ultimately, what value they equate to your products.
Threat of new entrants
What is the likelihood of a new competitor ‘setting up shop’ in your neighborhood?
More often than not, this has to do with the barriers to entering your industry such as whether it is a highly regulated industry, or a business that takes large amounts of capital to set up. For example, there are extensive barriers to entry for a pharmaceutical company, including cost and regulation, compared to something like a consultancy, whose only overheads (in this remote environment) could be the human capital it employs.
It isn’t just new businesses setting up in your neighborhood that is critical to identify, but new products or services that might be coming to supplant your own. In both these cases, information is critical to ensuring you can maneuver appropriately or get your product to market ahead of the new entrant.
Threat of substitutes
How easily can your products be supplanted by an alternative? Not products that are directly competitive, but some new innovation or category of product. Think, Taxis → Uber, or programmatic TV → on-demand streaming, and so on.
One of the greatest successes in this space is the (perhaps overused) story of Amazon’s rise. Long story short, having already revolutionized the book-sale market in 1998, Amazon identified the encroaching substitution of hard-copy books by e-readers. Rather than competing head-to-head with this digitized version, Amazon launched Kindle. In 2010, e-book sales had surpassed sales of paperback books for the first time in the US, of which Amazon is expected to own close to 50% of the market share.
The threat of substitution differs wildly by industry, yet with the information and foresight needed to see shifting market demands, organizations are able to turn what could be the threat of substitution into the opportunity of first-to-market innovation. This foresight may come in the form of regular intelligence briefings or tailored reports, designed not only to keep you updated with innovation in your category but also how this relates specifically to your organization’s position.
Competitive advantage, as defined by Investopedia, is “the factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals.” Ultimately, it is a critical success factor in the longevity and profitability of any business.
So, by using one of the fundamental models of identifying competitive forces and building a strategy that enables a long-lasting competitive advantage, it becomes obvious how critical accurate and timely information is in responding to each of the forces effectively. Therefore, for any business looking to establish a sustainable competitive advantage, harnessing the power of information and identifying the relevant insights to determine your strategies is key.