Strategic Reactions to the Five Competitive Forces

by Matthew Murphy

 

There are three possible reactions by firms to the five competitive forces as they affect an industry; positioning the firm where the forces are weakest, exploiting changes in the forces, and reshaping forces to their advantage. 

It is interesting to note IBM as an example for the second option, exploiting changes in the competitive landscape.  Clearly IBM failed to recognize the threat of a substitute product, the PC, to its successful mainframe business.  Intel and Microsoft recognizing this shift in computing resources and power, positioned themselves well to exploit this change at IBM's expense and thus established relative dominance in their industry.  In some ways, I think this example underscores what Porter called "exit barriers.'  We are probably all familiar with the idea of barriers to entry that prevents new competitors from entering a profitable industry, but there are also barriers to exit.  This is the case when a firm has acquired such specialized assets or management processes devoted to a specific type of business that it finds the idea of shifting inconceivable.  This may have been the case with IBM,  which began as a hardware company and had invested so much in the development of mainframes, that it was 'blinded' to  the potential of smaller scale decentralized PC computing.  Exit barriers keep a firm in an industry even if revenues and profits are decreasing. IBM was surprised to find that the demand for its products had been eclipsed by more nimble PC competitors, Dell, Hewlett Packard, and Compaq.

Ironically, IBM may have had a hand in creating and strengthening its own competition.  IBM had pursued the third strategic option as well; reshaping competitive forces to their advantage.  When PCs were first being developed, IBM initially expressed interest and did form a PC Division that was operated separately from the main business line.  In order to compete with the existing products in that market segment, IBM chose to develop an open architecture that would allow it to reshape the nature of supplier power in the industry.  This open architecture attracted allies and suppliers who could develop complementary products and add-ons in the form of software and peripherals for IBM products.  What seemed like a reshaping of competitive forces to redivide profitability, soon became an undermining of the industry structure as IBM lost control of the critical components of the PC, namely microprocessor chips and operating system software, to Intel and Microsoft.  The result of a standardized PC architecture was to invite price competition and shift competitive power to suppliers.  While IBM temporarily improved its position in the industry, it did so by reshaping the industry to one that was much more unattractive in the long term and ultimately pushed IBM to the brink of bankruptcy.

One final lesson that can be drawn from the IBM/Intel/Microsoft competition is the option of expanding the profit pool  of the industry.  Rather than simply exploiting weakness or reshaping the industry to one's advantage, it is possible   for firms to work collaboratively with their suppliers to improve coordination and reduce costs which has the positive effect of reducing cost and price and thereby stimulating demand.  Working with suppliers to increase quality levels and standards may allow for an increased price without additional costs thereby increasing profit.   These actions would increase the profitability of the industry as a whole, not just for the individual firm.  This can be thought of as establishing a collaborative value network, or a 'business ecosystem.'  This is the strategy thatMicrosoft chose which allowed it to establish dominance in the operating system software market.  It expanded profitability throughout the market by setting a product quality standard, in effect making Windows the common language for countless business productivity applications.  By insuring quality standardization, it expanded opportunity, raised quality and price and increased profitability across the industry for itself and its collaborators.  Its dominance lasted until it was supplanted by even more open architectures; open source operating systems, SaaS and cloud-based architecture.