Exactly why is digital business so disruptive to traditional business models and traditional notions of industry competition? A useful way to analyze the situation is by looking at Porter’s model of the five forces of industry competition and exploring how digital business is impacting each of the various forces.
According to Michael E. Porter, in one of his landmark books, titled Competitive Strategy, “In any industry, whether it is domestic or international or produces a product or a service, the rules of competition are embodied in five competitive forces: 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.”
Image courtesy of Thinkstock via Computerworld.
Let’s look at each of these five forces and examine the role and impact of digital business:
The entry of new competitors
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.
In effect, tomorrow’s leader may not be someone you know. We often think of industry competition as a perpetual battle between the same set of incumbents, but in reality, things are far more dynamic and transitory. As an example, whereas 89% of the Fortune 500 went out of business between 1955 and 2014, in recent years, according to R “Ray” Wang of Constellation Research, 52% have been merged, acquired, gone bankrupt or fallen off the list solely since 2000.
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. In terms of digital business, this can come from a purely digital substitute or a hybrid digital/physical substitute. Taxi services, such as Uber and EasyTaxi for example, provide a hybrid model via a digital app for consumers and taxi drivers, coupled with the physical taxis.
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