Porters Five Forces Model

a Guide for the UniSA BIS Course

Terence Blackburn Feb 2009

There are a number of theoretical models that allow organisations to evaluate their
position within their industry. Porters model is quite old (relatively) and it is not the
only one available and, depending on who you talk to, it may not be the best.
However, for this course, we will use it as an example of applying information
systems theory to the real world.

The motivation for this primer is that students are failing to use the model in a useful
way and they are losing marks in their end of course exam.

We will use, as an example, the Pfizer case from Chapter 12, page 453 of the 9
th

edition of the Laudon and Laudon text: Management Information Systems, Managing
the Digital Firm.

For the assignment on Porters 5 forces model, students need to provide a quick
overview of the organisation and the environment in which it operates. Do not do this
in the exam (unless asked to) or you will lose time and gain no extra marks for your
effort. I wont provide the overview here I can leave that to students but I would
like to make some comments on the pharmaceutical industry. Download the case, read
it and consider the following.

Lets apply some common sense. We know that when people need a prescription
filled, they go to a chemist (or drug store, pharmacy or whatever it is called in your
part of the world). When they talk to the sales assistant, they may be asked if they
want to purchase a cheaper brand, if one is available - this is certainly the case in
Australia. Given that t he pharmaceutical industry is the biggest industry in the world
(followed by the toy business), it means that it is a very competitive environment and
there will be a lot of choice for consumers. Having noted that, lets look at Porters 5
forces model.

Reviewing the 5 forces, we can summarise the different influences on an organisation
as follows:

The power of customers
The power of suppliers
The power of existing competitors
The power of new entrants into the market and
The power of substitute products

(Some of you may also point out, correctly, that environmental factors can also have a
substantial effect on an organisation.)

You will not score any marks just for citing the components as this is not using the
model or answering the question. The critical part of this exercise is to evaluate each
of these components and argue whether or not it has a high or low influence on the
organisation in question.

The justification is provided in the form of a table. (This is a very good exam
technique and one that you should use whenever possible. )

Force Power Justification
Customers High The effort to switch to an alternative drug supplied by
a competitor is nil. Customers, therefore, have all the
power when they wish to make a purchase (except in
the case of only one manufacturer for an arbitrary
drug but this is the exception to reality).
Suppliers High It might be possible to argue who has the power when
considering suppliers in this example. It often comes
to a case of supply Vs demand and in this case there
are a number of drug companies requiring the
chemical ingredients from a smaller number of
suppliers. This leaves the power in the hands of the
suppliers.
Existing
competitors
High As mentioned above, even though Pfizer might be the
largest pharmaceutical company in the largest
industry in the world, they still have very serious
competitors. This should be evident from the case
based on the expense and lengths Pfizer goes to in
order produce new drugs.
New entrants Low This is a very expensive industry to enter and,
accordingly, most potential new entrants will think
twice before committing themselves to setting up a
new business.
Substitute
products
High This component also has a serious influence on
Pfizers operation and the companys strategic
thinking. In this case it relates to the existing
competitors component and given the fierce rivalry
between firms, it is clear that more than one
organisation can supply a given drug and there are
plenty of generic brands available. (While herbal
remedies, jungle products etc are also substitutes, they
are marginal and do not represent viable alternatives.)

You would not need to provide this much detail for an exam but almost this much for
the assignment question.

The next question is How does an organisation use this information to craft a strategic
plan for their future? Please review this material from your text book following the
section on the Porter model.