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Chapter 3 Strategy and Information Systems
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Q3-2 What Five Forces Determine Industry Structure?

Organizational strategy begins with an assessment of the fundamental characteristics and structure of
1
an industry. One model used to assess an industry structure is Porter’s five forces model, summarized
in Figure 3-2. According to this model, five competitive forces determine industry profitability: bargain-
ing power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants,
and rivalry among existing firms. The intensity of each of the five forces determines the characteristics
of the industry, how profitable it is, and how sustainable that profitability will be.
To understand this model, consider the strong and weak examples for each of the forces in
Figure 3-3. A good check on your understanding is to see if you can think of different forces of
each category in Figure 3-3. Also, take a particular industry—say, auto repair—and consider how
these five forces determine the competitive landscape of that industry.
In the opening vignette of this chapter, Cam is concerned that focusing only on physical secu-
rity may place Falcon Security at a competitive disadvantage. She thinks the company could expand
into agricultural survey, industrial inspection, real estate videos, and wedding videos. She’s also
worried about being financially dependent on a few large industrial accounts. Figure 3-4 shows an
analysis of the competitive landscape Falcon Security faces.
The large industrial accounts that Falcon Security serves could demand more services or
lower prices because they account for a large percentage of Falcon Security’s revenue. The threat
of substitutions, like customers choosing to install wireless digital Web cameras, is somewhat
strong. But these substitutions may not be viable options for some of the industrial clients due
to the lack of internal technical expertise or physical distance limitations. A new entrant, like
Amazon starting to offer surveillance service using its delivery drones, could be a substantial
threat. But Falcon Security could respond to this by offering additional services, like real-time
3D mapping. Or it could enter new markets like agricultural survey and industrial inspection.
Figure 3-2
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Competitive Advantage: Creating r 6JTGCV QH PGY GPVTCPVU
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(The Free Press, a Division of Simon r 4KXCNT[
& Schuster Adult Publishing Group).
Copyright © 1985, 1998 by Michael
E. Porter.

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Examples of Five Forces