Effective Competition in an Industry Subject to Disruptive Technologies

In 1980 Michael Porter published a book titled “Competitive Strategy”. Included in the book was a description of the five forces that shape the structure of all industries. These forces are Direct Rivals, Buyers, Suppliers, Substitutes and Potential New Entrants. Andy Grove, former CEO of Intel has suggested that the model needs to be modified to include a sixth force: Complementors. Complementors are companies that provide value enhancing products to an industry. An example of this is a company that creates apps for cell phones. Consumers may make purchasing decisions regarding cell phones based on the apps that are available for these devices.Direct Rivals are those firms in the same industry. Rivalry is stronger when products are similar in features or when there are low switching costs. Some common strategies for competing against direct rivals include price discounting, advertising, innovation and customization. Substitutes refer to the products offered by sellers in adjacent industries. For example, Splenda is a substitute for sugar. Producers of substitutes are perceived as a stronger threat when consumers believe that the substitutes are comparable in quality and performance. Suppliers provide products to an industry. For example, Intel provides semiconductor chips to computer manufacturers. Suppliers have more power when the supplier industry is dominated by a few large companies. Buyers are those companies that buy from an industry and have more power when they are large. For example, Wal-Mart has the power to influence prices of items sold at Wal-Mart since sellers’ products are exposed to a broad market of consumers.Potential new entrants are startups or companies in other industries that might choose to enter the industry under consideration. Strategies used to defend against these potential new entrants include economies of scale, learning based economies resulting from experience, patents, exclusive partnerships with suppliers, favorable locations, a first mover advantage resulting in strong brand preferences and consumer loyalty, a large existing user group that use the product to collaborate, high capital requirements, partnerships with distributors and retailers and restrictive government policies such as licenses and permits. These are generic strategies since the potential new entrant does not yet exist. Since a disruptive technology may cause fundamental changes in an industry and may be used by a potential new entrant, more specific strategies may be required.Blockbuster is an example of a company that was slow to respond to a disruptive technology for the VHS movie rental business: the invention of DVD discs and players. David Cook opened the first Blockbuster store in Dallas in October, 1985. In 1997 the first DVDs were released. Netflix was founded in 1997 in Scotts Valley, California by Marc Randolph and Reed Hastings and opened for business in 1998. Netflix offered DVD rentals by mail. Only in 2004 did Blockbuster start offering a DVD by mail rental service. On September 13 2010, Blockbuster filed for a Chapter 11 bankruptcy whereas in July 2014, Netflix had approximately 6 million DVD subscribers.In order to effectively use Porter’s model when an industry is subject to disruptive technologies I would suggest that a virtual competitor should be constructed. Essentially this is a prediction of a company that could be formed using a disruptive technology. If the business model of the virtual competitor is superior to that of the existing company it is only a matter of time before someone creates this company. The use of this technique enables the analysis of such companies before they are created. The competitive strategies used by these virtual competitors and their effectiveness would be determined by analyzing the impact of their business model on the existing customer base. Once this is done specific strategic responses may be developed including a radical change in the business model that incorporates the new technology. The value of this approach is to enable companies to take timely action before the new entrant is able to establish a strong foothold in the industry.