Changing industry structure
The structure of an industry is embodied in five competitive forces that collectively determine industry profitability: the power of buyers, the power of suppliers, the threat of new entrants, the threat of substitute products, and the rivalry among existing competitors (see Exhibit V). The collective strength of the five forces varies from industry to industry, as doe’s average profitability. The strength of each of the five forces can also change, either improving or eroding the attractiveness of an industry.5
Information technology can alter each of the five competitive forces and, hence, industry attractiveness as well. The technology is unfreezing the structure of many industries, creating the need and opportunity for change. For example:
• Information technology increases the power of buyers in industries assembling purchased components. Automated bills for materials and vendor quotation files make it easier for buyers to evaluate sources of materials and make-or-buy decisions.
• Information technologies requiring large investments in complex software have raised the barriers to entry. For example, banks competing in cash management services for corporate clients now need advanced software to give customers on-line account information. These banks may also need to invest in improved computer hardware and other facilities.
• Flexible computer-aided design and manufacturing systems have influenced the threat of substitution in many industries by making it quicker, easier, and cheaper to incorporate enhanced features into products.
• The automation of order processing and customer billing has increased rivalry in many distribution industries. The new technology raises fixed costs at the same time as it displaces people. As a result, distributors must often fight harder for incremental volume.
Industries such as airlines, financial services, distribution, and information suppliers (see the upper right-hand corner of Exhibit IV) have felt these effects so far.6 (See the insert, “Information Technology and Industry Structure,” for more examples.)