Week 6 Reading Reflection

This week we read the article of Michael Porter: The Five Forces that Shape Competitive Strategy.
 It was really interesting. The reader's major focus was how the five forces - profits, costumers, suppliers, potential entrants, substitute products - define an industry's structure and its competitive relationships with other industries. An industry determines its own strategic positioning based on the industry's structure. The more the industry understands its structure the more effective its strategy is. Industry structure grows out of a set of economic and technical characteristics. These characteristics determine which of the above competitive forces is a major contributor to the industry's strategy. The first thing that the author talked about more in depth was the threat of entry. This is the threat other industries "feel" when a new industry or an already existing one introduces something new into the market, just like Apple did when it entered the music distribution business with iTunes. When the threat is high, other industries are forced to keep their prices low or boost investment to deter the new competitors. The threat, in this case, becomes a barrier in the potential profitability of an industry, especially when the competitors have pretty much a stable position in the market place. I wasn't very sure about what the "threat measurement" stands for because I'm not very accustomed to business terms, but this is what I got out of the whole concept.

Another issue discussed in the article is the sources of barriers of a new entry into the industry. One of the sources is the "demand-side benefits of scale"(also known as network effects). These are benefits that arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company. These benefits discourage entry by limiting the willingness of costumers to buy from a newcomer and by reducing the price the newcomer can command until it builds up a large base of customers. In my opinion, this isn't always true. People may have chosen to be devoted customers for a specific company that satisfies their needs. When another company, however, creates a whole new experience for them and takes what they already knew to another level then the competition will be really high. In this case, the new company is taking a risk of introducing something new that they do not know how the people will react to. Of course, the prices have to be low at first to attract costumers, but if the quality of the new type of service is much better than the previous one, the profit of the new company will rise more quickly than that of the older company.