Running an internet business, I wonder whether Porter’s five force model makes any sense for the Internet businesses.

Traditional businesses, would create a strategy which limits the Bargaining power of buyers, limits the bargaining power of suppliers, creates barriers of entry for competition and create models so that buyer is not able to replace/substitute the product…

But the internet seems to have redefined all of it…

1. Bargaining power of Buyers:  Rather than curtailing buyer’s bargain power, internet actually enhances it by its very nature

2. Bargaining power of Suppliers: Again, internet businesses typically bring the transparency..unless the company is not very big, suppliers have reasonable bargaining power… example if flipkart tries to squeeze samsung, samsung might decide to abandon flipkart and go to another shopping portal exclusively.. since suppliers are aware that customer switching cost is minimal

3. Threat of substitutes:  Most of the internet businesses have their IPs freely available in public..i mean code base of some algorithm/engine etc.. so technically there is a very high threat of substitutes / competition

So by very nature of the business, customers rule the game, suppliers cannot be squeezed to the hilt..especially the branded suppliers, and threat of competition and substitutes is very high..

If one would have evaluated internet business on porter’s five force, nothing would have made sense.. then why are these businesses getting crazy valuations…

Also, if all forces are against a company, how come this industry creates winners take all companies which are far bigger than No.2

How has the paradigm changed?

1. Customer Stickiness:   Rather than talking about Bargaining power of Customers, this industry speaks about Customer Stickiness… which is why should customer stick around with your product / company?

2. Power of Aggregation: Rather than talking about Bargaining power of Suppliers, this industry talks about Power of Aggregation which again is pro-consumer, denoting how much value you bring to the table for consumers aggregating suppliers and that in a way defines your relationship with suppliers..

3. Speed of Innovation: The model assumes that change is inevitable and only way to defend customer shift to new substitutes is that product constantly keeps on evolving… So speed of innovation defines the fate of the company…

So instead of 5 forces of porter, there are 3 forces – Stickiness, Aggregation and Innovation which defines Internet businesses.. Unlike the traditional way of looking businesses, which assume themselves as fortress and the one which builds the best fort wins, Internet businesses assume themselves as Magnets which attract stickiness, aggregation and innovation..