Classroom Companion: Business

8.5.2 
 Porter’s Five Forces Applied to the Digital Economy
Competitive rivalry 
takes place between companies sharing the same market. 
Competition in the digital economy may be on price as in non-digital markets, but 
not always, for example, when the price is zero as it is for several digital goods and 
services. Competitive rivalry in the digital economy is complex. In some segments, 
competition takes place between companies offering digital services and companies 
offering traditional services. This includes e-commerce markets for physical goods, in 
which the online shop (e.g., Amazon) may have advantages since it is accessible any-
time from anywhere and offers products that are not found in the shelves of tradi-
Rivalry among
existing competitors
Threat of new
entrances
Bargaining powers
of end-users and
buyers
Threat of substitute
products or services
Bargaining power of
suppliers
. Fig. 8.5 Porter’s five forces. (Authors’ own figure)
 
Chapter 8 · Value Creation Models and Competitive Strategy

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tional shops. The advantage of traditional shops is that the customer can see, touch, 
taste, and smell the product.
Competition may take place between companies offering similar digital ser-
vices, for example, Facebook and Myspace. In some of these markets, strong net-
work effects may result in de facto monopolies where one of the competitors 
captures the whole or most of the market (as in the case of Facebook versus 
Myspace). In other cases, several competitors may share the market, each having 
market shares that are stable over long periods of time, for example, mobile net-
work operators.
Competition may also take place between companies offering entirely different 
services to their users. One example is Facebook offering social networking and 
Google offering email and web browsing. They do not compete for users but for 
money from the advertising business. This situation may arise in multisided mar-
kets (see 
7
Chap. 
10
). Another example is MasterCard serving two markets: card-
holders and merchants. Since the card is accepted almost everywhere, there is no 
competition with other credit card companies for attracting new merchants. The 
competition is for attracting new cardholders. Airbnb offer services in two market 
segments: hosts and guests. Airbnb is subject to competition in both segments, for 
example, from hotels and travel agencies.
New entrants 
may establish themselves in existing markets. In this context, the con-
cern is about companies producing the same or equivalent goods and services. New 
entrants producing substitutions are considered below. The general effect of new 
entrants is that the profitability of the market for each manufacturer or service provider 
is reduced. In cases where investments are high, competition may lead to the formation 
of oligopolies, resulting in complex and unstable forms of competition. The mobile 
communications markets are oligopolies with few competitors. In other cases, it may be 
virtually impossible for new competitors to enter the market because strong network 
effects may have created high lock-in barriers. This is the case for many social media.