The model “Porter’s five forces” was originally developed by Michael Porter in 1979, as a strategic tool to help businesses analyse the overall competitiveness of its industry environment and thus the overall attractiveness of the industry in term of profitability. In other words, it shows an organisation how competitive its external environment is. As the competitive directions are strongly affected by the industry structure, Porter’s five forces model help businesses determine its position of an organisation when compared with its competitors in the industry and evaluate the profitability in the industry. According to (Porter, 1980 p.3, 4), profits are the return of capital invested by businesses and businesses uses the strength of forces to secure their return. Otherwise stated, businesses utilise the competitive forces to drive up profit into the businesses and earn profit on return. Businesses, therefore, uses this model to plan strategies. This essay will critically analyse the advantages and limitations of the application of these forces on a company’s position in a competitive market.
According to (Porter, 1979), Porter’s five forces model consists of five major components that shows the attractiveness of an industry. The first forces, supplier power refers to the ability of suppliers to drive up the price of the inputs. It is crucial that a company has more potential suppliers to choose from, so that the suppliers would not have a strong power to push up the price. On the other hand, the fewer suppliers available in the market, the more power the suppliers have to charge a higher price and thus profitability varies. The next forces, buyer power refers to the ability of the consumer to push down the price. In a situation where there are a lot of buyers, they have a weaker position to drive up the price. Whereas a small number of buyers seems to hold more power in controlling prices. The third forces, threat of substitution, refers to how likely the consumer is able to find an alternative product. A consumer is likely to switch to a substitute product that offers similar benefits if the cost of switching is low, the substitute offers a lower price and better quality. As a result, the threat of substitution is high and less profit potential. The fourth forces, threat of new entrants, refers to how easy for new firms to enter the market if it is profitability. Firms will face lesser threat it is operating in a market with high barriers to entry, such as high fixed cost or start-up cost or regulations. The fifth forces, competitive rivalry, looks at the numbers of competitors in the market and the quality of the products they produced. Airline industry as an example where they compete with different routes and undercut each other prices to steal gain a larger market share by stealing customers away from the competitors. The forces above sum up the level of competition within an industry.
Porter’s model provides benefits to an organisation that uses these forces to analyse market conditions. According to (Recklies, 2001), the model outline three advantages of the model’s application in a firm’s planning. Firstly, it enables firms to determine the attractiveness and profitability of the industry, helping firms making decisions about entering or leaving the industry. It also illustrates the comparison of competitive forces impact between a firm and its competitors, letting firms having a better understanding of its marketplace and planning for a more applicable strategy to its current situation. Secondly, firms obtain the possibilities of improving their competitive position by understanding the analyst of five forces framework, such as differentiation, strategic partnership. Thirdly, firms are able to indicate the growth within the industry by using the combination of both Porter’s Five Forces and PESTE analysis. The five forces framework provides an analysis of the microenvironment of an industry, while PESTE analysis focus at a macroenvironment of the market. With both analysis, it provides a clear overview of the industry.
Besides the advantages of the model, there are limitations when analysing an industry. Grant (2002, p. 89) stated that most economists criticised the applications of Porter’s Five Forces model in the market. This is mainly due to the static character of the model. (Hill and Jones, 2007, p. 66) conclude: “The Five Forces model is of limited value because it represents no more than snapshots of a constantly changing situation. Thus, managers must constantly repeat industry analysis and pay attention to changes in the forces of competition.” The emerging economy puts challenges for firms using Porter’s five forces analysis as information from the analysis of the model will only be suitable for short term strategy due to the rapidly changing external factors.
In the article written by (Recklies, 2001), it refers to critics as a changed in the operation of the industry. During the eighties, the model was developed where it supposed perfect competition market and emphasized on steady market structures and vigorous competition. The model has limited application on more regulated market such as conglomerate market. Nowadays, the advancement of internet, technology and e-commerce changes the structure of the industry. According to (Downes, 1997), digitalisation, globalization and deregulation are the three main forces that influence businesses operation. With the help of the internet, firms access more information compared to the past, and therefore can eliminate future obstacles and unfamiliar competitions and planning better strategies. Globalisation allows firms to have more varieties of potential buyers and sellers, meaning that buyers will have a smaller threat to firms in pricing and sellers have smaller power to drive up the price, such as cost of raw materials, hence profit increases. Deregulation opens up to more incomers into the market which might drive up the competitiveness between rivals, putting pressure to innovate and produce better quality products. Deregulation also encourages firms to expand its operation into different types of industries. In overall, Porter’s five forces model does not encounter for the changes in industrial competitiveness and impact of technology advance to businesses operation.
In conclusion, Porter’s five forces model has been criticised by researches and studies in the academic world, but it still provides a strong analysis to businesses. Businesses should consider the advantages and limitation of the model and with the analysis combination of PESTE model, to achieve a better approach in strategy planning and this approach is advisable to all kinds of business model.
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