The Five Forces by Michael Porter - Essay Example

Background The Five Forces by Michael Porter provides a realistic evaluation of prospective stages of profits, opportunity and risk of a company inan industry (Abell, 1999). The model of Porter is according to the framework of corporate strategy and the threats in the company's external environment. The model gives emphasis on the competitive strategy that an organization implements in accordance to their understanding of the structures in the industry and the changes they undergo (Bakos, 1998). Porter's has initiated the five forces that formed each industry and each market. This model distinguished the strength of rivalry and hence the revenues and attractiveness of an industry. Five Forces Model can be utilized as an instrument to enhance a strategic edge over the rivalry of companies inside an industry in a competitive manner. The Five Forces Model is as follow (Bowers et al, 1990): Suppliers Buyers Entry/Exit Barriers Substitutes Rivalry The characteristics of these forces provide the companies the appropriate framework to give them the ability to create the necessary strategies in order to be successful in the industry (Thurby, 1998). Supplier Supplier attentiveness Value of quantity to supplier demarcation of participation changing costs of company's in the industry existences of substitutes in the industry threat of familiar incorporation Cost comparative to entirety acquires in industry Buyer Power negotiating power Buyer number Buyer data Brand distinctiveness Price sensitivity Threat of reluctant incorporation Product demarcation Buyer attentiveness vs industry Existence of substitutes Buyers' rewards Entry/Exit Barriers Absolute cost advantages Propriety learning curve Access to inputs Government or other binding policy Access to inputs Government or other binding policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products substitutes Rivalry Exit barriers Industry concentration Fixed costs Perceived value add Industry growth Overcapacity status Product differences Switching costs Brand identity Diversity of rivals Corporate stakes Service Level of service compared to others Added value perceptions Dynamics with other attributes To provide an in-depth review of the industry where a company dwells, the researcher will use Porter's five forces model (Campbell et al, 2002). The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces (Cemal and Keskin, 2003). The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. The discussion will be initially covered by the description of the buyer's power over the industry followed by the depiction of the power of suppliers over the companies (David, 1999). Another attribute of the industry that will be taken into account is the intensity of competition among companies as well as the level of potency of new companies who have recently entered the market of retail. And finally, the ability of substitute product to affect the business disposition of a company will also be taken into consideration (David, 2001). Buyer's Power Based on Porter's five forces analysis, companies in the industry sell to a few large customers/buyers (Downes, 1999). Likewise, the industry also displays an apparent impracticality for customers/buyers to switch from one source of supply to another. This is reflected by the cost of raw materials as well as the costs of operations. Moreover, the products offered by companies in the industry are essentially interchangeable and indistinguishable (Gratton, 1999). The product could also be considered as a commodity in an industry. Moreover, the industry shows that the cost of the product and service represents a relatively large percentage of the buyer's and customer's total cost (Hardy and Clegg, 1996). Nonetheless, the customers could if desired backward-integrate specifically by acquiring a company in the industry. Suppliers' Power Many suppliers provide raw materials to the industry. Moreover, companies in the industry are not likely to backward-integrate. On the other hand, it could also be posited that the companies in the industry are the primary source of revenues for the suppliers. This makes the competition among suppliers more rigid (Hax and Majuf, 1996). Likewise, if raw -material costs get out of line, companies in the industry would be able to have a hard time using a different type of raw material to produce the product. The industry is also characterized with the quality and costs of raw materials having a significant impact on the quality and price of the products and services produced by the industry (Hunter, 2003). Moreover, the raw materials provided by suppliers are essentially interchangeable and indistinguishable (Leek, 1997). The raw materials are essentially commodities. Likewise, in an industry where loyalty is also considered necessary, there is also the possibility for the suppliers to forward-integrate. Rivalry Among Competitors Companies in the industry considered to be diverse in their history and culture and in how they do business (Liou, 2000). Moreover, the product/service sold by the industry has low storage costs or is not perishable. Nonetheless, the industry is experiencing fast market growth. The products offered by companies in the industry are essentially interchangeable and indistinguishable (McCarthy, 2003). It has also been established that the product provided by the company is a commodity to a major part of its stakeholders. Moreover, it also shows that there are considerable numbers of large competitors that dominate the industry. In the said industry, companies in the industry have high fixed costs and spend a lot of money on plant and equipment (Miller, 1992). Likewise, production capacity, to be economically feasible, must be done in large, expensive increments. Significant barriers as well hinder companies that want to exit the industry. These include regulations, labor agreements, costs of closing facilities, and the absence of secondary market for assets (O'Connell et al, 1999). In addition, it could also be observed that staying in the industry is of great strategic importance to companies in the industry, probably because they have nowhere else to go. Threats of New Entrants The economies of scale play a significant role in the cost of produce the product and service (Pearce and Robinson, 2000). Companies in the industry have low fixed costs and spend relatively little on plant and equipment. Moreover, competitors in the industry are not likely to cut their price to defend their market position. In an industry experiencing fast market growth, patents, proprietary knowledge, and brand reputation are also considered as barriers for companies entering the industry. Threat of Substitute Products The price of substitute products is more expensive. This provides the industry a great following. Moreover, the quality, features and benefits of substitute products are generally lower (Porter, 1996). The Limitations of Porter's Five Forces Model Some industries view Porter's Five Forces as a model that represents them, such as the entertainment industry is unstable, the telecommunication industry are fickle, computer companies are in mergers, utility companies are going down, while the real estate industry is growing (Siegel, 1992). The Five Forces of Porter can guide these industries to have a better understanding of the different activities in these industries and also serves as a guide for enhanced strategic plans and decisions. Yes, indeed, Porter is considered to be a management guru and he has a great influence in the field of strategic management. The five forces model and the value chain model has become a template of the management industry (Huter, 2003) On the other hand, Porter's view has been the topic of appraisal under the impression of the development of Internet Economy during the last decade. Since the economic environment has undergone dramatic changes everyday, the five forces has been left behind. The continuing development of the Internet and different types of e-business implementations has a great impact in all industries. Porter's model emphasizes on the critical evaluation of the actual situation such as the customers, suppliers and competitors, and other conventional developments like new entrants and substitutes. The strengthening of the competitive advantages inside the five forces model, therefore, it is evident that the model cannot explain the present dramatic changes that are capable and powerful to change the whole industry (Pralahad and Hamel, 1990). In this time of age, according to Downes in his 1998 study, Porter's five forces model is not practical anymore for the improvement of the company's strategy, Porter must keep in mind that a high standard quality should never be according to a few chosen models. Strategic management should be purely based on comprehensive analysis of both internal and external factors and on their prospective transformation and improvement. While, according to the study of Turner in 2003, the framework should have the core principles of the innovative-industrial strategy that can be accessed from partisan infrastructures and making all the resources accessible to the activities inside the industries. These beliefs have pointed the insufficiency of Porter's frameworks. The present industries are greatly influenced by the innovations in technology particularly in information technology (Siegel, 1992). Hence, it is not feasible or not possible, to create a strategy that would focus on the Porter's five forces model. The model of Porter can only be useful to established and well-known companies because of its long-term strategy. In this way new and small companies are having some second thoughts. Although, they see that they need to think big and make expansion possible according to two distinctive things- strategy and operational efficiency. Every company has its own strategy, each company is integrating to the readers and would base upon the nature of their business, the location and the region involved (Arons and Waalewijn, 2002). It is just right to say that the strategy used by Porter is not appropriately designed specifically for small companies that are trying to get the larger scope of the market. In order to gain strategic objective a company should well-define the needs of the organization (Thompson and Strickland, 2003). According to the five forces, the members of the company should have a critical meaning in their chosen fields in which endeavours are focused so that the systems of the information needed be integrated to the company information management systems. If the firm will be complacent to their present competitiveness, in whatever environment, growth is impossible. Although, Porter's five forces model used as a mechanisms of approach in identifying the requirements of the company and in sharing to the outline or the backbone of a company's system this is not enough to guide their competitive advantage (Leek, 1997, O' Connell et al, 1999). The digitalization, globalization and deregulation have become very strong forces in the past few years that is why the five forces of Porter cannot be fully applied anymore. Today's industries are greatly pressured by the technological development, particularly, the conventional drivers of the industry. The five forces centred its analysis to the economic situations of the time they are created by Porter (Chow and Holden, 1997). In conclusion, a company must fully understand the competitive environment that they are in and competing; in order to do this they must be successful in achieving their own objectives or goals. Based on the above discussions, the five forces of Porter has its own limitations, it is not necessary to implement to the strategic analysis of companies anymore, but a company must also learn on how to use five forces as a framework, they should combine this model to some other influential factors in the business environment. 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