Term Paper on "Michael Porter's Five Forces"

Term Paper 7 pages (1956 words) Sources: 1+

[EXCERPT] . . . .

Michael Porter's Five Forces

Porter's Five Forces model has long been considered the standard in the world of marketing strategy and economics. Nickols (2003) points out that Porter is for the most part the "undisputed guru of the competitive strategy" identifying the five forces that drive competition including: threat of entry by new competitors, intensity of rivalry, pressure from substitute product, bargaining power of buyers and bargaining power of suppliers (p. 3).

Yet despite the praise the Porter often receives, many critics and business analysts believe that his model is now outdated. Porter's model is sometimes described as generic, and there are many researchers that point out that the model, while applicable to the era of the eighties, no longer applies to today's complex, multi-disciplinary and technologically advanced marketplace. These ideas and more are explored below.

Critique Porter's Five Forces

Many researchers have suggested that there are weaknesses in Porter's model as applicable to the corporate marketplace today. Recklies (2001) suggests that the main weakness of the model "results from the historical context" that it was developed in.

Because Porter's model was developed in the early 1980s, the economic patterns that dominated society were much different than what they are today. In the early eighties the primary patter observed was one of cyclical growth, and this was characterized throughout the national and global economy (Recklies, 2001:1). Generally in this type of environment the primary corporate objectives one would see would include increasing profitability and surviving in the competitive global marketplace, and to achieve these aims an organization would have to optimize strategy with regard to their external environment (Recklies, 2001).

Harfield explores a new interpretation and examines this idea of optimal strategy of Michael Porter's five force analysis. Harfield points out that most associated the work of Michael Porter with strategic management, which is inevitably intertwined in his theories and frameworks. Porter's works are according to Harfield fundamental to the field of strategic management.

Porter's work is generally the subject of much theoretical debate and testing within the realm of strategic management (Foss, 1996; Sharp & Dawson, 1994). Harfield however suggests that Porter's influence is more often as a reference rather than a direct resource for many theorists. For example, Chafee (1985) suggests that strategy with regard to management is a condition that is both multidimensional and situational, but suffers from three conflicting models of interpretation including linear, adaptive and interpretive (Harfield, 2004:1). Generally Chaffee suggests that most research with regard to strategic management focuses on planning and forecasting, a function of linear management (Harfield, 2004:1). He goes on to suggest many other models but does not list Porter's five forces in any of these models.

Fahey & Christensen (1986) do comment on Porter's work, particularly his five forces model. They suggest that strategic management contains strategic content. They suggest that a distinction exists between academic and practical literatures regarding strategic content and that the foundations for strategic management lie in corporate and competitive strategy, as identified by Porter and others (Harfield, 2004:1).

Mintzberg (1990) has attempted to create an encyclopedia of sorts with regard to strategic management research, and defined 10 specific schools of strategy research "Which have developed from the emergence of strategic management as a field of study" (Harfield, 2004:2). He suggests that Porter's models place him in the category of 'positioning school' which "advocates strategy formation as an analytic process" (Harfield, 2004:2).

Porter generally suggests that a dynamic relationship exists "between enterprise strategy and industry structure" (Harfield, 2004). Cotterill (1994) suggests that Porter's Five forces model does not "explicitly capture industry specific government intervention as a factor determining industry attractiveness" (22).

During the 1980s when Porter developed his model, many organizations in various industries had operated in a manner that was both stable and predictable, as compared with the dynamic that organizations face today, which is often more chaotic and unpredictable (Recklies, 2001). There are many things that Porter's model assumes which open the door for criticism.

For one from an economic perspective Porter's five forces model assumes that the market organizations are operating in is classically perfect; thus the more an industry is regulated the less meaningful and applicable his model is to strategic management (Recklies, 2001). Further, Recklies (2001) points out that the model is most applicable for analyzing simple rather than complex market structures, and suggests that a comprehensive description and analysis of the five forces Porter suggests is nearly impossible given the complex nature of some industries which face "multiple interrelations, product groups, by-products and segments" (Recklies, 2001).

Generally if one follows Porter's model in a complex environment they may focus too much on particular segments of the industry which may result in missing important business and economic elements. The model also assumes that the market is rather static, which is not the case in today's dynamic economic marketplace, where technological breakthroughs and "dynamic market entrants" from start-ups and other industries have changed the nature and scope of many business models (Recklies, 2001). Further there are entry barriers and even relationships that exist along the supply chain that aren't considered with regard to the modern economy.

The Five Forces model can be used for some analysis, but may not be able to provide meaningful advice in all circumstances.

Recklies (2001) also notes that the model is based on the idea of competition, which assumes that companies try to gain a competitive advantage over other corporations, customers and even suppliers in the global marketplace (Recklies, 2001). By doing so Porter does not take into consideration things including: "strategic alliances, electronic linking or information systems of all companies along a value chain" whether a traditional or online marketplace (Recklies, 2001).

Though Porter's model does have limitations in today' marketplace, is still is capable of supplying business models to managers and helping organizations understand the intricate dynamics that operate the marketplace. It may also help managers think about the manner in which the industry is structured in a simplistic way, as a "starting point" for future analysis (Recklies, 2001).

Use of the Five Forces model can provide some information regarding a few aspects of corporation planning, including: statistical analysis, dynamical analysis and analysis of options (Recklies, 2001). Statistical analysis will involve determining the potential an industry has for success, with regard to profitability. Dynamical analysis will reveal if there are drivers for change within an industry as well as revealing potential information about the profitability of a given industry (Recklies, 2001). Analysis of options simply refers to providing and understanding of what the competition has to offer and what competitive forces may exist within a given industry; such analysis might help lead an organization to a new strategic position or help them differentiate between competitive products and potential partnerships (Recklies, 2001).

Like Recklies, Downes (1997) critiques Porter's model and suggest that it focuses too much on the economic conditions that existed during the 1980s, thus is not as widely applicable in modern society as it might otherwise be. Downes further suggests that the viability of the model is somewhat limited given the complex nature of business today and the rapidly changing conditions that make up the economic workplace. Downes also proposes avenues for structuring and strategically analyzing an organization, suggesting that digitalization may be a force organizations must reckon with as an important factor of the new economy (Downes, 1997). He also acknowledges that technological progress and information technology will generally change the shape and scope of organizational practice in the future (Downes, 1997).

Downes (1997) does point out however that many of today's organizational leaders and planners have been raised on Michael Porter's model and theories contained in "Competitive Advantage," thus change will be slow in coming if any. He suggests that Porter himself understands that in today's marketplace digital technologies have become a more important consideration as they have "thrown nearly every industry into a new era of competition" where many of the old rules do not apply or are not valid.

Conclusions About the Efficacy of Porter's Model

The problem with Porter's model in today's society is that it presumes that competition is predictable and identifiable, and that business environments will tend to stay in place while organization's analyze them; however digitalization and globalization as well as considerable deregulation of the marketplace have made this assumption nearly impossible (Downes, 1997).

Digitalization and technological advances are by far the most impacting aspect of the new business model. An information explosion of sorts is occurring in the global marketplace, creating networks and organizations that involve "unfamiliar, unpredictable competitors and partners" that are consistently changing before a customer or competitor is able to strategically analyze them (Downes, 1997). In addition the global marketplace has created a market where organizations are competing as one very large network, and many businesses that were once local are now global; many of these new global entrepreneurs are creating networks of partners and suppliers and customers are engaging n more "border-less" shopping for their everyday needs (Downes, 1997).… READ MORE

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