Mg 206 - Porter's 5 Forces

Candidate Number: 50413

MG206: Essay for Lent Term 2014-2015

Word Count: 1891

1. Critically analyze Michael Porter’s five forces of competition framework

The changing nature of today’s competitive arena demands firms to expand the definition of competition by looking beyond established industry rivals, as Porter explain in his 1979 Harvard Business Review (HBR), four additional competitive forces can influence a firm’s prospective profits. The extended rivalry stemming from those five forces defines an industry’s structure, which in itself sets industry profitability, whilst shaping the nature of competitive interaction. Understanding the forces that shape industry competition provides the starting point for developing strategy. To a great extent, the five forces address the question of why industry profitability is what it is, however there are certain weaknesses inherently present in the model which managers should acknowledge when conducting the analysis. Further Since Porter’s five competitive forces rely on the principals of microeconomics; the ability of the model to accompany the changing trends in the competitive environment, such as the increasing role of the Internet and globalisation may be limited.

This essay will first focus on the underlying assumptions of the Five Forces in order to provide a guideline to critically analyze the framework as an effective tool to guide managers towards fruitful strategic actions. It will further question the extent to which the framework is able to capture the dynamic nature of an industry’s structure as Porters model is inherently static further raising problems of causation. In addition it recognizes the usefulness of the five forces as providing practical guidance for strategists, whilst further analyzing potential weaknesses of the model associated with uncertainty and the idea of complementary forces. Such limitations may lead to common pitfalls and misjudgments when both conducting the analysis and interpreting the results, this may question the effectiveness of the model as a guide for strategists whilst suggesting the framework should be used in conjunction with other models.

Michael Porter’s five competitive forces framework is based on the assumption that “industry structure drives competition and profitability”, not the business cycle or regulatory matters. He argues such factors can affect industry profitability in the short run, however in the medium and long run ultimately industry structure will mirror profitability. The five competitive forces include: threat of entry, the bargaining power of buyers and suppliers, rivalry amongst existing competitors and threat of substitutes. The model claims that by analyzing all five competitive forces one can gain a complete picture of what is influencing profitability in a specific industry. However one major limitation of the model is that of chronological thinking, Porters model is inherently static, representing only aspects of the present day. As strategic planning involves long-term objectives and the pursuit of adaptability, the Five Forces may prove too static to be relied upon outside of short-medium-term objectives.