Porter's Five-Force model - Essay Example

Porter’s Five Forces Model As explained by Swaan, Porter’s five forces model of competition helps a firm to gauge the level of threat which it mightface from competition in the industry. It helps firms understand the barriers it might face while entering and exiting an industry. Porter’s five forces model help firms set their international strategies for expansion, what markets to enter and through what channel to expand. Using Porter’s five forces model to gauge the competitiveness of any international market, gives a comprehensive situation of the industry norms and principles practiced in the latter.

It is crucial for any international business to critically study the competitive environment of the industry. The number of close substitutes, availability of resources, buying power of the consumers, threat of new entrants and the level of rivalry between existing firms must be studied closely to determine whether the industry would present the firm with a favorable and profitable environment. Porter’s Five forces model allows a firm to critically analyze each and every factor in the respective elements of industry competitiveness noted above (Swaan et al, 1999).

Porter describes five forces which affect the industry’s competitiveness. The Threat of Substitute Products available in the market determines the power which a business may have in the industry. If the product is a generic one which has high substitutes in the market, the industry will be considered as highly competitive. Similarly, high level of close substitutes means that the buyers’ cost of switching is low and imposes a high threat to the firms. Besides this factor, all the factors are included in Figure 1 (Swaan et al, 1999).

Likewise, if the buyers in the industry have a high negotiating power, the firms will be lead to lower their profit margins and the prices. A high negotiating power means that there would be less number of buyers as compared to the number of sellers in the market. Also, switching costs would be low and the products would be common rather than differentiated. Simultaneously, when there are fewer suppliers in the market who sell highly technical or hard to procure raw materials, they would have more negotiating power (Swaan et al, 1999).

The ability and the ease of new entrants in the market also say how much competition a firm can expect in the future. With all these specifics, comes rivalry between firms. If one promotional campaign is followed aggressively by competing firms, the rivalry would be high. Similarly, the level of product differentiation besides other factors noted in Figure 1 explains rivalry amongst firms (Swaan et al, 1999). Critique Porters Five Forces model assumes a simplified market. As put by Grundy, it does not take into interrelations and correlation between different industries and fails to consider other industry dynamics such as interdependency, business models followed by competing firms: such as supply chain processes or market positioning, information systems, strategic alliances etc.

These factors can predominantly be found in any industry and also has a high impact on the firms’ performance. David explains that Porter’s Five Forces model however, giving a detailed analysis of the competitive environment a firm is faced with enables business managers to keep every detail of competition in their mind while taking decisions (David, 2005; Grundy, 2006). ReferencesSwaan, A. H., & Waalewijn, P. (1999). A knowledge base representing Porters five forces model. Rotterdam: RIBES, Rotterdam Institute for Business Economic Studies.David, F. R. (2005). Strategic management: Concepts and cases.

Upper Saddle River, N.J: Pearson Prentice Hall.Grundy, T. (January 01, 2006). Rethinking and reinventing Michael Porters five forces model. Strategic Change, 15, 5, 213-229.