Strengths and Weaknesses of Porters Five Forces Analysis - Essay Example

Porter's five forces model is used to explore the external environment for any business successfully in most of the business plans. But, over the years only MBA's have been using it in their assignments. We do not see any efficient manager applying the theories of the model to analyze his environment and develop their business. This paper explores the strengths and weakness of the model and how it can be practically applied to various fields of business to make it much more profitable. Strengths of the Porter's Five Forces Model Porter's five forces model basically explores the five major dynamic forces of the market the competitive rivalry, the threat from new entrants, the threat from substitutes, bargaining power of the suppliers and the buyers (Porter, 1985). The model was framed way back in 1980's when the business trend was much more different than it is today. It provides a general overview on the external environment. Any new business can use it to analyze the market they are entering before starting their venture and customize their plan according to the results obtained from it. Though there are certain limitations, it covers more or less all the aspects a businessman should consider before starting a new venture. Porter's five forces model is by far the most simple and easiest tool to understand the industry structure. Understanding the industry structure is vital to plan effective strategies to gain a competitive edge (Porter, 2008). Industry structure is nothing but a set of characteristics which is shaped by the economic and technological factors prevalent there. Understanding the causes which determines the success or profit of one particular brand will help others plan their strategy accordingly. Porter's five forces analysis helps them do the same. For example, consider a person wants to start an online shopping website. There are already thousands of shopping websites in the internet. They have to give something new and attractive to the customers and manage the heavy competition from others. Porter’s five forces model acts as a checklist of the new businessman enlisting all the important entities to be checked. They prompt them to check the core competitors in the industry first like Ebay. The website owner might decide to cater the needs of certain kind of people interested in high class antique products, as there are so many websites selling apparels and related accessories. Second, Porters model prompt them to check the threat form new entrants and substitutes. They might check whether someone else is trying to establish a similar site. They can also check if there are chances for any company to produce low quality fake antique goods in place of original antique items. If such threats exist, they can alter their business model to sell only non- imitable high quality goods which cannot be found in the other competitor’s stores. Next the model prompts them to check the bargaining power of the customer and the suppliers. If there are too many sites providing similar goods the bargaining power of the customers will be very high. If you are purchasing rare goods, the bargaining power of the supplier will be very high. The pricing aspect in the business plan should be altered to suit the profit limit according to this bargaining power. If the supplier is in high demand, the company cannot advertise it will sell a particular product before he supplies it to them. Porter himself actually redefined his concept and created the porter's six forces model with "complementary products" as the sixth force. This might be translated as the impact of the related products or services in the market or giving out related products as free gifts to customers to lure them into visiting the site. For example, the new website can simply release many coupon codes and discount vouchers online and offline. Customers who come across them will visit the online store just to make use of it and buy one object or another. It is a great way for new website to gain popularity and build a steady customer list. They can simply give out cleaning products along with the art crafts purchased to impress the customer. They can ensure regular customers get certain amount of discount to make them come back to the store again and again. Limitations of the Porter’s Five Forces Model Every theory of competitive advantage has its own limitations. Porter’s model is no exception. Though the model provides distinct ways to analyze competition in market, it is highly illuminating when it comes to application in a broader level. The online shopping website owner will only look at the competition prevailing in the internet as a whole. He does not get a chance to make the normal antique lovers visiting the physical stores get into his website. Though the Porter's sixth force complementary products eliminate this problem to a certain extent, it is not applicable to all the industries (Youndiame, 2010). Likewise Porter's models limit the threat from substitutes to the particular industry alone. But, it might arise from even a completely different industry. For example, a company not linked with antique rare products like a glass manufacturer, can simply start marketing their wrongly crafted glass pieces which look like rare antique items. The bargaining power of the supplier entity mentioned in the Porter's model is also not very applicable these days because dominant companies simply control the price the suppliers get in all the industries. Wal-Mart is the best example. Giving complementary products might be applicable to huge players in the industry. But, it is not possible for small vendors to do the same, sacrificing their profit margin always. The limitations in the Porter’s five forces model are usually overcome by the managers of all the firms by using their common sense and decisions taken based on groups discussions. They usually bring about changes which their intuition suggests would help deal them with the scenario best, instead of depending upon the books in times of necessity. Substitutes for Porter’s Five Forces Model The Scott Morton's five forces model provides a better way to gain a competitive advantage over others using IT/IS strategic planning. (Gamayanto, 2004). It is much applicable for the latest software industries and the new modern businesses where individual roles as well as teams play a very important role in determining the success. The model does not separate the internal and external environment activities. It integrates the internal performance of individuals in organization with the strategic planning of the organization. Unlike an online shopping website, a software company cannot plan on entering a new venture without the best programmers in the necessary field and the required tools. Hence, the Scott Morton’s model is more applicable to the IT industry rather than any other field. It is the main limitation of the model. While Porter’s five forces model is applicable to most of the industries with few exceptions, the Scott Morton’s model is applicable only to a few industries with the majority as exception. There are no ways to analyze the threats from the potential entrants or substitutes in this model. Bakos and Treacy model is more or less similar to the porter's model. It explores cost, unique product features, switching cost, internal efficiency, and inter-organizational efficiency as the main entities to study the external market. The Porter’s model is very famous because of its simplicity and wide usage by the Harvard students. The former one is more or less similar to the Porter’s model. Here is a comparison. Cost – bargaining power of the customers Unique product features – competitive rivalry Switching cost – bargaining power of the supplier Only the internal efficiency and the inter-organizational efficiency entities are different. They are not as effective as the Porter’s model in examining the core competency prevailing within in the market. Comparing both the models with the Porter’s five forces analysis, there are more flaws in the other models than the Porter’s model. So it is by far the best model in the business world to analyze the external environment till date. PESTLE analysis is another famous tool used to analyze the external market from various aspects. It is considered as a model better than the Porter’s five forces model by many business magnets as it provides various ways to analyze political and legal factors which are very important to start as new business. These factors are simply inevitable for new as well as established businesses to explore foreign markets and new fields. Hence, it is considered the best external market analysis tool. How Porter’s Model Can Be Practically Applied To Business? The managers or new business ventures should start implementing various strategies used in the book to analyze their profit or loss. Porter's model gives a chance to explore the competitive advantages by listing out various means to strengthen the company’s strategy in comparison to other firms in the market. For example we can mention the lowering of cost analyzing the bargaining power of the customer strategy. It helps the business people create a good value for their products and establish themselves as unique product marketers by kindling them to use differentiation to create irreplaceable products. Even companies which do not have a chance to establish themselves as a leader in a particular industry can gain a brand name by producing unique products following the Porter's strategies (Hunt, 2011). An online shopping site which would have gone one amongst others if they have sold accessories could now create a unique position for them because they chose to sell rare antique products. Though they are not leaders in the market, they created a unique position for themselves in the market and a brand image. They can use this image further to venture into many other industries gradually. One company which employed the Porter’s five forces analysis successfully in their venture is Flipkart.com. Started originally by two employees who worked for Amazon.com, Flipkart was initially a simple company selling few Indian novels. They analysed the market properly and started selling Indian novels written by local writers in local languages mainly because there were several online stores selling English novels already. This small step enabled them to build a huge empire with revenue of $5 billion per year. They started with books and gradually expanded to other markets like electronic goods, health items etc making it a full-fledged website. They guessed the bargaining power of the customer well and started giving them books at the lowest price possible. Similarly they differentiated their service by becoming one of the first firms to introduce the cash on delivery scheme in India. Interestingly the Flipkart.com model can be used to analyze the limitations of the porter’s five forces model too. They maintained a strong relationship with their writers and printers. They never advertised about a book without gaining proper rights from the writer ever. They gave ample importance to individual performances and strong value chain which keeps the supplier power in check. Conclusion There are several models to analyze the external market and internal market of an organization like VRIN, BCG matrix, PESTLE model etc. But, Porter model is considered as the most widely used one. The Porter’s five forces model became very famous because it can be used practically to map the competitive forces which are different in every market and industry. Porter's method gives a way to understand the strategy planning dynamics to the core, do a macro analysis on the related driving forces associated with sales and success. They also give a chance to prioritize the important factors ahead of other minor entities and help the business people explore interdependent fields (Grundy, 2006). Porter’s five forces model serves as a checklist which will ensure guaranteed success no matter what field is explored. Though the modern businesses cannot depend upon it completely, they too use a major portion of the five forces model for their market analysis. Porter’s five forces model has more advantages than errors and is applicable to nearly any industry universally, even after three decades after it has been framed. Its success depends on its simplicity and easy to use nature rather than complexity and sophisticated nature. References 1. Gamayanto, I., 2004, 'porter’s Five Forces Model; Scott Morton’s Five Forces Model; Bakos & Treacy Model Analyzes [Strategic Information Systems Management]', Journal Informatika. Vol. 5, No.2. Retrieved December 18, 2012, from http://puslit.petra.ac.id/files/published/journals/INF/INF040502/INF04050208.pdf 2. Grundy, T ., 2006, 'Rethinking and reinventing Michael Porter’s five forces model', Wiley Interscience, Retrieved December 18, 2012, from http://mis.postech.ac.kr/class/MEIE780_AdvMIS/2012%20paper/Part4%20(Pack8)/Strategic%20Management%20of%20Technological%20Innovation/8-7)%20Rethinking%20and%20reinventing%20Michael%20Porter's%20five%20forces%20model.pdf 3. Hunt, O., 2011,'Porter’s Five Forces Theory: Strong and Weak Points', Business Growth Strategies, Retrieved November 2004 from http://www.mccraigh.com/Archives/porter_k.html 4. Porter, M.E. 2008, 'The Five Competitive Forces That Shape Strategy', Harvard Business Review, Retrieved November 2004 from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1 5. Porter, M.E., 1985, ‘Competitive Strategy’, Simon and Schuster, New York 6. Youndiame, 2010, 'Porter's Five Forces Analysis', Studymode.com, Retrieved December 18 from http://www.studymode.com/essays/Porter-s-Five-Forces-Analysis-366353.html Read More