Analysis of Five Forces Model - Essay Example

Business Strategic Drift Strategic Drift can be defined as a situation where the leadership and the management of the organization fail to acknowledge the changes that occur in the business environment. This situation may result in an unfavourable condition for the business as by the time the management realizes that the change has occurred they bear considerable losses. If the delay in taking the necessary change is considerably large then it can even lead to the failure of the business. Figure 1: Strategic Drift (Source: Clay and Clay, 2013) The above diagram shows the strategic drift model that was developed by Johnson in 1992. Johnson had described his model in three stages. The first stage refers to the small incremental changes in the market which may cause the demand pattern to change in the market. The impact on the business can be in the form of fall in revenues. The second stage refers to a situation where the change becomes more pronounced which may lead to severe financial distress for the business owners as the changes in the external environment continues to take place. The third stage refers to a situation where the firm realizes that the change in the market conditions is so severe that minor changes made by the management both at the senior and the junior level will not be adequate to solve the crisis. This is a situation which calls for dramatic strategic shift to increase the market share and revenue of the firm. An inference that can be drawn from this model is that the strategies of a firm requires constant changes because strategic drift mainly occurs when the strategies of the firm loses focus about the external conditions in the market. Porter’s five Forces and Resource Based View of strategic management In the literature of strategic management one of the most important topics is the way in which firms attain their competitive advantage and maintains them. The two major concepts that have been developed regarding the way in which this can be achieved are commonly referred as the resource based view and Porter’s five forces. Porter’s five forces model is also referred to as the positioning school (Stonehouse and Snowdon, 2007). However, Porter’s models of competitive forces have been subject to major criticism. From an economic point of view it has been observed by Hax and Wilde (2002) that the model of Porter assumes a perfectly competitive market which is a utopian concept. It has also been observed that Porter’s model can at best be used to analyze simple market structure because as the industry structure becomes complex with multiple interrelations then the model is not very suitable (Hax and Wilde, 2002). It has also been argued that the model assumes too static market conditions which may be impractical (Berg-Marketing, n.d.). For instance Pepsi’s competitive strategies are actually determined by the strategies of Coca-Cola rather than world market for soft drinks. This shows that the essence of strategic competition is actually derived from the interaction between the players (Schmidt, 2010). Porter had also pointed out that five forces approach uses a zero-sum game framework where one firm can succeed at the cost of others. This is not always true in real like as it has been observed that Toyota and Honda work very closely with their suppliers to ensure availability of parts (Srivastava and Verma, 2012). Again in a recent empirical study conducted it has been observed that according to Porter’s five forces the IT industry in India should have been unattractive yet in reality this could not be confirmed given the robust performance of this industry (Krishnamurthy, 2010 ). The Resource Based View is an alternative view that tries to overcome the limitations of the Porter’s five forces model. The Resource based view of a firm focuses on the internal competencies of the firm that determines the key competencies of the firms. The resource based view emphasizes that the firm derives its competitive advantage and performance from the resources it owns. RBV has also been assumed to provide an efficiency based explanation for determining the differences in performance of firms. RBV has been able to take into consideration about the internal resources which was ignored by Porter. RBV actually tries to show that the internal capabilities of the firm are actually important in determining the strategic choices taken up by the firm in its external environment. For instance the resources and the capabilities of companies like Apple and Toyota have allowed them to come up with products like i-pod and hybrid cars which have created new markets and added value to the customers. Toyota’s capability like using efficient production techniques, excellent control over the inbound logistics backed by proper measures of marketing and advertising provides the firm with competitive advantage which allows it to earn maximum revenue in the automobile industry (Henry, 2011). According to Porter it is the industry structure within which the firms operate that determines the level of profit. However, in real life it has been observed that the profitability of Tesco and Sainsbury, both of which operates in the food retail market of U.K. have different levels of profitability (though according to the model of Porter they should have had similar levels of profitability) (Henry, 2011). Though this theory tries to explain the source of competitive advantage yet it is not free from criticism. Criticisms about this theory pertains to the unit of analysis, neglecting environment and behavioural and assumptions of non imitable nature of resources. These criticisms restrict the credibility of this theory limiting its explanatory power. RBV has also been criticized on the grounds of being an excessive inside-out view. Porter had argued that the resource based view cannot be considered as an alternative view that helps in determining strategy. Priem and Butler (2001) had argued that the RBV is circular in nature which makes the outcomes of the model inevitable (Priem and Butler, 2001). Foss (1998) argues that the legitimacy of the resource based view is only valid if the relevant resources are properly defined and free-standing (Foss, 1998). Barney (1991) had argued that in order for a firm to maintain competitive advantage the resources must be valuable, rare, inimitable, and substitutable (Barney, 1991). Porter (1991) had argued that resources cannot be rare by themselves and technology, behaviour of buyer and can change the nature of the resources (Porter, 1991). Though the model developed by Barney has been widely accepted in strategic literature yet only few researches have been done to establish the empirical validity of the statement. A recent study conducted by Talaja (2012) on Croatian firms had confirmed that the hypothesis predicted by the theory is valid (Talaja, 2012). However, more research empirical needs to be conducted before accepting this approach. Reference List Berg-Marketing, n.d. Five Five forces revisited. n.p. Available at: < http://www.berg-marketing.dk/GIF/porterrev.pdf > [Accessed 3 May 2014]. Clay, J. And Clay, M., 2013. Sales strategy for business growth. London: Thorogood Publishing. Hax, A. C. and Wilde, D. L., 2002. The Delta Model -- Toward a Unified Framework of Strategy. [online] Available at: [Accessed 3 May 2014]. Barney, J., 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), pp. 99-120. Foss, N., 1998. The Resource-Based Perspective: An Assessment and Diagnosis of Problems. Scandinavian Journal of Management, 14(3), pp. 133-149. Henry, A., 2011. Understanding strategic management. Oxford: Oxford University Press. Krishnamurthy, B. V., 2010. Five Forces Model: Analysis from an Emerging Economy. [pdf] Available at: < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1577469> [Accessed 5 May 2014]. Porter, M., 1991. Towards a dynamic theory of strategy. Strategic Management Journal, 12, pp. 95-117. Priem, R. and Butler, J., 2001. Is the resource-based “view” a useful perspective for strategic management research? Academy of Management Review, 26(1), pp. 22-40. Schmidt, B. B., 2010. The Dynamics of M&A strategy: Mastering the outbound m&a wave of Chinese banks. Frankfurt: Peter Lang. Srivastava, R. M. And Verma, S., 2012. Strategic management: Concepts, skills and practices. New Delhi: PHI Learning Pvt. Ltd. Stonehouse, G. and Snowdon, B., 2007. Competitive Advantage Revisited Michael Porter on Strategy and Competitiveness. Journal of Management Inquiry, 16(3), pp. 256-270. Talaja, A., 2012. Testing VRIN Framework: Resource Value and Rareness as Sources of Competitive Advantage And Above Average Performance. Management, 17(2), pp. 51-64. http://books.google.co.in/books?id=-MWEizuu_NsC&pg=PT15&dq=Strategic+drift+diagram&hl=en&sa=X&ei=Im1oU9CPFoWi8AWRu4LYCg&ved=0CCwQ6AEwAA#v=onepage&q=Strategic%20drift%20diagram&f=false Read More