Porters Five Forces model is used to analyse industry attractiveness. Describe the model, consider its limitations and suggest how they might be overcome. What relationship, if any, links the Five Forces model and the PESTEL framework - Essay Example

Porter’s Five Forces model Introduction There are industries that are attractive and those thatare not attractive. In order for any individual or group to find out which industry or even business is attractive at that particular time, several things that make an industry run should be assessed. All these things are found in the Porter’s Five Forces Model. Porter’s five forces model is used to examine the attractiveness of any business by examining its different aspects. The five forces described in the model include degree of rivalry, threats of substitutes, threats of new entrants, supplier power and buyer power (Gerry, Whittington & Scholes, 27).

Describe the model Rivalry is a real driving force in any industry and is one of the major determinants in any business. Any industry that lacks competition has no growth potential and should be avoided and especially by new entrants into the industry. What attracts people to an industry is the degree of rivalry that exists in it. This is so because rivalry brings about competition, it leads to competitive strategies bring strategized, developed and implemented as well as leads to an extent transparency as people get to see the strategies and examine their advantages and disadvantages based on issues such as financial attractiveness among other things.

Suppliers are very important people next to the customers in any industries because without constant supply of the raw materials, the business is likely to fail as a result of delay of making the products and meeting the demand in the market. It will also encourage a loss of competitive advantage. Suppliers do not supply only raw materials but also labour and expertise services. The business has to work with the industry supplier and do so in such a way that brings more advantage to the business than to the others in the industry.

Suppliers become powerful when they are the only ones and hence control the prices and commodities and this calls for tactics on the business part in order to gain from this without destroying the relationship with the supplier. Buyers are at the other extreme end compared to suppliers but they are the ultimate determinants of whether the industry will continue its existence or not. Buyers just like suppliers can set the prices of the products and especially in a monopsony market where they are the only ones.

In order for an industry to be attractive, it has to find ways to increase the number of buyers control the prices of the products and still maintain buyer relationship. Threats are what bring down most industries. Threats from new entrants is among the worst threats to an industry’s attractiveness as it not only brings in competition but decreases the profitability by diving the number of buyers and that of the suppliers as well. Entry into the industry is encouraged by the government policies, cost requirements and brand equity among many others.

The other threat in the model is the threat of substitutes. This refers to substitutes of products or even services. When the buyers have substitute products from that which is being produced in the industry, then this spells doom for the industry attractiveness. The industry as a whole rather than the individual businesses within the industry must come together and find strategies to eliminate or control this threat. Its limitations The limitations of the model are explained through an explanation of the limitation of each of the five forces described above.

The degree of rivalry refers to the level of competition within the particular industry. This is examined through the number of competitors, how many products are in competition, whether there is customer loyalty to the competitors, whether the cost of leaving the market is high or low, whether the industry is growing or has any prospects of growing in the near future, the number of corporates that are at stakes as well as whether there exists any exit barriers. Supplier limitations include issues such as volume of the suppliers within the industry, the strength of the suppliers and the distribution channels, the supplier relationship with the business owners within the industry, suppliers’ solidarity among many others.

Buyers’ power also has its own limitations which range from the volume of the buyers, differentiation of the products, sensitivity of the prices, incentives to the buyers and bargaining leverage held by both the buyer and the industry. The threat of new entrants has limitations such as their access to distribution and inputs, whether there is customer loyalty within the industry, the profitability of the industry which is what attracts the new entrants and they divide the profits. When the capital requirement is low in the industry, it attracts new entrants and very fast for that matter and this is a major limitation.

If the new entrants also expect little or no retaliation at all when they enter an industry, then it will encourage more of them to enter increasing the threat even more and limiting the industry even further. Lastly are the limitations to the threats of substitution. The limitations include buyers being inclined towards purchasing the substitution and not the original product, high switching costs, the likelihood of increased substitute depending on the ease of substitution, the quality of the products depreciating as well as development of substandard products being developed and which come at lower prices.

How they might be overcome In order to overcome all the limitations mentioned above, there are certain strategies that must be employed. The first of these strategies is having patents of the products. This will make it difficult for new entrants to enter the industry hence eliminating the threat. This can also be addressed by setting up high capital requirements and restricting distribution making the conditions not permissible to many people. On supplier power, the industry can join forces and set up their own supply base which will be a competition to the other suppliers, will increase the products being supplied and hence reducing the cost of switching to other alternatives.

The same strategy can be applied to buyers through reduction of prices and encouraging other buyers as well as reducing the substitutes and hence increasing the buyer’s size. In order to reduce rivalry, industries can engage in innovative methodologies and productions as well as constant creation of new products. They can also intensify their promotion strategies which will attract more people to their products and hence outdoing their rivals. What relationship, if any, links the five forces model and the PESTEL framework?

The PESTEL framework examines the external market factors that impact the organization. These factors are political, economic, social, technological, environmental and legal. These factors affect the market and therefore affect some of the market forces as well. The stability of political factors for example mean that the government will regulate and set up new policies for trade and taxes as well as set up new entry regulations. These issues affect the attractiveness of the industries positively or negatively and industry attractiveness is part of the Porter’s model.

Economic factors when regulated encourage for credit accessibility and hence businessmen who could not enter an industry because of the high capital requirement are able to do so with the increase in credit. It may also increase the unemployment rate which in turn affects the number of buyers and suppliers as well as their powers. PESTEL sets up the market with new technologies, innovations and discoveries. New innovations and technologies are very effective in the Porter’s Five Forces model as they are a means to reducing the degree of rivalry in the industries.

This is so through using technologies to come up with better innovations that those of the competitors hence gaining competitive advantage in the industry. The legal factors enable the reduction of substitute products with less quality as it ensures that the safety, health and product regulations are met by all players in the industry. Work Cited Johnson, Gerry, Richard Whittington and Kevan Scholes. Exploring Strategy (9th Ed.). New Jersey: Financial Times Prentice Hall, 2011.