Relevance of Michael Porters Five Forces Model in the Modern Business Environment - Case Study Example

Analysis of the Relevance of Michael Porter’s Five Forces Model in the Modern Business Environment Student’s Name Institutional Affiliation Course Name Date of Submission Table of Contents Table of Contents 2 Abstract 3 Introduction 4 Theoretical Framework 4 Porters Five Forces 5 Criticism and Limitation of Porter's Model 6 Application of Porters Five Forces Model within Current Market Conditions 9 Conclusion 10 References 12 Abstract Michael Porter is regarded as one of the most prolific business gurus of the 21st century. Porters Five Forces Model, which was developed in 1979, has acted as a useful management tool for assessing the company's competitive strength in comparison to those of the rival firms in the industry. Accordingly, businesses use this management tool to understand their position in the market so as to be able to develop appropriate competitive strategies. Although businesses have used this model since 1979, the model has been under sharp criticisms from business experts who claim that the model has been rendered irrelevant by the increased globalization and digitalization that have significantly changed the business environment. This discourse seeks to critique the use of Porters Five Forces Model as a strategic decision-making. The paper will achieve this by discussing some of the criticisms against the model and finally explore its applicability as a strategic management tool in the present day business environment. Introduction Michael Porter is regarded as one of the most prolific business gurus of the 21st century. In 1979, Porter developed a business management tool famously known as Porters Five Forces model to assist to help business analysts and marketers assess their competitive strength in comparison to those of the rival firms in the industry so as to be able to develop an working and effective strategy capable of countering competition (Karagiannopoulos, Georgopoulos and Nikolopoulos 2005, p. 66). Despite the model having been popular in the past, Porters Five Forces Model has been increasingly falling out of favor with most marketers and business analysts who argue that the model is no longer relevant in the current globalized and digitalized business environment. This discourse seeks to critique the use of Porters Five Forces Model as a strategic decision-making. The paper will achieve this by discussing some of the criticisms against the model and finally explore its applicability as a strategic management tool in the present day business environment. Theoretical Framework Porters Five Forces Model has been one of the most popular management tools that marketers and business analysts use to analyze the position of a business in a market. The model is based on the industrial organization theory (IO) which holds that the attractiveness of an industry where a firm does business is gauged by the structure of the market since the behaviors of the participants in any given market is influenced by the market structure (Cameron and Pickett 2009, p. 61). Porters Five Forces model is the most popular and has been used since 1971.The framework is a valuable management that help marketers ascertain the attractiveness of an industry by noting the factors that trigger competition in an industry, the threat of substitute products and new entrants and the bargaining power of buyers and vendors in a market. By understanding the how these forces operate against a company, managers can decide whether or not to enter a new market or develop strategies that would make the company look attractive than rivals in the industry. Porters Five Forces Just as the name suggests, Porter developed five models that can be used to analyze the degree of competition in a given industry. Competitive rivalry is one of the fundamental force that must be analyzed so as to understand the level of competition in a market and how best to respond. Porter defines competitive rivalry as the level of competition between existing firms in a given industry (Grundy 2006, p. 214). In this regard, Porter observed that markets that are characterized by stiff competition between firms tend to impact on the prices charged, profits generated and the strategy that a firm adopts. Porter noted that high rivalry exist in markets an industry where companies adopt similar strategies, offer undifferentiated products, experience slow industrial growth and has no barrier to exit or entry. The second competitive force that Porter identified is the threat of new entry. In this regard, Porter observed that firms not only face the threat of competition from the existing firms, but also from firms that might enter the market (Karagiannopoulos, Georgopoulos and Nikolopoulos 2005, p. 68). For instance, industries that are profitable tend to attract other firms to enter the industry to exploit the opportunities available in the market. Their entry poses a serious threat to the existing firms because they might come with new strategies that result in a change in the market dynamics. Accordingly, Porter advises that managers must analyze the threat of new entry into a market in order to succeed in a given industry. Thirdly, Porter noted that the threat of competition in a market is shown by the level of the existence of close substitute in the market. In this regard, Porter noted that the competitive position of a firm declines is a market has close substitutes that a customer can switch to whenever there are price increases, notes Grundy (2006, p. 218). The fourth force described by Porter is the bargaining power of buyers. Porter advises that it is very important for managers to consider whether or not buyers have the power to influence prices where they operate or intend to enter. In this respect, Porter noted that the power of a buyer to influence the prices in a market is influenced by the importance of a given buyer in the market (Grant and Jordan 2012, p. 9). For instance, Porter observed that an industry that has few strong buyers can easily have the prices of their products influenced by the buyers because of the importance that players in the market place on them. The last model described by Porters is the supplier's bargaining power. In this respect, Porter advises that businesses need to analyze the power of suppliers to influence prices or product quality. In this respect, Porter observed that markets that are dominated by few suppliers face the danger of the suppliers using their power to influence prices. Criticism and Limitation of Porter's Model Even though Porters Five Forces Model has been used for decades as a strategic decision-making tool, the model has become under sharp criticism in the recent past from some quarters. In this regard, there is a section of business experts who have criticized the model claiming that the changes experienced in the business environment in the recent past have rendered the framework irrelevant. The first major criticism against the model is that Porter's framework does not apply to the present day business environment since it only delves into the external factors that affect a firm's competitiveness while ignoring the internal factors (Aktouf 2004, p. 27). However, studies have shown that the competitiveness of a firm in a given industry is influenced to a large extent by internal factors, as well. As such, critics of Porters model argue that in order for a firm to compete effectively, managers must be knowledgeable not only of the external factors, but also on the internal capabilities to augment the prevailing conditions of the market. Unfortunately, Porter's framework takes no cognizance of the internal capabilities of a firm, ineffective for use as a strategic decision-making tool. Secondly, critics have argued that Porter's model is no longer appropriate for use as a management tool because it assumes that an industry is stable. As such, critics of the framework claim that Porter's framework was only applicable in the olden day when industries were stable. However, Mohapatra (2012, p. 16) notes that the nature of industries has changed due to the effects of digitalization and globalization that has made markets very dynamic spurred by innovation. The dynamic nature of industries in the modern times can be seen in the phone manufacturing industries where, where new concepts keep emerging that revolutionizes the industry. For example, Smartphone was invented in 1973 but took several years to be introduced into the market. Reports indicate that the Smartphone was introduced to the consumer market in 1992, but later on in 2007, Apple revolutionized the industry by introducing the iPhone. Accordingly, the emergence of the Smartphone has forced players in the industry to the changing needs of consumers so as to remain relevant in the industry. This is because more and more consumers are increasingly looking for phones that have the latest technology, notes Barney (2011, p. 94). Accordingly, it becomes clear that, without internal capabilities, it would be very difficult for a firm in the industry to adjust quickly to the changes that occur in the market. Failure to act promptly and appropriately would have dire consequence on a company since it makes it hard for a company to compete effectively with others that have adapted quickly to the changing needs of the consumers in the market. This contrasts with Porters claims that the strategy is adopted only to manage competition. In the count business environment, the competitiveness of a business is largely determined by how innovative the business is. In fact, evidence shows that most businesses today compete largely in terms of innovation to get a competitive advantage of the less innovative. As such, in the modern time, business must thrive to be as innovative as possible in order to compete favorably as is seen in the phone industry where Samsung and Apple are competing fears on the basis of innovation. Therefore, it can be stated that, although Porter's model was useful in the early 21st century although to the early 1990s, the changes that have occurred over the past few decades have rendered it redundant. This is because the framework fails to address the operational efficiencies that may result from the increased globalization of markets for products and services. Currently, global strategies frameworks have become largely in use mainly because it assists businesses analyze the internal and external capabilities, as well as the cost and benefits associated with a global strategy (Johnson, Scholes and Whittington 2014, p. 81). Unfortunately, Porters model fails to address the internal capabilities of a firm, which makes the model ineffective for use for companies that endeavor to adopt to adopt innovative strategies as a means of exploiting the global market opportunities. In addition, the model is ineffective for use in the modern world since it assumes stability of an industry, which has been proved wrong. Application of Porters Five Forces Model within Current Market Conditions The recent filing of a bankruptcy by Porter's Monitor Group took the world by surprise. The company was founded in 1983 and was believed to be effective because of its adoption of Porters model for analysis of market conditions. However, to the surprise of many, the company filed a bankruptcy in November 2012 resulting in its abrupt closer. The failure of the company that has adopted Porter's model for many years has left business people wondering why they should continue using Porters framework when it has failed to protect its owners. However, with the changing dynamic of the market in the modern business environment, value chain has emerged as the key to having a stainable advantage. In this regard, evidence in the global business environment shows that the effectiveness of a strategy adopted by a company largely depends on the kind of relationship that the company has built with customers, suppliers, and collaborators. In fact, the increased connectivity of global markets due to propagation of social media marketing and e-commerce has rendered the size of a firm irrelevant as far as success is concerned. Instead, to be successful, Mohapatra (2012, p. 22) advises that a company must be able to adjust and see its customers not just as money, but as part of companywide. Additionally, winning in the present globalized business environment require a company to be as distinctive as possible. Today, most businesses engaged customers online through social media sites such as Twitter, Facebook, and LinkedIn. Thompson and Martin (2010, p. 16) note that these new forms of engagement have significantly changed the nature of most industries, as well as the supply chain. Tourism industry is an example of the industry that has been impacted greatly by the technological advancements and globalization. Tourism industries nowadays use social media as a means of keeping in touch with customers so as to understand their needs and how best to fulfill them. The capacity of an organization to identify and respond to the changing needs of a customer is regarded an internal capability. Unfortunately, Porter's model fails to address the internal capabilities of a firm, which makes it difficult for a firm to respond effectively to the changing needs of customers in a market. This implies that Porters Five Forces Model may not apply in the tourism industry that largely depends on internal capability to meets the changing needs of the market. However, the greatest limitation of Porters model in the current globalized business environment is that the model assumes that competition favorably against rivals and making profit has nothing to do with creating value for company stakeholders (Andriotis 2004, p. 134). Additionally, Porter Five Forces Model has limitation in the present day business environment since it aims to safeguard a firm against competition, but not to create value for company stakeholders. Conclusion Michal Porter has been regarded by many in the business field as one of the most prolific business managers and theorists. Porters Five Forces Model, which he developed in 1979 has acted as a useful management tool that a business can use to assess the company's competitive strength in comparison to those of the rival firms in the industry so as to be able to develop a working and effective strategy capable of countering competition. However, Porters Five Forces Model has fallen out of favor with most marketers and business analysts in the recent past, arguing that the model is no longer relevant in the current globalized and digitalized business environment. This is because Porters Five Forces Model is based on certain assumptions that have been rendered irrelevant with globalization and digitalization of the business environment. Some of the criticisms labeled against Porters model include failing to take cognizance of internal capabilities of a firm, and the fact that it assumes industrial stability, all of which have been proved wrong in the modern business environment. 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