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TOPIC NO 9 - Essay Example

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The model helps firms in determining the current state of the industry and its potential as regards economic profits for the firm. This analysis also allows…
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Download file to see previous pages Factors such as culture and history are not included in the Porter’s five forces industry analysis. Because of this, the model is seen as inadequate as an environmental assessment tool. Moreover, the forces behind the model are grounded on the premise of constant returns to scale by Alfred Marshall in his ‘theory of production.’ This paper aims to discuss the changes, such as increasing returns to scale and their effect on the intensity of the forces. Factors such as culture and history and their effect on the forces are also explored.
When constant returns to scale is a vital premise where Michael Porter has derived his Five Forces of the industry model, it mainly based on Alfred Marshall’s theory of production. According to Marshall’s theory of production, for a certain increase in the level of all inputs, the output will increase by the same proportion ( 2009). This has been identified as the constant returns to scale.
The concept of constant returns to scale has been the traditional assumption as regards the theory of production. However, changes in our times state that the concept of constant returns to scale is not always the case for production. As firms strive to build production competitive advantage in order to lead the competition, they strive to produce more outputs for a given increase in the level of the inputs, hence increasing returns to scale. As stated in Porter’s five forces:
“In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences (”
“[…] unique industry characteristics that define the industry. ...Download file to see next pagesRead More
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