In a competitive market most organizations and firms would look into how they will gain a competitive advantage in the industry. Organization aims to increase their profit or attractiveness. Thus, strategic models are commonly used to determine possible profits and pitfalls in the industry. However, as mentioned by Henry (2008, p. 68), models are merely simplifications of what is really happening in the competitive environment of the industry. Furthermore, Henry discussed that this kind of simplification can never ‘replicate’ reality in all of its complexities yet models are still valuable to be able to determine projections on possible outcomes of the organization’s action/s.
Michael Porter, in 1979, tried to create a generalization of the different aspects that can affect a certain organization. He has done this by determining commonalities between patterns that affects different organizations over time (Henry 2008:p67). At the end of his generalization, he had accounted five major forces that affect organizations attractiveness in an industry. This is what he called as the Five Forces Framework.
The paper would discuss Porter’s Framework with an assessment on how it determines an industry’s attractiveness. Afterwards, it would enumerate possible pitfalls and criticism of the Five Forces Framework that will help in determining if it is still valid and can still be use in today’s modern world.
Five Forces Framework
This framework works under the assumption that although ‘each industry is unique’ the elements that works and affects the performance, attractiveness and profitability of each organization within the industry will be the same (Henry, 2008:p69). Porter himself identified that the five forces framework is only a tool for organizations to asses the competitive environment in the industry (Porter, 1980). Furthermore, as a ‘tool’ it ought to help the organization to determine possible profit potentials in the industry to which they belong—this can be done through an examination of how the ‘five competitive forces’ interact. Through the use of the framework, Porter believes that it would be able to asses the return of investments and generation of profits by the organization (Porter, 1980:p) Grant (2005:p 97) summarizes that the the ‘Five Forces of Competition Framework, links the structure of the industry to the competitive intensity within it’.
The first element in the five forces is the threat of new entrants. This according to Richard Daf, (1997, p. 91), brings more desire for organizations to extend their market shares since this can give them an edge in controlling prices of products and costs of supply along with how much is needed to be invested to a specific product. Generally, the existence of new entrants increases the possibility that the existing organizations will have lower profit potential in the future. The presence of new entrants has an effect on the allocation of resources and investment of the organization. Thus, if the threat of entry is considerably high the organizations in the industry must increase their investment to be able to hold back the entry or to lower the edge of the forthcoming competitor.
The next element is the threat of substitutes. Substitute exists if there are products and/or services that are similar with those that the organization produced. The threat here is when this product and/or service/s perform better, more available and most importantly cheaper than what the organization offer. Substitutes post a possible reduction on the sale volume of the organizations that produces the same product and/or service/s.
Another force that Porter includes in his framework is the presence of rivalry and/or competition among the existing firms or organization in the industry. It is the competition that already exists between the players in the industry. Higher pressure caused by the competition or rivalry can results to changes in prices, quality, margin, and/or the overall performance and profitability of all the players. Most likely as mentioned by Grant (2005, 78-79), rivalry between the existing players will most likely be high when they all have the same strategy, their about the same size, market growth rates are low and exit barriers are too expensive.
The next two forces in Porter’s framework deals with the concept of bargaining power. The first of this two is the bargaining power of the buyers or the customers. This bargaining power is described as the capacity of customers to inflict pressure on the demand-side or how much is the volume of the product that should be produce. Some of the aspects that determines bargaining power of the buyers are when they are able to purchase large amount of the product (wholesaling), when there are other substitute for the product/service/s, when the product and/or service/s offered are not of high importance or something that customers can live without and when the customer is knowledgeable about how the product and/or service/s is produce.
On the other hand, the last element in Porter’s Competition Framework deals with the ‘bargaining power’ of the suppliers. Suppliers are generally the source of product and/services that an organization needs to be able to produce their own products and services. The Supplier has control on the price, volume and quality of the product or services that they offered. Relatively, suppliers bargaining power tends to be high when there are only few suppliers of the product and/or services, when there is no more economical substitute/s that exist for the required input and the profit outnumber the cost of the supply.
The Five Forces Framework by Porter helps organization in the industry determine their probable profit and help them assess their competitors that helps them plan for better strategy and improvement. Through an examination of the Five Forces Framework, an organization can look into their ability to effectively compete in the industry.
Porter’s framework is primarily based on an economic theory known as the “Structure-Conduct-Performance” model (Henry, 2008: p71-72). In detail, the framework tries to identify the structure of the industry to determine the competitive behavior or conduct of the organization that has effects on the organization’s performance in general or its probability. Also, Porter’s framework helped the organization determine if there is a need to exit the industry or to further increase the resource commitment for specific product and/or service. With the help of Porter’s Framework, organization can estimate future trends and future profits.
Porter’s framework aims for a ‘competitive strategy’ that ought to help an organization to find a specific position in the industry and provide an insight for the organization as to how it can effectively guard itself against the possible impact or to help the organization influence the current Five Forces of the Competition. In this regard, the management of an organization needs or at least is guided to have the ability to change the industry structure towards their advantage. Thus, by strengthening the position of the organization within the industry, through the use of the Five Forces Framework, it develops a Competitive Advantage over its competitors.
While Porter’s idea is viable during the 1980’s, critics address that in today’s economy, it is not anymore useful. Among the most prominent critics of Porter’s Five Forces are Brandenburger and Nalebuff (1997; p. 6,30) who concludes that Porter’s framework did not include the possibility of complements. They did this by presenting how game theory can show the possibility of collaboration of the different players (organization) to compete with other competitors. This process is known notably as ‘co-opetition’. Another criticism that was put forward with regards to Brandenburger and Nalebuff’s argument is the Zero-sum game. In this criticism, there is a stress that the framework is designed under the assumption that given that an organization can only ‘win’ at the expense of others—a win-lose relationship (Henry, 2008; p. 80).
Another pitfall that is always a subject of criticism is the assessment that Porter creates the framework under the assumption of a stable market. According to Prahalad and Hamell (1990; p73) the organization should develop a strategy that will not only ‘position’ it on a given industry space but it is more about ‘shaping, influencing and creating’ such space. Prahalad quoted by Duggan (2003, p. 253), further argues that in today’s world, organizations are faced with great and abrupt changes in the competitive environment’. With the advent of technology that improves communication, production, media and other things that affects how the organizations conduct their business which changes or evolve in only short period of time, Prahalad believes that a new and more effective paradigm must be set; the one that can cope with ‘disruptive competitive changes’ (Henry, 2008;p81).
D’Aveni (1994, p.119) on the other hand argued about the presence of ‘agrressive competition’ or ‘hypercompetition’. In such instance, the different organization in the industry tries and use all the possible tools that they can utilize to ‘destabilize’ other players and to acquire the best competitive advantage. Such hypercompetition does not exist in the 1980’s and if it does, it is not as blatant as it is in today’s economy. This new form of competition is harsh and merciless and thus, dangerous. Former frameworks and strategies seem to be a lot more obsolete than viable in such accounts. To this end, another critic added, Waterman as quoted by Henry (2008, p.81), suggest that companies, instead of going to where the “puck” is now, should locate and move towards ‘where the “puck” should be’ –in reference to ice hockey. Porter’s framework in the eyes of the above critics is static and therefore it cannot survive and deal with modern market systems.
In support to the above criticism, there exist ‘emerging strategies’ without the aid of advance planning. These spontaneous strategies are used by organizations especially when unexpected things happened which requires immediate action. Apart from this, spontaneous chaos arose or is present in every company. There are several phenomenons, natural or man-made, that might require sudden changes on the company plan. Natural catastrophe such as floods, earthquakes, tsunamis and hurricane can change the future of a company in matters of days, even hours. Accidents, such as fire, machine/equipment breakdown, malfunctions and contamination might also occur. These are some of the things that are not included in Porter’s Five Forces. These may affect the demand and the supply in a rapid manner that is not expected in Porter’s framework. This also has impact and importance not only to the organization but to the whole industry as well. Mintzberg and Waters (1985, p. 257-272) discussed that due to ‘unexpected changes’ subsequent strategy emerges in response to the competitive environment.
Aside from all of the above possibilities, another important aspect of the competitive environment is the changes and the continuance of current laws and legislation that applies to the industry. Most explicitly, the government role in controlling and declaring taxes like value-added taxes. Another thing is the impact of minimum wage that can also affect not only the company’s expenses but also the bargaining power of the buyers. In this case, these other forces are also worth noting and require a place in competitive strategies and frameworks.
Since there are several criticisms that address the seemingly ‘static’ nature of Porter’s framework, other critics believes that revision are urgently needed. The whole framework has little or cannot be efficient in case of a ‘new industry’. Furthermore, Porter’s planning style makes use of predictable elements. Downes states, as quoted from Lysons and Farrington (2005, p 49), that there are newly emerging forces that overwhelms the traditional Five Forces, namely, globalization, deregulation and digitalization. These new forces are not in existence or are not as important to business industry as they are today. It is only natural that Porter has not thought about it, or has not included them in his review.
Henry (2008, p. 82-82) states that Porter, in fact, concedes that there are research that are still needed to determine the links between ‘organization behavior and industry structure’. Porter responded to the comment of Waterman, as quoted by Henry (2008, p. 83) that skills becomes valuable depending on its position, ‘successful companies do not skate for the “puck” instead they define it’. Porter also argued that in fact, the Five Forces are ‘time-variant’ and thus, it is valid in any point in time.
Due to the several changes from the 1980’s to the present the viability of Porter’s frameworks remained in constant doubt and criticisms. Nonetheless, Porter did not advise that organizations should only and/or solely use his framework to succeed. The Five Forces Framework is a generalization of the concepts in microeconomics and business strategy that ought to act as a guide for company’s decision. For an organization to depend its future strategy to only one model and/or framework would be a major error.
Porter’s ideas remain viable and applicable in today’s world. His arguments remains valid in the ground that it depends on basic microeconmic under which the main framework operates on the idea of how buyers, suppliers, substitutes, new competitors and existing competitors works, affect and plausibly threaten the organization. Organizations remains to work or operate within the framework, although some additions are need to be considered or another framework should be establish to include the changes brought about by modernity.
Word Count –2183 with 100-280 words of in-text citations, headings and direct quotations.
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Cite this An Assesment of Porter’s Five Forces of Competition Framework
An Assesment of Porter’s Five Forces of Competition Framework. (2017, Jan 13). Retrieved from https://graduateway.com/an-assesment-of-porters-five-forces-of-competition-framework/