The relevance of Michael Porter's 5 forces model to modern day business

Résumé du document

In 1979, a new model was developed for the industry analysis and for the business strategy development: Porter's 5 Forces model. This framework is named after its creator Michael Porter who is a university professor specialized in strategy at Harvard Business School. The model was published for the first time in a book called "Competitive Strategy: Techniques for analyzing industries and competitors" written by Michael Porter himself. He is famous for his main studies focused on how a firm could develop a competitive strategy to obtain a competitive advantage by mastering better than its rivals and understanding the forces which structure its competitive environment. Therefore, he built several strategic tools which are the value chain, the generic tree strategies, the market positioning strategies, strategic groups, Porter's clusters of competence for regional economic development and of course Porter's Five Forces Analysis.

Since the beginning, Porter's Five Forces which has become a reference in analyzing the power of the forces is governing the market. He has identified five competitive forces which recover all kind of markets. Three of Porter's five forces refer to competition from external sources. The remainder is internal threats. Porter referred to these forces as the micro environment. These forces are the intensity of competitive rivalry within an industry, the threat of new entrants and of substitute products, the bargaining power of the customers and suppliers. They consist of those forces close to a company that affect its ability to serve its customers and make profit.... Each of these forces helps to understand the nature of the intensity of the competition present on a market and how this market is or not attractive and profitable. Attractiveness in this context refers to overall industry profitability. "An "unattractive" industry is one in which the combination of these five forces act to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all time are driven down to zero." The overall industry attractiveness does not imply that every firm in the industry will return the same profitability.

Extraits

[...] Analyzing the bargaining power of suppliers helps to know if suppliers have a powerful position on the market. Do they have the capacity to impose their conditions (in terms of costs, prices or quality) to a market? A market with powerful suppliers is opposed to a truly competition market where there is no way for suppliers to fix its prices. Suppliers power impacts directly on customers bargaining power. Their power is even stronger when there are many buyers and few suppliers, which are dominating the market as in a situation of supplier's monopoly on the market. [...]

[...] It is thus argued that this theory be coupled with the Resource Based view (RBV) in order for the firm to develop a much more sound strategy. Globally, we can say that Porter's five forces model is still a useful tool, easy to use and to understand. But it should be used for analyzing a current companies' situation on a market in order to have a global vision, considered as an opening for deeper analysis which will be at the origin of decisions. Conclusion As we have seen previously, Porter's Model is a fundamental tool and one of the most used in Strategy by companies. [...]

[...] It can concerns different products answering to a same need. For example, the need of traveling could be answered by a car, a train, a bus or even an aero plane. Substitute products are characterized by a positive crossed elasticity, which means that the demand increases when prices increase. The example of luxury goods is relevant. Customers' behaviors show that when a price is too low for a premium product, people will wonder if there is something wrong with the quality of this item. [...]

[...] But, the model is not really more adapted to our modern day business. Indeed, the way of making business nowadays is not the same as it was in the two last decades of the twentieth century. Business world has evolved and has faced to a globalization process. Market is no more static and earlier making business would mean being reactive, flexible and being aware of any kind of unexpected situations. Relations between companies have also evolved and are no longer based on power and threats. [...]

[...] Does any one of them have a monopoly position on the market or are they all on an equal level? Competitors fight constantly within the sector to increase or just maintain their position or their market shares. Between firms there exists more or less rivalry. Competitive rivalry is likely to be based on dimensions like price, quality and innovation. Companies can be protected from competition by technological advancement. This applies to both products and services. Companies that are successful, introducing new technologies are able to charge higher prices and achieve higher profits. [...]