MPM701A Business Process Management: Porter’s Five Forces

The past three weeks you wrote essays with the help of your fellow class mates, and your tutor. This week there will be no class, and you will do the questions all by yourself. Like the previous weeks the questions are meant to help you come to grips with the article, and they form the basis of the essay you will write.

Michael Porter was successful in putting the content of business strategy to avoid competition center stage. His work belongs to the positioning school, which teaches that the position of the company could explain or predict performance in the industry. Porter’s work focuses on the industry environment in which a company operates: it is the job of the strategist to find an optimal fit between the company and its environment. That job is dynamic: a good strategist has means to channel the change of the competitive environment somewhat too.

Read the questions below before you read the article. Answer them after you have studied the article.

1. Porter writes: “ntense competition in an industry is neither coincidence nor bad luck.” (page 137, upper-left). What are Porter’s main arguments for this view?

2. According to Porter, there exist five forces which affect the performance of a company. What are these forces, and what do they involve?

3. According to Porter, how should a company formulate its competition strategy?

4. According to Porter, companies should choose a generic strategy. One such a possible strategy is cost leadership: being able to produce the product cheaper than competitors, so as to offer a lower price to the customer. There exists another strategy which is explained by the Dr Pepper example. Which strategy is this?

5. How can a strategist help a company exploit industry change?

6. What is multifaceted rivalry?

Answer:

Porter’s five forces is an important tool which is used to study the competitiveness of a business environment and to identify the potential profitability of the organisation and determine the strategies which will help the company to succeed in the market. The five forces were created by Michael Porter, who was a professor at Harvard Business School in the year 1979. Since then it has been regarded as one of the most popular and useful business tools which are used to study the attractiveness and profit of an industry. Porter identified five forces which could create an impact on the business environment. The five forces are as follows. Firstly, competitive rivalry means the strength and the number of rivals or competitors that a firm has. The intensity of the competition determines the price and the marketing campaigns of a firm. Secondly, the threat of substitution is another product that is found as a substitute by the customers for a product supplied by the firm (Rajasekar & Al Raee, 2013). Thirdly, the threat of new entrants means that the position of the firm might be affected due to the entry of any new firm in the market. This threat depends on the foothold that the firm has over the market and the strength of the customer base. Fourthly, supplier power means the power that the suppliers have over the buyers and the increase that they make in their prices. This power comes when the firm has a dominance in the market and knows that the customers have no other choice. Lastly, buyer power is the dominance that the buyers have over the supplier in terms of the price of the product (Marler & Fisher, 2013). This happens when there are several choices in the market for the buyers. This essay will focus on whether Porter’s five forces is still an applicable as a strategic tool for companies such as Uber, Amazon, Facebook, Groupon and eBay.

Dälken (2014) states that porter’s five forces model is a very useful tool which is still applicable to the scenarios of measuring market attractiveness. This tool helps to determine the strength and weaknesses of the market and therefore is beneficial for all industries. The five forces model becomes a relevant part of the business in today’s time as well since it helps to understand the root cause of profitability if a business and determines the competition to a great extent. Companies such as Uber, Groupon and others would be able to develop proper strategies depending on the external factors of the model. On the other hand, Danemo (2018) argues that the five forces model might not be equipped enough to understand the complex situation of the current market. This makes it incapable to assess the market properly and form the best strategies for the business. Since companies like Uber, eBay, and Facebook operates through online services, it is most important for them to determine strategies which would boost the level of their services. The researches argue that the five forces model might not be applicable for internet companies of current times.

Hence, it can be concluded that even though the five forces model is a very strategic tool which helps several companies to form strong strategies by assessing their external environment, it also has certain drawbacks. Due to the huge competition that has arrived in current times, it might be impossible for the five forces model to act as the perfect tool for internet companies and to assess their complex environment. Therefore, with the change in time, there have been changes in the ways that the external environment of the businesses is analysed.

References:

Dälken, F. (2014). Are porter’s five competitive forces still applicable? a critical examination concerning the relevance for today’s business (Bachelor's thesis, University of Twente).

Danemo, J. (2018). How is AI influencing industry competition?: An exploration of online retailing using Porter’s Five Forces Framework.

Marler, J. H., & Fisher, S. L. (2013). An evidence-based review of e-HRM and strategic human resource management. Human Resource Management Review, 23(1), 18-36.

Rajasekar, J., & Al Raee, M. (2013). An analysis of the telecommunication industry in the Sultanate of Oman using Michael Porter's competitive strategy model. Competitiveness Review: An International Business Journal, 23(3), 234-259.