Assignment1: Advantages and Limitations of Porter’s Five-Force Model Chaitanya K Mandyam American Public University System Michael Porter observed and explained the different levels of profitability across firms and industries by his “Porter’s Five – Forces”. The main factors that affect the difference are: 1. Threat of Substitutes, 2. Buyer Power, 3. Supplier Power, 4. Barriers to Entry/Threat of Entry and 5. Rivalry. He analyzed the importance of all these forces minutely and provided the reason why these are useful and has to be considered in the strategy of companies growth in respective industry.
We should consider “Threat of Substitutes” because this may affect the future of the company we don’t look over the substitutes that can be a threat of replacement for our product. Porter even explains the ‘Price Elasticity’ where the proportionate change in quantity of demanded goods is always reverse to the proportionate change of price. “Buyer Power” plays an important role in the strategic analysis of product consumption and production to the end user. There shouldn’t be any monopsony where the user can decide the price of the product, which can be more complicated when it comes to competition with rivalries and meeting the user price. Supplier Power” is considered to analyze the profits made by the supplier versus the company and there can be a possibility where company can even consider forward integration to maintain the equilibrium of profits and user demands. “Barriers to Entry” is also important to restrict new investors to join the industry and inhibit the profits of the present companies in competition by causing more rivalry and weaken the market. Porter also explains different ways of restricting the new reluctant investors. And the new investors can face barriers from Government making only a single company responsible to some areas/counties.
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Companies can themselves have patents by which it can eliminate fresh investors who can risk those highly specialized areas and huge investments. Companies that might think of investing in an industry can even think of Minimum Efficient Scale (MES) before they invest which is the minimum unit cost and if the company can’t make the entry unit cost closer to MES, it’s better to drop from investing in the industry. The more the difference between the MES and the entry unit cost the more the probability of the company risking it’s investment. Porter even explains that the company should consider the following influential factors for “Rivalry”: . Number of firms in competition 2. Market growth of the industry 3. Fixed costs 4. High storage costs / Highly perishable products 5. Switching costs 6. Brand representation 7. Diversity of rivals 8. Industry saturation All the above forces which porter explained in detail plays a critical role in the strategy of establishing a company. Strategic analysis can be made in different levels of company like, Corporate level, Business level and functional level where Business level strategic planning plays an important role and drives the company on a long term sustainability in the present market.
I see even Porter working on dynamic forces that are driven by innovation and he named them as “Punctuated Equilibrium”. I would prefer that we need to consider the dynamic changes of the present world which can affect the strategic analysis constantly and the companies should be volatile to consider of all these changes play accordingly. I don’t see any limitations for Porters five force rules since he is even considering and working on dynamic forces.