Business Strategy Essay

For better understanding, this assignment has been organised in four sub- headings, they are as follows: the general overview of Porter’s Five Forces model; the importance or usefulness of Five Forces model; the criticisms and evaluation of Porter’s model; the recommendation and finally the conclusion. Overview of Porter’s model Johnson et al (2011) described Porter Five Forces as a strategic tool that helps identify the attractiveness of an industry in terms of five competitive forces: the threat of new entry, the threat of substitutes, the power of buyers, the power of suppliers and the extent of rivalry between competitors. Porter (1980) argues that this model is based on the insight that a good business strategy should meet the opportunities and threats in the organizations external environment. Particularly, competitive strategy should be based on an understanding of industry structures and the way they change. From the above explanation we can see that Porter’s Five Forces is a simple tool that supports strategic management in decision making through understanding where strength and weaknesses lie. Importance of Porter’s Five Forces The Porter’s Five Forces is a simple but powerful tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of the firm’s current competitive position, and strength of a position a company is looking to move to. †¢This model also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its application inspired numerous companies as well as business schools to adopt its uses as suggested by Wheelen and Hunger (1998). With clear understanding of where power lies, it will enable a company to take fair advantage of its strengths and improve on its weaknesses and off cause avoid taking wrong steps. Therefore to apply this planning tool efficiently, it is important to understand the situation and look at each of the forces individually. Criticisms and Evaluation of Five Forces Porters Five Forces is no doubt a powerful framework in determining the competitive nature of an industry. However it has been criticised by various commentators regarding its usefulness in today’s dynamic business environment. Although, Wheelen & Hunger (2002) recognised the five force they both thought that Stakeholders influence should have been included as the sixth force. This is because interest groups like the government, local communities, creditors, trade associations, special interest groups, unions and shareholders all have big influence on how the organisation operate. For instance, financial policies such as interest rates are being regulated by the government and may have a negative or positive effect on the organisation. Also as part of the stakeholders if creditors refuse to provide credit facilities for some firms could force them into liquidation. Porter’s model assumed that all businesses are competing against each other while in the actual sense some complement each to provide a better product, which are known as complementors. Complementors in this sense are businesses that provide complementary services to each other. These companies form strategic alliance to enhance the services that they provide either for the purpose of efficiency or cutting of cost. Example of this situation can be seen on iPods and headphones. Apple produced the iPod while Sony produces the headphone which Apple uses and same time Apple is competing with Sony on its brand of MP3 music player, in other words, each of these firm benefits from each other’s presence. Downes (1997) in his article â€Å"Beyond Porter† in the Context Magazine, suggested three new forces which he called; Digitalisation, Globalisation and Deregulation. Digitalization: He claims that organisations are now highly influenced by technological advancement, especially in information technology as well as retail organisations. Most firms no longer depend on high street sales rather online to boost their revenue. Some high street store also trying to play catch up with organisations like eBay and Amazon who have dominated the online. The introduction of credit cards by credit card organisations, loyalty cards by retail stores, all these new digital technologies allows companies to chase competitive advantage on a different level thereby creating new strategy to outweigh its competitors. Globalization: According to Downes (1997) days are gone when firms were only competing with their local rivals. Most organisations are now competing on international level by way of improved distribution channels, businesses can now buy and sell and on a global level. Customers, through the internet have the chance to shop around and compare prices globally. Even most medium size companies find themselves in an international market, even if they do not have branches overseas. Based on these facts it is not enough anymore for any business to position itself as a price-leader. Instead competitive advantages emerge now from the ability to develop long-term relationships to more mobile costumers and to manage extensive networks of customers and associates for mutual benefit. Deregulation: Industries like Communication, Railways, Airlines, now have different ways of competing against each other since firms are now in the hands of entrepreneurs’ unlike in the 1970 when most firms were in the hands of government. Deregulation creates more intense atmosphere for competition because every player in the industry wants to dominate the market. When compared to Porter’s Five Forces model, digitalization, globalization and deregulation have become more powerful forces in the last few decades, which Porter barely takes into consideration in his work. Today’s companies are highly influenced by technological progress, especially in information technology. Therefore, it is not advisable for any business to develop a strategy solely on the basis of Porters model. Shapiro and Varian (1998) claimed that economic laws do not change while technology do then went further to argue that Porter’s models are economic laws and rules that has been around for ages before his study but technology and information has moved and still moving and will continue to be a major force in competitive strategy. Presently, the level of information made available to businesses has intensified competition. For instance, firms can now gather so much information about their customers and how much they are willing to pay for the product. With customer’s shopping available to them they may choose to â€Å"lock them in† which would not have been possible many years ago when five forces was propounded. Despite the huge success of five forces in strategic management, this model did not give exact percentage of these forces to signal when the company is at risk, therefore the model on its own lacks enough information to actually guide decision makers. Although, still applicable in today’s dynamic business environment, it was advocated many years back when the business environment were not that competitive, for instant, when it was proposed it could be that a firm has only one supplier for its material which eliminated the possibility of strong competition among suppliers. This model from all indication assumed identifiable competitors, business partners, and customers who engage in more or less predictable ways. Kippenberger (1998), Haberberg & Rieple (2001) all suggested that it is not advisable to develop a strategy based on Five Forces model alone, it should be used in addition to other frameworks, thus SWOT and PESTEL analysis. This does not mean that Five Forces is invalid, but it is good to adopt a model knowing its merits and demerits. Rather than jump into a framework thinking it has solution to every situation. Recommendations Managers and decision makers in conducting analysis on Porter’s Five Forces should brainstorm on all relevant factors for the firm’s market situations and then check against the factors presented for each force. It will also be relevant to use positive sign to indicate forces that are in favour of the organisation and negative sign for forces strongly against the organisation in question. After identifying the favourable and unfavourable forces of the company’s performance and industry’s attractiveness, the manager should analyse the situation and examine the impact of these forces. Conclusion This assay has given a thorough account of Porter’s Five Forces by drawing attention to some of the criticisms of this model, which includes neglecting the all-powerful forces of Stakeholders, the emergent effects of digitalisation, globalisation and deregulation. Complementors and Collaborators as well as easy access to information were all overlooked by this framework. Through evaluation of this model, we also found that most organisations have managed to avoid the bargaining powers from either the supplier or distributors by way of backward or forward integration. This assignment acknowledged the usefulness of Porter’s model in strategic analyses even in today’s dynamic business environment but must not be used in isolation without considering other forces mentioned above. And finally organisations and decision makers should not assume that all their competitors and business partners are identifiable as suggested by this model.