Analysis of Porter’s Five Force Framework as a weak guide to the competitive environment of international business
Introduction
In existing period of time, conditions for business activities have been changed quite dramatically. There are a number of different issues such as stiff competition prevailing in the market place and instability of the global economy that have induced the business organizations to adopt different strategic measures. Among such measures, geographic business diversification strategy is one of the prime strategies adopted by a business organization in which, it considers to get entered into a new market place or a new industry (Harris 2005). However, for the purpose of getting entered in a new market place or an industry, there is a need of having a rational and analytical approach.
The management of the organization should have an intensive analysis of the target market. For this purpose, there are different strategic frameworks and models which help the organization to have effective analysis of the viability of the external market place and industry for its business activities (Schermerhorn 2009).
In relation to the above discussion, Five Force Model postulated by Michel Porter is regarded as one of the well known strategic model and tools for the managers to reveal the feasibility of a specific industry. Although, there are different crucial information delivered by this model regarding a specific industry, yet still in existing business environment, the significance of the model in delivering effective and desired information regarding external market place has come into scanner (Hill and Jones 2008).
The viability and effectiveness of this model in judging the compatibility of external market related trends with the existing business model of the organization has come under the scanner (Henry 2011). In this regard, the presented essay is aimed to reflect the extent to which, Porter’s Five Forces framework can be considered as a weak guide to the competitive environment of international business.
Thesis statement: The prime thesis for the presented essay is:
“Porter’s Five Forces framework is not capable to provide some concrete evidences regarding the competitive environment of international business for a multinational business organization”.
The entire findings of the paper will be directed to test the above mentioned hypothesis.
Critical analysis of the viability of Porter’s Five Force Model in international business
Porter Five Force Model is aimed to reflect some of the crucial information regarding existing trends prevailing in the targeted industry with the help of which, potential treats as well as opportunities of that market for the business organization can be identified. The overall viability of this model in existing conditions can be judged under different heading mentioned as below:
Porter’s Five Force Model
Prior to judging the model, it is essential to reveal crucial aspects of the model so that perspective of the model in existing conditions can be cleared in the most effective manner. For the purpose of explaining the existing trends prevailing in a specific industry, Michel Porter has postulated a strategic analytical framework, namely Five Force Model. As per this model, there are five different forces of the external market place, which can affect the viability of the existing business operations of the business organization in the most effective manner (Henry 2011). These five forces can be listed as below:
- Bargaining Power of Customers: This force reflects that to what extent the customers can affect the strategic choices and products offerings of the company
- Bargaining Power of Suppliers: This force presents the degree of dominance of the suppliers of raw material for the company operating in the industry, which can affect the cost structure and prices, and quality of the product and services (Hill and Jones 2010).
- Threat of New Entrants: This force shows the entry barriers prevailing in the industry which put restrictions on the entry of a new organization in the industry.
- Threat of Substitute: The substitute product can be understood as the products which are able to accomplish some specific needs of consumers. The high availability of such products in the market can be proved as one of the prime threats possessed by the company in that industry (Schermerhorn 2009).
- Existing Rivalry in the Market: The existing position of competition in the existing market place can be considered one of the prime forces prevailing in the industry that can change the strategies for the company (Harris 2005).
In this way, the five force model presented by Porter is directed to reflect some of the crucial industry related trend on the basis of which, effective formulation of the strategy can be taken into account.
Limitation of the model
Despite having a number of different crucial advantages, there are certain limitations of the Porter’s Five Force Model, which directs to restrict the span of the usage of the model in existing international and globalised business environment. These limitations are quite critical and can affect the strategic orientation of the organization in a new market or industry in the most effective manner. These limitations of the model can be detailed as below:
Unrealistic Assumptions
The first and foremost limitation of the model is that the model considers some specific assumptions, which can be considered quite unrealistic in existing period of time. The first assumption for this model is that there should be conditions of a classic perfect market, where there are high number of sellers and high numbers of buyers, and there is no any restriction over business transactions undertaken by the business organization. In existing business environment it is not possible to find such perfect marketing conditions as there are a number of different regulatory, monitoring and administrative bodies at international and national level, which are targeted to impose some restrictions and regulations over the business transactions and activities undertaken by various business organizations operating within a specific industry. In such high regulated business conditions, the degree of effectiveness of the insights about the market by the five force model decreases (Roy 2011).
In addition to this, Five Force Model also assumes that conditions of the market should be static. However, in existing conditions the dynamism and complexities of the market have been enhanced quite significantly. Various critical factors such as availability of venture capital, integration of supply chains through internet, technological breakthroughs in practices, and liberalizations of economies and international business norms has made the market conditions more dynamic (Porter’s Five Forces 2009). In such dynamic conditions, it can be proved quite hard for a manager to predict the business conditions with the help of porter’s five force model.
Lack of in-depth understanding of the market and business conditions
Another critical limitation of Five Force is that it provides limited knowledge and understanding regarding the existing trend of the market. The model only provides insights regarding what is prevailing in the market. It does not reflect the reasons behind the occurrence of such market trends. With the help of the information provided by the model can be helpful for making short term strategies and decisions only as such information is based on the existing marketing conditions only. With the help of model proper reasoning behind the occurrence of different trends prevailing in the market cannot be availed. Owing to this reason, strategic decisions making on the basis of the information retrieved through Porter’s Five Force Model cannot be possible (Symes 2013). In addition to this, through this model, the impact of only external factors on the performance of the company can be analyzed.
There are different other factors related to internal business environment such as organizational structure, hierarchy, internal process, working environment, and capabilities of employees, which can affect the performance and sustainability of the business organization within a specific market place. These are some of the critical factors which cannot be trace with the help of porter’s strategic framework of Five Force. In this way, it can be considered that the model only reflects snapshots of the external market conditions. In-depth and strategic information cannot be retrieved with the help of this model (Roy 2011). Owing to this reason, the model contains little significance in strategic decision making for business organizations.
Less consideration for non market forces
The models help the management of business organizations to collect and analyze different market forces, such as competition, status of customers, and suppliers. Along with such critical market related forces, there are some other critical non market related forces such as governmental regulations and policies, economic trends, social and cultural norms, and technological breakthroughs, which can affect the business conditions of the business organizations (Katsioloudes 2006). In regard to this, for a business organization, it is quite crucial to give proper thought over such non market forces while making any strategic decision (Amason 2010). The Porter’s Five Force model does not provide adequate considerations over different non market forces, which can be considered one of the prime limitations for the model. The lack of proper consideration for non market forces decreases the effectiveness and viability of the model in the long run for managers.
Only on the basis of the information of market forces, a viable decision and holistic business decisions cannot be undertaken. In existing business environment, different factors such as increasing involvement of government policies in business operations, dynamic status of global economy, rapidly changing preferences and taste of customers, and changing business processes under the influence of the rapidly advancing technology, affects the success and sustainability of the organization in the market place (Sadler 2003). In regard to this, it is essential for the organization to have proper response to such critical non market forces. Owing to this reason, lack of information regarding such crucial non market forces can make it difficult for having undertaking crucial strategic decisions.
Hard to be applied on the market with complex Structure
Another critical weakness associated with the model is that the model can be applied only in the simple structure of the market in which, perfect conditions for business transactions are prevailing. For instance, in the market, there should be a large number of buyers and sellers and sellers are required to deal in homogeneous products. In the regard to this, simple structure of the market, the interpretation and recording of various market forces that affect the performance of business organization can be done in the most efficient and effective manner (Amason 2010). In the conditions, where the business conditions are quite complex, i.e. sellers are engaging the practices of selling a large number of products, which are heterogeneous by nature, the application of five force model is quite hard.
This nature of the Model has been emerged as one of the prime limitations of the model as in existing scenario, there are very few markets across the globe that can be considered statistic by nature and performance. In existing dynamic business environment business organizations frequently use diversification and intensification growth strategies for the purpose of averting risks of business environment. Such strategies make the process and mechanism of the market quite complex and dynamic.
The business model employed by business organization has been changed quite intensively. For example, in the case of Wal-Mart, which sells products of different nature and different brand, it is not easy to estimate some specific forces including threat of substitutes (Enz 2009). In this way, in the context of a complex structure of the market, Five Force Models can only be used for the purpose of collecting some elementary information regarding the market. It is not quite possible to retrieve in-depth and strategic information regarding complex and dynamic markets with the help of Porter’s Five Force strategic Framework.
Lesser focus on non competitive growth strategies
The prime focus of the Porter’s Five Force Model is on forming the policies with the help of which, the company can be able to win the competition prevailing in the market. The basic idea of the model is to address stiff competition provided by close competitors. As per the basic assumption of the model, all the strategies of the company should be focused on attaining competitive advantage over competitors in the market as well as customers and supplier as it is the prime aspect of the company’s success and sustainability in the market (Orcullo 2008).
However, apart from such critical competitive marketing strategies, there are some other non competitive strategies such as strategic alliance, implementation of virtual enterprise-networks, upward and downward integration of supply chain, and integrated management of information for the purpose of developing synergy between the company and competitors in the market place. These all the non competitive marketing strategies can be proved quite crucial for the organization to be sustained in the market place in the most effective manner. In relation to this, lesser focus of the non competitive business strategies do not provide holistic approach for the business organization to fight the competition in the non conventional manner.
Ignorance of the sixth Market force: Power, vigor, and competence of Complementors:
The Porter’s five force model considers five crucial sources related to a specific market. Along with such crucial five market forces, Power, vigor, and competence of Complementors is also one of the crucial market forces which helps the organization to be successful in the existing market place. The presence of complementary companies in the market can be considered as one of the positive factors for the business organization.
Complementor Company can be considered as the company which, sells the products of the company and add value with the product of the company. In relation to this, effective compatibility of the business organization with the compementor helps the company to attain desired success in the desired market place (Howes and Tah 2003). For instance, this market force can be illustrated in the most effective manner in the case of computer hardware industry for which software industry can be considered as the complementary industry.
The availability of the effective and innovative software in the market induces the people to purchase more effective and expensive hardware products. In this way, effectiveness of software industry indirectly affects success and sustainability of the software industry in the most effective manner. The porter’s five force model neglects such type of crucial market forces, which can be considered quite crucial from the perspective of the success of the company in the long run (Bamford and West 2010). In this way, the model supplies incomplete information regarding different crucial trends prevailing in the market place.
In this way, these are some of the critical aspects related with the porter’s five force strategic framework due to which the scope of the application of the model gets restricted.
Challenges to the Model in assessing the viability of firm’s status in international business environment
In relation to different limitations of the model as illustrated in the above sections, there can be multiple challenges faced by the model in existing business conditions. The first and foremost challenge is related with its application in existing business conditions. The model was postulated by Porter in the period of early eighties, when business conditions were entirely different from the business conditions in existing period of time.
The structure of the market at that period of time was relatively static and containing perfect business conditions for business organizations. However, in existing period of time, the markets conditions have become changed in the most effective manner (Kozami 2002). In such changing conditions, interpretation of new market trends with the help of old assumption can be considered as one of the prime challenges in front of the business organizations while utilizing the porter’s five force model for analyzing a specific industry and its future potential.
Along with this, another critical challenge in front of the model is to incorporate various non market forces in the analysis of an industry. In existing period of time the model reflects different trends of a market or an industry with the help of five specific market forces. However, there are certain non market forces also that can affect the performance of the company in the most effective manner. It will be a critical challenge for the model to realize and value such crucial non market related forces while assessing the effectiveness of a specific market and industry (Orcullo 2008).
In addition to this, there are crucial concepts regarding marketing and strategic management such as compelementry goods and non competitive growth strategies, which are completely neglected by the mode. Owing to this negligence, the overall relevance and effectiveness of the model in existing period of time decreases in the most significant manner. In regard to this for the model, it is quite essential to provide adequate amount of considerations over such crucial strategic measures in the most effective manner (Sadler 2003). In relation to this, it will be a challenging task for the model to adhere such new concepts of marketing while undertaking orthodox assumptions.
These are some of the critical challenges faced by Porter’s five force model in order to be the first choice of business managers and analysts while analyzing the existing and potential success of an industry or a business market place.
Conclusion
Along with different crucial strategic measures, Porter’s five force model can also be considered as one of the prime measures for the purpose of revealing the strategic importance of a specific industry or a market place. However, in existing period of time, strategic managers and scholars use this model as a source of collecting only elementary information related to the market trends and market potential. The importance and significance of the model in revealing strategic information has been dropped quite critically in existing period of time. In regard to this the paper has highlighted some critical reasons behind this lack of interest shown by managers in the strategic framework related to Five Forces.
These are some of the critical limitations of the model which harms its overall significance in making strategic decision. In direction to this, there is a need of undertaking some crucial and effective amendments in the overall five force model so that the model can be used by the business organizations for taking its strategic decisions. In this way, it can be considered that Porter’s Five Force Framework can be considered as a weak guide to the competitive environment of international business.
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