Porter’s five forces model was primarily designed to allow companies worldwide with the ability to assess their performance and most significantly, their competitiveness in comparison to others within a particular industry. The model is innovative in the sense that it provides an in depth analysis of the different aspects that either make or break the performance of a company in both the short and long term (SMI, 2013). It is also a useful tool in regards to measuring not only the success of a company but its level of intensity and its potential. Once the model is applied to a particular company or even situation depending upon its nature and intent, the leader or set of managers can then make changes and further assess the potential of their entity to be successful in the future. This paper will subsequently critically analyze each of the five forces included in Porter’s model in order to determine its overall effectiveness and whether it should be used in the future (SMI, 2013).
The first force of the model is “The Threat of New Entrants”. This is pertinent to all industries and companies as those that are successful will motivate other firms to be established in order to harness any previous success and look at making even larger profits (HBR, 2014). The threat of new entrants is significant as new firms can take away the profitability of pre-existing companies and this forces them to develop strategies that make them more competitive and dominant within the particular field. For instance, in the banking or financial services industry, pre-existing banks may develop particular benefits or strategies that help to retain customers and also attract additional customers, therefore preventing loss of profits and accounts overall. This part of the Porter’s Five Forces Model is particularly important and should be retained as many firms seem to forget that competitiveness drives chain and further inspiration for success (Chapman, 2013).
The second force to be analyzed within the Porter Model is “Threat of Substitute Products or Services”. This part of the model may overlap with the first force as it also looks at the development of new products and items as a result of previous success from other and more traditional firms. In this case, successful products with a high level of competition will almost always attract the onset of new and more innovative products and this also increases the intensity of the market and the level of competition. For example, competition between products from the well known shoe and athletic product companies, Nike and Adidas highlight the significance of particular threats posed by competing companies and substitute products (CGMA, 2013). For every product that exists on the market, there will always be an updated model or alternative version that is developed and always launched on the market. Companies need to be weary of this fact. This paper determines that perhaps substitute products could be included in the first force of “threat of new entrants” in the current market in the 21st century.
The third force of the model is “The Bargaining Power or Customers or Buyers”. This is deemed to be very important and crucial to the success of thousands of businesses worldwide. Customers or clients ultimately determine whether the products of a company become successful and if the company itself can continue to profit from their continuing and renewed interest (Chapman, 2013). For example, a financial services firm may have a certain number of customers or clients who may only remain loyal with the company if it reduces its fees or ongoing advice fees subsequently (Investopedia, 2013). This is proof that customers and clients have a certain amount of bargaining power that can not be forgotten nor can it be altered. The more bargaining power they have, the better products have to be in terms of their respective benefits and advantages to the customer only (Chapman, 2013).
The fourth force of the model is “The bargaining power of supplies”. This is also pertinent to current firms and companies that sell products as this determines whether they will make a profit off of what they sell (HBR, 2014). For example, if a company can convince a supplier to provide more of a product at a lower price and the company is able to sell that product in a larger amount and at a higher price to a customer or client, then the bargaining power of that supplier is particularly large. This is one area of the forces model that may become quite redundant or irrelevant to certain situations as not all companies and firms rely on suppliers and many of them supply or produce the products themselves (Arline, 2015).
The fifth force to be critically analyzed is “The Intensity of Competitive Rivalry”. This also determines the success and level of competition of a company as competitive rivalry can inspire customers to produce better products in fear that other companies will outcompete them (CGMA, 2013). This part of the model is the main driving force behind the re-development and re-design of companies to better their products and subsequently, their competitive rivalry with one another. For example, as a result of the competitive rivalry and its intensity, coke and Pepsi have continued to compete with one another but also provide high quality products such as diet Pepsi and diet coke, which continue to compete with one another on a daily basis.
In conclusion, it can be assessed that the “Porters Five Forces Model” is significant and crucial to the success of companies based on their rivalry with others and the level of association or relationships with crucial stakeholders such as suppliers and most importantly, customers who can potentially make or break a company.
- Arline, K. (2015). Porter’s Five Forces: Analyzing the Competition. Business News Daily, http://www.businessnewsdaily.com/5446-porters-five-forces.html (8th April, 2016).
- CGMA. (2013). Porter’s Five Forces of Competition Position Analysis. Chartered Global Management Accountant, http://www.cgma.org/Resources/Tools/essential-tools/Pages/porters-five-forces.aspx?TestCookiesEnabled=redirect (8th April, 2016).
- Chapman, A. (2013). Porter’s Five Forces Model. Business Balls, http://www.businessballs.com/portersfiveforcesofcompetition.htm (8th April, 2016).
- Greenspan, R. (2015).Starbucks Coffee’s Five Forces Analysis (Porter’s Model). Panmore Institute, http://panmore.com/starbucks-coffee-five-forces-analysis-porters-model (8th April, 2016).
- HBR. (2014). The Explainer: Porter’s Five Forces. Harvard Business Review, Video, https://hbr.org/video/3590615226001/the-explainer-porters-five-forces (8th April, 2016).
- Investopedia. (2013). Industry Handbook: Porter’s 5 Forces Analysis. Investopedia, http://www.investopedia.com/features/industryhandbook/porter.asp (8th April, 2016).
- Reckles, D. (2015). Porter’s Five Forces – content, appliication, and critique. The Manager, http://www.themanager.org/2015/11/porters-five-forces/ (8th April, 2016).
- SMI. (2013). Porter’s Five Forces. Strategic Management, https://www.strategicmanagementinsight.com/tools/porters-five-forces.html (8th April, 2016).
