RUNNING HEADER: FIVE FORCES MODEL

Five Forces Model

Question No. 1: What is the theoretical basis or foundation of the Five Forces Model? Select an industry and analyze it using the Five Forces Model. What are the limitations or shortcomings of the Five Forces Model as a tool for industry analysis?

Michael Porter's main purpose behind the development of this model was to protect the business from competition and to achieve some competitive advantage. This model creates a framework for managers to analyze their strategies and helps them in achieving their organization goals with proper strategies. With the proper utilization of Porter's Competitive Forces Model, the industries can enhance their understanding not only about the various opportunities available to them, but also about the miscellaneous threats to their industry's business. Moreover, the industries can examine their profitability with the help of this model. (Porter, 1979)

Porter's Competitive Forces Model is for strategy analysis. The model represents five major external forces that can affect a company's profitability and competitive advantage. Threats of entry, Powerful suppliers, Powerful buyers, Substitute products and Jockeying for position are the five forces that constitute this model. The analysis of these five forces is highly significant in strategy formulation and evaluation of firm's strategic position. (Porter, 1979)

Competitive advantage is like achieving a better place than competitors. The industries can achieve competitive advantage by proper formulation and analysis of their strategies. Michael Porter (1979) developed five forces model for strategy analysis and formulation. These forces analyze the opportunities available and threats to the industries. Thus the analysis helps the managers gain a better understanding of the strategies that are useful for industries to achieve their goals.

Threat of entry refers to the entry of new competitors/industries that affect the work of existing industries in the same field. So in order to prevent this threat, the industries should make some barriers like economies of scale, product differentiation, capital requirements, access to distributional channels and government policy, etc. while formulating their strategies. These barriers prevent the entry of new industries up to some extent. Further, the bargaining powers of suppliers and buyers also affect the company's profitability and should be kept in mind while formulating and analyzing various strategies. Suppliers tend to have an advantage when there are fewer companies competing with them or when they own a unique product. But they do not benefit by having special customers as the efficient bargaining skills of such customers can lower the profits earned by an industry. Generally speaking, the bargaining power of buyers increases when they purchase stuff in large volume/quantity or purchase a standard product/component of the product. Further if they earn low profits from the resale of these items, then they would try to bargain with the selling party and buy the items at cheaper prices. Thus, the bargaining powers play an important role in choosing customers and sellers. In addition, substitute products can also affect the industries in achieving competitive advantage and increasing profitability. Threat of substitute mainly depends on the opinion of ...