STRATEGIC MANAGEMENT

Porter's Five Forces Model and Strategic Management

Porter's Five Forces Model and Strategic Management

Introduction

The concept of market structure is contained in the academic disciplines of economics and marketing. Its inclusion in each of these fields is a result of their mutual concern with strategic decision making. Economics has a focus on high-level socioeconomic issues, while marketing looks to gain understanding of behavioral issues facing both producers/suppliers and consumers. In addition, marketing managers seek to define market structure to create competitive strategies as part of an overall marketing plan. Success of any decision depends upon the critical analysis made under the models. Porter's model of analysis of five forces simulates a competitive situation. It resembles to other method, such as PEST analysis, but focuses on a single strategic business area instead of a product or product range. This paper presents information about the Porter's five forces model and define its importance in Strategic Management.

In the contemporary world, strategic management has become an accepted and important aspect of organizational management. Senior managers are acutely interested in identifying how their business divisions can identify a competitive advantage for the organization. Winning in the competitive world requires well-organized planning. Strategy is a pattern of actions to determine a future direction for a business created through a formalized approach to strategic planning. Managing the pattern of actions determined through this process distinguishes strategic management from strategic planning. Strategic planning is about identifying the strengths, weakness, opportunities, and threats of an organization, creating mission and vision statements, identifying organizational objectives, and determining strategies (actions) to meet objectives (Porter, 2003). Porter's model led basis for the analysis of industry and forces that shape the strategic decision of corporations under external environment pressures. Strategic management is concerned with the implementation of the strategic plan (Whittington, 2001). Porter's five forces model enhances the objectivity of the implementation to work with and through other people to ensure articulated organizational objectives are realized under strategic management principles.

Porters Five Forces Model

Porter's five forces model emphasize on the principle the structure of an industry and business profitability in the latter depends on five forces. These forces include:

Intensity of competition in the industry

Threat of new entrants

Bargaining power of customers

Bargaining power of suppliers

Threat of substitutes

Threat of New Entrants 

The new entry is influenced by barriers to entry, the initial investment required, tickets, patents already in place, standards, protectionist measures, the image of the industry and companies already established, cultural barriers, technical standards, etc. All these methods make entry more difficult for a new firm. Threat of new entrants is highly important for existing companies or companies choosing to diversify (Waldman & Jensen, 2007). These can be competitive due to knowledge of business gained in other sectors or in other country.

Bargaining Power of Suppliers 

The ability of suppliers to impose conditions on a market (in terms of cost or quality) directly impacts the flexibility and profitability of companies engaged in it. This ability is inversely proportional to those of clients. A small number of suppliers, a strong brand, and highly differentiated products ...