Porter's Five-Force Model

Describe Porter's Five-Force model and how it is helpful when developing one's international strategy. Do you see any limitation to Porter's modeling techniques?

Michael E. Porter, a professor from Harvard University, is the author of one of the most important books about business strategy management, Competitive Strategy (1980). This book is one of his best known and most widely used and referenced books in business field. His work is widely read by business strategists around the world and by business students, especially MBA students. His work has had a great influence on business strategy than any other business theory from 1980s.

In his book, he mentioned Five-Force model as a means of providing corporations with an analysis of their competition and determining strategy. So Porter's Five-Force model looks at the strength of five distinct competitive forces. These forces when taken together, determine the long-term profitability and competition of a corporation. Competitive Strategy: Techniques for Analyzing Industries and Competitors, which the theory of Porter's Five-Force model originally comes from, revolutionized contemporary approaches to business strategy through application of this model in business practice.

The five forces are competitive factors which determine the industry competition. These five forces are rivalry within an industry, suppliers, substitute products, customers or buyers, and new entrants. Porter applied macroeconomic principles to business strategy and analyzed the strategic requirements of industrial sectors, not just specific companies, but also for any size and types of business in the world.

Even though the strength of each force can vary from industry to industry, but the forces, when considered together, determine long-term profitability within the specific industrial sector. "The five forces affect prices, necessary investment for competitiveness, market share, potential profits, profit margins, and industry volume. So that his model depends on the concept of power within the relationships of the five forces"1. (Porter's 5-Forces Model 2010)

The Five Forces

1, Rivalry

Or industry competitors naturally develop between companies competing in the same market. Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct.(QuickMBA 2010)

To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and pricing-cutting, diverse competitors, high-stakes investment, and the high risk of industry exit. There are also market entry barriers.

2, Threat of substitutes,

Or pressure from substitute products or services, are the natural result of industry competition, but they place a limit on profitability within the industry. A substitute product involves the search for a product that can do the same function as the product the industry already produces.

3, Buyer Power

Or bargaining power of buyers, is significant in that buyers can force the prices move down, demand higher quality products or services from the supplier, play competitors against one another. All of these can result in potential loss of industry profits to corporation. Furthermore, other aspects such as buyer can exercise more power when they are large-volume buyer, the product is a significant aspect of the buyer's cost or purchases, the products are standard within an industry (which can easily find more supplier), there are few changing or switching costs, the buyers earn low