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Michael Porter developed his 5 forces model in 1979 and it has been widely used ever since. However, there are some commentators who criticise this model. Critically discuss this model and whether the model still has relevance for today’s modern business environment.
Porter’s Five Forces model (Porter, 1979) was developed with the objective of being used by businesses in order to assess their competitive strength and ultimately achieve greater profitability in the marketplace. It is designed to be used as a model for analysis, or an analytical lens, for those designing corporate strategy to be able to identify and assess strengths and weaknesses of an industry. The Five Forces model, in theory, can be applied to any industry. Nearly forty years later, it is claimed that the model is frequently used today to determine corporate strategy. However, there have been an increasing number of criticisms from commentators (Grant, 1991; Grundy, 2006) who call into question its relevance for businesses today, and suggest that there are a number of alternative strategic theories which are more practical and useful. One such theory is the Resource Based View of the firm. The following essay will firstly discuss Porters Five Forces, providing a platform and benchmark to later discuss and evaluate. Second, the essay will then briefly discuss the main themes of Resource Based View Strategy. Third, the essay will discuss and analyse the strengths and limitations of the two strategies, and lastly, the essay will evaluate the discussion and will reach a conclusion about the relevance of Porters 5 forces model for today’s modern business environment.
Porter’s Five Forces Model
Porter (1979; 1980; 1985) references what he calls the ‘Five Forces’, of which a successful firm is capable of influencing through its conduct. Importantly, this particular model emphasises significance of external forces, rather than internal forces, that give rise to opportunities and threats for a business.
The first force of the five forces is bargaining power of customers. This relates to the ability of customers to put the firm under pressure in such a way that its prices can be altered, which affects their price sensitivity. Powerful customers are ones in which can play industry participants of against each other to bring prices down, by demanding better quality or a better service (Porter, 2008:30). Additionally, should many alternatives be available to the buyer, the greater the buyer power is. Ideally, a firm would wish there to be few alternatives, reducing the bargaining power of their customers. The second force is the bargaining power of suppliers, in other words the supply of raw materials, labour and expertise services. The supplier holds more power if there are no other or few substitute suppliers available to the firm. In this scenario, the firm has little choice but to pay the prices dictated by their suppliers, which greatly affect the firms’ profitability. The third force is the threat of new entrants, and if a particular industry is seen as being profitable, the greater the likelihood of new entrants entering the marketplace. Ultimately, this can reduce the ability of every firm in the industry to generate profit. The forth force is the threat of substitute products - where substitute products exist, the greater the propensity for a customer to switch to a substitute product. The higher the number of substitutes available, the easier it is for customers to try similar but alternative products, and therefore, the harder it is for a firm to maintain customer loyalty. Lastly, Porter identified the fifth force as being the intensity of competitive rivalry, determining the overall competitiveness of an industry. A major factor that influences the intensity of competition could be how well firms are able to innovate and the degree to which they are able to maintain superior and competitive advantage. Porter argues that it is a combination of all five powerful forces that determine a firm’s competitive advantage and therefore, its profitability (Porter, 1979). By using the tool, Porter believed that firms are better able to understand their current competitive position and also the strength of a position that a firm may be considering moving to.
Resource Based View Strategy
The Resource Based View model recognises resources and capabilities as being the key to a firm’s superior performance (Barney, 1991). Unlike Porter’s model, which places importance on external forces, the RBV perspective emphasizes the need to look internally for sources of a competitive advantage (Peteraf, 1993; Wernerfert, 1984). Supporters of this approach believe that it is much more realistic and feasible for a firm to exploit existing resources by using them in a new way, rather than trying to build new products or services. The Resource Based View approach argues that firms can be more profitable, so long as they have superior resources than their rivals, and are able to apply them in such a way that they form a competitive advantage (Barney, 1991; Wernerfert, 1984). According to the Resource Based View perspective, superior resources are those which can be classified into the following categories: 1) valuable, 2) rare 3) inimitable and 4) non-substitutable, these are known as the VRIN characteristics (Barney,1991). Resources can also be further defined as being ‘tangible/physical’, for example property, and ‘intangible’, with an example being the managerial expertise and experience. Capabilities have been defined by Makadok (2001), as the firm’s ability and capacity to deploy a resource. It is argued that in order to create a competitive advantage, a firm will need to create specific and specialized knowledge, skills and culture that are difficult to copy (Afiouni, 2007; Mata et al., 1995). If this can be maintained, then sustainable competitive advantage can be created.
Criticisms of the Five Forces Model
Using Porter’s Five Forces model to review the effectiveness of a modern-day business strategy can certainly be of use, in terms of providing insight into market forces, supply and demand and competition. However, it has to be noted that the model may not provide a great deal of insight. Firstly, Porter’s model was developed in the late 1970s, and is arguably therefore, significantly outdated and not entirely relevant for today’s modern business environment. It assumes perfect competition in the market place, and does not take into account that some markets are highly regulated, creating imbalances and reduced competitive forces are at play. Additionally, Porter’s model has been criticized for focusing on external forces, such as markets, and this focus can obscure what is going on inside the firm (Clegg et al, 2011). For example, the model does not consider the internal strengths and weaknesses of the firm such as human capital. Arguably, a firm with an outstanding managerial and entrepreneurial team would be a source of competitive advantage. By contrast, a firm that may be positioned well according the Five Forces, may have a weak management team in place that mean that a competitive advantage is simple unsustainable.
Furthermore, the model has been criticized for its solely external outlook. In today’s world where markets are changing so quickly and there are so many external forces out of the firm’s control, it could be argued that it is simply too dangerous and risky to be orientated around outside this perspective when markets are so volatile. Grant (1991) argued that in fast changing times an external orientation does not provide a secure foundation on which to develop a successful strategy. In addition, even with a successful strategy (as determined by the Five Forces Model) the likelihood for a firm to be copied by a competitor is much greater today (Clegg et al 2011). It is therefore argued that a firm should a firm base their corporate strategy solely using the outdated Five Forces Model, chances of success are greatly jeopardised.
It is therefore interesting that Porter’s Five Forces Model can sometimes take a prominent place in strategy textbooks, when according to Grundy (2006:213), ‘not a great deal has been done to develop this thinking since the 1980s’ and appears to be have been ‘frozen in time’. The model has been accused of being too rigid, analytical and abstract. It may capture the attention of business students, but for practical managers and entrepreneurs, it appears to offer little value (Grundy, 2006). To contrast, the SWOT analysis tool, which was developed prior to the Five Forces Model, seems to be much more common place in industry (Grundy,2006: 2011).
Limitations of the Resource Based View Perspective
The central idea of the Resource Based View of the firm is that it’s the ability of the firm to exploit its core competencies that provide the competitive advantage (Barney, 1991; & Barney, 1995; Peteraf, 1993; Wernerfert, 1984), and not the forces at play in the external environment as Porter (1979) suggests. However, for many firms, the model proves difficult to use because of the difficulties in being able to identify a firm’s resources and capabilities to begin with. For example, whilst a firm would have access to its financial accounts, they do not take into account the value of their people’s skills and expertise and other intangible resources, which Grants remarks ‘are probably the most strategically important resource to the firm’ (Grant, 1991: 119). But maintaining a resource base in order to maintain sustained competitive advantage could be difficult to achieve (Grant, 1991). However, it is not simply enough for a firm just to have possess these resources, the firm has to understand what it can do with a collection of resources and have the right organizational capabilities in order to execute their strategy. It is therefore crucial that the firm understands the relationship between resources and capabilities. ‘The key to a resource-based approach to strategy formulation is understanding the relationships between resources, capabilities and competitive advantage, and profitability – in particular, an understanding of the mechanisms through which a competitive advantage can be sustained over time’ (Grant, 1991:133). The Resource Based View model is therefore only useful if the management team of the firm have insights into this relationship and have the ability to act on it.
Strategy Evaluation and Conclusion
Thus far, this essay has discussed Porter’s Five Forces Model in terms of its applicability in today’s modern business environment. To aid this, a discussion of an alternative strategic theory – the Resource Based View has also been implemented in order to compare and compare and contrast and help evaluate the relevance of Porter’s Five Forces Model.
Drawing to a conclusion, Porter’s model helps a firm to evaluate its competitive environment, whilst Resource Based View helps it to evaluate its ability to exploit its internal strengths and respond to the identified weaknesses. Therefore, it could reasonably be claimed that when designing a corporate strategy, using both models for analysis would surely assist in designing a more comprehensive strategy that takes into account both the internal and external environment (which are both significant in their own rights). However, it should be stressed that most experienced firms (and indeed start-ups) do examine the external environment, but not necessarily through Porter’s model. Rather, a SWOT analysis (which examines the strengths, weaknesses, opportunities and threats to the firm), a tool that is more commonly used. Reasons for this are probably due to the highly analytical nature of the Five Forces Model which may appeal to those students studying the field of Strategic Management, but not perhaps for those managers in industry who need a more practical tool to use.
To conclude, whilst Porter’s 1979 model has been widely used since it was developed, this essay has demonstrated that its relevance is perhaps better suited to the classroom, rather than in industry itself. The core concept of the model is certainly important, i.e. positing the firm with respect to the powerful external market forces, but it could be argued that there are more practical tools available to use in its place, for example a SWOT analysis. Furthermore, this essay has sought to argue that a successful strategy should use a number of models for analysis including one that can examine the external environment and one for looking at what takes place inside the firm. And lastly, it has to be acknowledged that developing a strategy is not a simple process. Given the nature of the fast pace and changing nature of the industry, it would be foolish to develop a fixed long term strategy without flexibility to change quickly. Therefore, whether using a Porterian tool or other, for it to have true value, it is better used as a strategy development aid in combination with others, and not a blueprint, which would result in failure.
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