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... to be aware that this model, though a powerful structure for discussion, Porters Five Forces Model has some major limitations in today's market environment. One of the criticisms of the five forces is that it assumes relatively static market structures. In fact, Porters Five Forces Model mainly base on the economic situation in the eighties characterized by strong competition and relatively stable market structures.
It is not able to take into account new business models and the dynamics of markets which implies that this model is hardly still applicable in current rapid change market (Prahalad and Gary, 1990). Nowadays competition is dynamic and hence industry structure changes. Today's markets are highly influenced by technological progress, especially in information technology. Technological innovations and dynamic market entrants from start-ups will completely change business models within short times.
For example, the computer industry is often considered a highly competitive industry. Such industry structure is constantly being revolutionized by innovation. It this case, the five forces model is of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porters models (Prahalad and Gary, 1990).
Another limitation of the five forces is that it provides a good framework for analysis but does not really consider issues around implementing changes to reposition for strategic advantage. Partly because of five force's simplification of complex relationship such as in the structure of networks and cluster, new strategies such as strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks, to some extent, impair the applicability of the five forces as it used to be (Prahalad and Gary, 1990). What's more, this model also overemphasizes the importance of industry structure as a determinant of company performance and underemphasize's the importance of differences between companies within an industry (Hill and Jones, 1995). The model focuses on an industry as a whole not on individual firms. Actually there can be vast variance in the profit rate of individual companies within an industry.
Recent research shows that industry structure explain only about 10 percent of the variance in profit rates across companies, suggest that individual resources and capabilities of a company are far more important determinants of its profitability than is the industry. A company will not be profitable just because it is based in an attractive industry. (Hill and Jones, 1995) 2. 3 Implementation issues within organizations Some issues during the implementation of these five forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take to develop barriers to the various forms of competition (Prahalad and Gary, 1990). With the realization about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategic option, e. g.
a new positioning; differentiation for competitive products of strategic partnerships. Porter's Five Forces can be applied to particular companies, market segments and industries with the step-by-step analysis of market structure and competitive situation. First of all, when implementing this module in organizations, it is necessary to determine the scope of the market to be analyzed. Following, all relevant forces for this market analyzed and key forces are identified (Gerry and Kevan, P. 117). Actually some organizational strategy and the longer-term goals are mainly based on or consistent with the key forces. Hence, it is not necessary to analyze all elements of all competitive forces with the same depth.
Moreover, the key forces in the competitive environment will vary in different industry. Different forces take on prominence in shaping competition in each industry (Porter, 1980). In the oceangoing tanker industry, the key forces is the buyer, while in the steel industry the key forces are foreign competitors and substitute materials. That is also an important consideration when applying Porter's Five Force into organizations. The importance of the Value Chain as a tool is that it shows the contributions from different functions of an organization in the value-adding process. At its simplest, it integrates both the process steps for a customer delivery and the various functions in a company that enables the delivery at different stages (Walters, P. 132). 3. 1 Claimed benefits Just as it was helpful to use Porter's Five Forces model as a framework to analyze industries, Porter's Value Chain is an effective tool to understand, at a high level, how each of internal business activities adds value to organizations by dividing a business into strategically relevant activities.
And it enables senior executive to identify the source of competitive advantage by performing these activities in a cost-effective way or better than its competitors. As a very powerful cost management tool, the value chain attaches great benefits to making a detailed analysis of a company's cost position to obtain the cost advantage. It makes a good attempt to understand the behaviour of costs across a chain of activities to determine where low-cost advantages or cost disadvantage exist. Because a series of these activities is to create value that exceeds the cost of providing the product or service, and maximize the profitability of company's business activities in a sustainable manner (Richard and Ramirez, 1993). Using the value chain to analyze costs to identify firm's strengths and weaknesses is much more useful than traditional cost accounting protocol that most companies are still utilizing. The value chain also offers opportunities to reach better outsourcing decisions.
A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage (Here and Morris, 1989). The value chain is also helpful to analyze the inner workings of competitor organizations in order to upgrade organizations performance. By understanding organization's advantages compared to other competitors, value chain can aid organizations designing products and systems that will maintain advantage within the competitive arena.
In general, organizations can then use this framework to identify one of the key competitors and then analyze as many competitors as necessary or appropriate for relevant situation. 3. 2 Potential limitations Although the value chain is a very powerful management tool to identify the source of competitive advantage...
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Research essay sample on Porters Five Forces Five Forces Model
