International Business: Porter's Five Forces of Competition Report

This report analyzes Michael Porter's Five Forces model, a framework used to assess industry structure and competitive dynamics in international business. The report explains the five forces: bargaining power of buyers, bargaining power of suppliers, threat of substitutes, threat of new entrants, and ...Read More

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Porter’s five forces of Competition
This model is given by Michael Porter to determine the industry structure and to fight the
competition with the help of five forces of competition (Juneja, 2018). Lesser attractive market
and lower profitability refers to stronger five forces.
The five forces can be explained as follows:
Bargaining power of buyer
If the customers have good bargaining power they will bargain at the time of purchasing that will
ultimately lead the seller towards loss. The factors which influenced the bargaining power of the
customers
• Buyers in the market
• Buyer’s size
• Order size
• Cost of switching
• Substitutes availability
• Price sensitivity of demand
• Threat of backward integration
Bargaining ability of suppliers
If the buyers have good bargaining power, this force allows the manufacturers to supply high-
priced or inferior quality products to the consumers. Threat of forward integration does exist in
this case. The bargaining ability of the supplier gets affected from the following factors
• Suppliers in the market
• Size of the supplier
• Ability to find substitutable inputs
• Scarcity of the inputs

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• Cost associated with switching
• Forward integration threat
Threat posed by substitutes
Substitutes have the ability to put high prices of the commodities (Juneja, 2018). This force of
Porter gets influenced by the following factors:
• Availability of close substitutes
• Cost of switching
• Quality of the substitutes
Threats of new entry
Potential producers are the ones, who are not in the same business line currently, but may enter if
given an option. To sustain in the competition, the costs have to reduce (Porter, 2016). This force
is closely linked to the entry barriers like:
• Economies of scale
• Loyalty towards the brand
• Government Regulations
• Absolute Cost Advantage
• Strong Capital base (Juneja, 2018)
Competitive rivalry
High level of competition establishes a threat to the profits of the firms. The strength of rivalry
can be expressed as a function of:
• Number of exit barriers
• Fixed cost prevailing in the market
• Global customers
• Presence or absence of switching costs

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• Industry’s growth rate
Importance of Porter’s five forces of Competition
The model helps to determine the industry structure and to fight the competition with the help of
five forces of competition. It helps to establish the significant strategies to enter the market as
well as to survive in it (Mind Tools, 2018). The model helps to find the level of competition and
the profitability of the business.
Limitations of porter’s five forces model
 The model is very static in nature so it fails to record and analyze all the necessary
changes that occur in the industry. Sometimes, it even fails to snapshots all the factors
that are changing in the industry.
 According to porter’s model, there is a major focus on the industry instead of focusing on
the factors of profits. The gaps that are observed between single companies are often
neglected and not taken into consideration.
 It is not able to analyze the intangible assets of the industry. This model only focus on the
operating factors and external resources instead of focusing on internal factors as well. In
case of complex industries, this model is not best suitable (Rothaermel, 2015).
Despite of warm welcome of porter’s competitive advantages, it was also criticized later. Many
management scholars supported the model and the model is still used in many business schools.
Some argued that cost and differentiation are not the only factors that must be taken into
consideration. It was argued that there are many government firms who aim at earning large
number of profits without using any model. They earn high profits because they are supported by
the state (Mekic & Mekic, 2014). Porters used three approaches of generic strategies named cost
leadership, differentiation and focus. Porter called the generic strategies "Cost Leadership" (no
frills), "Differentiation" (creating uniquely desirable products and services) and "Focus"

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(offering a specialized service in a niche market). He then subdivided the Focus strategy into two
parts: "Cost Focus" and "Differentiation Focus."
Klein, a famous economists argued that the porter explanation towards competitive advantage
was prescriptive. It was not only ineffective but also a counterproductive aspect of analyzing
industry on the basis of only 5factors (Pinto, 2015). Later, it was also found that the financial
sectors found difficulties in following this model. Klein also argued that porter have repeated the
term “competitive advantages” so many times but still the meaning of the same was unclear.
Porter stated that a firm must have competitive advantages but failed to describe what
competitive advantage is (Klein, Nessan & Troftgruben, 2017).
Likewise, Grundy, a famous economists also argued on the outlines of the porters model. He
suggested that an organization can still be improved apart from the five forces. Any business
firm can enhance and boost its practical value apart from adopting this framework. It was
assumed that porter’s model was a theoretical strategy model which was commonly used in
academic business context. So Grundy argues that the porter’s model cannot be applied
practically into the modern business in order to gain success. He explained that there are other
many forces that can be developed and implemented in order to gain business success for
modern business.
In addition to this, it was also argued that there must be additional forces such as digitalization
and globalization. The additional factors must be taken into highest priority because the early
model do not include any factors related to digital platform. While today every industry uses
digitalization which are not measured in porter’s model. Moreover, this model also fails to
analyze the exposure of industry towards international market. Industries today are highly
focused towards expanding their business territory in national boundaries along with
international boundaries. Thus, it can be concluded that besides of plenty of critics involved in
this model, it is still used in many industries (Kamps, 2015).

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References
Juneja, P. (2018). Porter’s Five Forces Model of Competition. Retrieved March 03, 2018, from
Management Study Guide: https://www.managementstudyguide.com/porters-model-of-
competetion.htm
Kamps, I. (2015). Shakespeare left and right. Routledge.
Klein, R., Nessan, C., & Troftgruben, T. M. (2017). October 2017 Book Reviews. Currents in
Theology and Mission, 44(4).
Mekic, E & Mekic, E. (2014). Supports and critics on Porter’s competitive strategy and
competitive advantage. Retrieved from:
https://www.researchgate.net/publication/266967720_Supports_and_Critiques_on_Porter
%27s_Competitive_Strategy_and_Competitive_Advantage
Mind Tools. (2018). Porter's Five Forces- Understanding Competitive Forces to Maximize
Profitability. Retrieved March 03, 2018, from Mind Tools:
https://www.mindtools.com/pages/article/newTMC_08.htm
Pinto, J. K. (2015). Project management: achieving competitive advantage. Prentice Hall.
Porter, T. (2016). States, markets and regimes in global finance. Springer.
Rothaermel, F. T. (2015). Strategic management. McGraw-Hill Education.