“Strategy is the
direction and scope of an organization over the long term, which achieves
advantage in a changing environment through its configuration of resources and
competences with the aim of fulfilling stakeholder expectations” (Johnson
et al. 2008). ?he main capabilities
of an organization that defines its position against its competitors in the
external business environment can be defined as its opportunities,
organizational processes and resources (Prahalad and Hamel, 1990).
According to Kaplan and Norton (1996), the purpose of
each organization is the profit for it and the strategy is defined as the
appropriate business direction that will successfully lead to it. they also add
that on the basis of appropriate business information from the internal and
external environment of an organization can be made the formulation of the
The general factors affecting all market segments
operating in the same technological, economic and socio-political environment
are the first step in identifying the position of an organisation held within
an operational environment (Daft et al., 1998). While knowing these factors,
there is a clear indication of how they can form an organization, and perhaps a
different approach to the competitive environment is needed.
At the end of
1970’s and early 1980’s when M.E. Porter (1979, 1980) presented and established
his famous analytical “Five competitive forces” tool, world’s economy was
characterized by continuous growth trend. In such circumstances the development
of majority national industries was generally stabile and predictable.
Consequently, the main prerequisite for business goals accomplishment could
have been optimization of firm’s strategic behaviour in relation to external
In order to analyze competition between organizations,
a model strategy, the Porter’s model of the five forces, was created. The
specific strengths of this model are the ones that determine competition, but
have evolved as a framework for analyzing each industry. For that reason, that
is why it favors the economic potential and the competitiveness of an
organization through the influence of these five factors (Porter, 1979).
to these forces in the micro environment as these consist of those forces close
to a company that affect its ability to serve its customers and make profit.
Normally, a change in any of the forces requires a business unit to re-assess
the marketplace owing to the change in industry information (Wu et al. 2012).
The power in a particular business situation using the
external view makes the five forces model seem simple but equally important (Johnson,
Scholes & Whittington, 2008).
these forces when acting well defining the long-term
profitability of an enterprise while at the same time threatening this profit
is (Porter, 1980):
three main factors which compose the competitiveness
of the supplying companies, such as demand conditions, various barriers to
market exit as well as the industrial structure
the difficulty of spending on markets can be the
result of new entrants being affected by three main reasons such as economies
of scale, cost advantages and trust in the mark
the use of substitute products by consumers that can
lead a company to a price reduction for the use of its products and services
there may be an increased operating cost of an
enterprise if different buyers require a reduction in prices with simultaneous
better quality and services
a possible increase in overall profitability when
suppliers force their product prices by simultaneously lowering the quality of
the products supplied
This paper critically aims to discuss the model
starting with a detailed overview of the framework. Further research and
critical evaluation of the theory on whether it still applies into modern
business environment will also be considered.
Evaluation of model
The accuracy of
analyzing and criticizing the framework suggested by the multi-level nature of
some industries can show us whether this is incomplete. In particular, as Johnson, Scholes and Whittington
(2009) point out, it is of crucial importance for the structure of a
reasonable analysis to understand that several industres may need to be
analyzed in different segments. As a relevant example, the authors refer to the
various aspects of airline companies, where in order to have a detailed picture
and not a simple overview, it is necessary to apply a successful analysis of
each industry to each customer and a complex of markets.
opportunities for gain and awareness of competition can arise from an
additional competitive power of this approach (Brandenburger and Nalebuff, 1995).
(2006) points out that the particular model is capable of further development
and improvement of its value. Historically, the five forces framework has been
used as a strategic model with a significant influence on academic business
management. The writer critically tried to analyze how the framework can be
successfully applied to the business world. This analysis included some
abilities, such as exploring the way of interaction and how to create industry
standards by assessing the impact of these forces.
According to a
(2001) points out the importance of the five forces model, applying to
the modern business world. He concludes that the framework is a valuable
strategic tool for a detailed analysis of all industries. Although the profitability
conditions differ from company to company, and maybe in these circumstances the
model will need further improvement, this doesn’t stop it by remaining a
commendable strategic analysis. So far it can be noted that the model of the
five forces managed to endure the competition of an industry, but it may be
worthwhile to analyze further factors.
Analysis of model
In addition, it is also noted that the five forces
model aims at four additional strengths apart from competition between
different competitors within an industry: supplier’s negotiating power, buyer
power, threat of lower competitors and threat from new competitors (Porter,
1979). The success of a business could be very easily overturned if all these
forces are combined. The composition of the five forces model is a “useful
starting point for strategic analysis even when the profit criteria may not
apply” (Johnson, Scholes & Whittington, 2008, p. 60). An important factor
in the implementation of a strategy is the appropriate and sufficient knowledge
of the industry in which the company operates, and this is important because
there are various factors that affect a company in an industry. Therefore, it
is important to consider only the appropriate factors for the companies
involved in each industry.
Benefits of Applying the Five Force model for
Evaluating Market Attractiveness
A specialist of strategy is able to create a plan in
which there can be an improved position of the organization within the
industry, analyzing its strengths and weaknesses. The framework of the five
forces provides the opportunity to examine and evaluate the interactions of
competitors within an industry in a structured way (Porter, 1979). Therefore, a
company can declare industry’s profits and attractiveness through the analysis
of this model (Johnson et al., 2008).
The evaluation of success and attractiveness of an
industry is not the only goal of the Porte’s model, but also to appreciate the “underpinnings
of competition and the root causes of profitability” (Porter, 2008, p. 29). The
Five Forces framework “went beyond a more simplistic focus on relative market
growth rates in determining industry attractiveness” (Grundy, 2006). Moreover,
he mentions that in comparison to the well known SWOT analysis model, managers
can focus more on the external environment of the company.
Limitations and criticisms of model
The criticism has become more and more increasingly
over the years, even though the five forces model can be characterized as a
famous and wide spread management model (Dul?i?, Gnjidi? & Alfirevi?, 2012).
As the characteristics and strengths of each industry
are constantly evolving, one could wonder whether the model could be in force
and to what extent it would be reliable, because the five forces model is a timeless,
tactile business tool that evolves
with based on industry trends to assess environmental influences and prosperity
As has been observed in recent years, information
technology has been dynamically in the forefront. as is known, technology is
one of the most important factors for change and not just to implement this
change. the conclusion of this change has paved the way for the creation of
three new forces not related to the model. moreover, the Five Forces model is
not considered obsolete and its basic idea is that every business relies on the
network of buyers, suppliers, sub-competitors, new and existing competitors
The use of the five forces framework does not
guarantee an inviolable and sustainable advantage (Aktouf, 2004). Dul?i? et al.
(2012) criticize this model quite strictly. According to them, managers could
take advantage of taking the time of stretching. and this is because, with this
technique, they are able to better assess market trends and the changing
However, Grundy (2006) observes that for a specific
industry or market, the model is not extensively referred to factors or growth
Moreover, in order to examine whether the framework
manages to respond to the current circumstances of the era, an effort should be
made to revise the framework to the present. Keeping in mind the development of
technology, which is becoming an increasingly important factor,
Karagiannopoulos et al. (2005) are trying to study whether this framework
responds to the current conditions of the present. They support the above
studies, that it is a commendable tool for examining competitiveness. In order
to precisely identify the changing nature and new standards of industry and the
economy, we need to take into account the influence of many other factors on
the technological innovation and the potential for profit.
Porter’s five forces model has been a very influential
strategy framework providing guidelines to investigate competition,
profitability and investment attractiveness within an industry. The purpose of
this paper was to discuss the value of this traditional strategy framework into
modern business environments. Providing a detailed examination of the
individual five forces, the process of competitive industry analysis was
The very process of determining the optimal strategy
following the principles of the model was identified. This relates to an
assessment of the level of intensity of the individual five forces being the
threat of entry, the threat of substitutes, the power of buyers, the power of
suppliers and the competitive rivalry between them.
Extending this principle into subsequent analysis and
evaluation of the framework, more recent research was considered. Major
conclusions signify that the defining characteristics of the framework can
still be applied with success into strategy and modern business practices.
However, good decision-making practices should include a set of parameters to
obtain a complete and up-to date picture. These parameters are based on the
notion that industries are dynamic environments and changing factors directly
affect competition as they impact on each competitor’s capabilities and profit
potential. The most crucial to be included in a relevant analysis are then
defined as technological innovation and advances, mapping of individual market
clusters within industries, convergence and the potential to complement and
Overall, current strategy research follows Porter’s
five force’s framework in competition and industry analysis. The framework is
found to be of critical importance in building strategic decisions. A more
practical and realistic approach is nevertheless required in order to achieve a
less vague and contemporary picture.
The Five Competitive Forces are still applicable, but
it is necessary to know the limitations of the model (Andriotis, 2004).
Despite being an
extremely important new technology, the internet neither changes nor leaves
everything untouched. It is not possible for distorted market signals to be the
judging factors of industry changes. On the other hand, the market recession
cannot set aside all changes caused by the internet with no discrimination. Old
rules/values that produce economic value are not obsolete and need to be given
proper attention and thus do not allow companies to rely on this observation.
They need to facilitate several changes and to adopt new ideas about the
industry structure and the position their companies’ hold. It is impossible to
predict the exact situation, but what is certain is that, in an increasingly complex
world, the greatest growth opportunities will come more often by the
interaction of multiple companies than from single visionaries acting on their
own. The internet is capable of boosting the power of partnership and their
benefits (Karagiannopoulos et al. 2005).
of industry evolution are even more complex if the firm is engaged in close
rivalry over the opportunity. Too much competition can rush investment in
technologies that may not be optimally suited to long-run opportunities. Worse
yet, the rivals may become committed to similar strategies, and may
consequently invest inefficiently once the new technologies become established