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Competition in the business environment and strategies to counter that competition has existed and evolved for centuries, however a true revolution in the strategy field did not occur until relatively recently by a Harvard University professor and economist by the name of Michael E. Porter. According to Porter, "the job of the strategist is to understand and cope with competition" (Porter, 2008), however Porter observed that competition was often too narrowly defined, and that managers almost always neglected other competitive forces such as customers, suppliers, other marketplace entrants, and the potential for substitutes products. Consequently, in 1979, Porter published an article in the Harvard Business Review titled How Competitive Forces Shape Strategy, officially introducing the world to Porter's five competitive forces that shape strategy (Porter, 2008).
Porter's Five Forces
The five competitive forces that shape strategy that Porter introduced to the world in that article 35 years ago are Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of Substitutes, and Rivalry among Existing Firms. In developing the Five Forces, Porter's goal was to help strategic managers determine just how attractive their specific industry is or will become in the future (Mawhinney, 2008), although it is important to note that according to Porter, "the configuration of the five forces differs by industry" (Porter, 2008).
To further assist strategic manager's in analyzing their industry, Porter's Five Forces can be further divided into sub-components. Therefore it is imperative that strategic managers assess the positive or negative effect each sub-component has on the main force as a whole so that they "can assess the forces driving competition in an industry and evaluate the odds of a firm successfully entering and competing in an industry" (Stahl & Grigsby, 1997, pg. 145).
The Five Forces and Operating Overseas
Over the past twenty years, technologically advances has led to a boom in globalization, which in turn has dramatically increased international competition. Porter's Five Forces model was never intended to be a domestic or regional only tool for strategic managers. In fact, it is an excellent tool for an organization to utilize to determine one's international strategy. The results from assessing the forces driving industry competition will ultimately determine an organization's profit potential, which is the bottom line for all businesses. In other words, "a high competitive force can be regarded as a threat and a low competitive force can be considered as an opportunity as it allows a company to earn high profits" (Jeyarathmm, 2008, pg.
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Five Forces Limitations
As with any model or theory, Porter's five competitive forces that shape strategy has its limitations. One of the primary limitations of the Five Forces is subjectivity. When strategic managers assess each force and their corresponding sub-component, there is basically no right or wrong answer. The experience and expertise of the strategic manager will play a large role, and a less experienced manager can greatly affect a company's control of their specific market (Mawhinney, 2008).
A second primary limitation of the Five Forces is innovation. Industry structure is often reshaped as a result of continuing innovation, particularly in hyperactive industries. Critics argue that "many industries are hyperactive and hyperactive industries are marked by continuous innovation" (Jeyarathmm, 2008, pg. 78), therefore the Five Forces model has limited application.
Prior to the introduction of Porter's Five Forces, it is amazing to think that there was no core model that organization's would use to determine strategy in their competitive environment. Now, Porter's Five Forces, which Michael Porter continues to evolve, has become the central "go-to" model for strategic managers to anaylze just how attractive their specific industry is or will become in the future. While not perfect, and very subjective, Porter has succeeded in giving organizations a starting point in determining profit potential in a particular industry or marketplace.
Jeyarathmm, M. (2008). Strategic management. Mumbai, India: Global Media. Retrieved from
http://site.ebrary.com/lib/apus/docDetail.action?docID=10415735&p00=porter's five forces
Mawhinney, M. (2008). International construction. Chichester, GBR: Wiley. Retrieved from
http://site.ebrary.com/lib/apus/docDetail.action?docID=10232623&p00=porter's five forces
Porter, M. E. (2008, January). The five competitive forces that shape strategy. Harvard Business
Review, Retrieved from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1
Stahl, M.J. & Grigsby, D.W. (1997). Strategic Management: Total Quality and
Global Competition. Retrieved from http://ebooks.apus.edu.ezproxy1.apus.edu/BUSN601/Stahl_1997.pdf