Porters Five Forces

8 Pages 1935 Words

International Business Analysis



Explain how Porters Five Forces determines the attractiveness of an industry?
What are the implications of the five forces on a firm’s strategy?
Is there such a ting as an unattractive industry?



Although Michel Porter’s Model of Five Competitive Forces is subject to critique, it still remains, some twenty five years after its conception a valuable tool in that stimulates managers to conceptualise their current situation and proposed changes in a structured way.

Classical economic theory suggests that rates of return (risk-adjusted) will be constant across firms and industries. The most profitable companies have a strong competitive position in a highly profitable industry with the less profitable companies having a weak position in weak industries. It is the level of competition within an industry that affects the profits. There is an inverse relationship between profit margins and the intensity of competition: as the intensity of competition goes up, margins and returns are driven down. By nature some industries will be potentially more profitable than others, principally because their competitive position is stronger and are placed within a more profitable industry. Businesses strive to develop markets in which they can achieve ‘super profits’- to reduce the intensity of competition. To achieve this they must utilize strategies that place them at on advantage over their real or potential competitors. Porters Five Forces is an analytical tool that lays the foundation for the development of such strategies. Porters Five Forces is founded on microeconomics. It takes into account supply and demand, complementary products and substitutes, market structures and the relationship between volume of and cost of production,
Four of the forces, the bargaining power of customers, and of suppliers, the threat of new entrants, and the threat of substitute products combine with other va...