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These days, businesses have become more competitive and productive. Therefore it is necessary for a business to define its business direction using strategic management to analyzing its environment inside and outside of the organisation and define but also implement appropriate strategies to control evaluations of the organizations operations over a long period of time. Strategic management is a planning system that requires sophisticated vision using conceptual models to drive the organisation into the right position throughout the market place.
This essay will start with a discussion about strategic models and how they can help managers deal with challenges that face them in everyday business life and how strategic models can help managers with decision making outlining the benefits associated with strategic models, a brief overview of the Industry Life Cycle, Product Life Cycle model and the swot analysis model.
Then this essay will move on to Porters Five Forces strategic model, first with the overall description of the model, and followed by the models limitations, then finally a critical over view of the model, with views take from authors and critics of the five forces strategic model.
Finally, this essay will move on and introduce the sixth force and why the sixth force hasn't been widely accepted unlike its brother Porters five force model.
All strategic management models help managers deal with challenges that face them every day. Models help managers know if the organisation is on the right track and how the organisation can improve, they help detect relevant information about its organisation and how this information can be used to allow the organisation to perform more efficiently and analyse recourses to make the organisation conduct to a greater standard. Also, models assess ethical political risk and the risks involved with operating in foreign countries, help with future scenarios giving managers less stress due to stimulating games and models help manager identify strategic factors through analysis.
There isn't anyone perfect strategic model that fits any company. Each company will end up adapting and developing its strategic model, this is often done by selecting a specific strategic model and adapting it to go inside with the companies planning processes.
The benefits from strategic models and the purpose they serve within an organisation through planning for managers at all levels include;
To clearly outline or define an organisation and establish the realistic objectives and goals for that organisation in a certain time scale, and make ready for implementation.
Communicate objectives and goals to the constituents of the organisation.
Ensuring that effective use has been and will be made of an organisation resources with the main focus being key recourses priorities.
Providing a structured base so an organisation can measure progress and establish a structured mechanism to implement change when needed.
Produce clearer focus of an organisation on producing more effectiveness and efficiency.
Increasing productivity from its increased effectiveness and efficiency.
Strategic models help managers with decision making through building a collective strong intuition that can enhance their ability at top management to seeing on coming threats and coming opportunities much sooner and with more accuracy by maintaining a disciplined forward pace that produces and drives the decision making process to obtain a satisfactory conclusion.
There are many conceptual models that might help a senior manager deal with the challenges that face them. Industry Life Cycle (ILC) is a model that's aimed at integrating technological and industrial evaluations in terms of trajectories and outcomes which will be observed to help with decision making (Suarez and Utterback, 1995 and Klepper, 2002) for instance; from an introduction of an organisation to its decline over a period of time ILC uses analysis usually using five stages reporting its growth to its demise by technological innovations (Scott, 2003).
Product Life Cycle (PLC) is a model that is also uses to research and analyse market trends but with greater importance than ILC, ILC research mainly focus on development issues while PLC mainly focus on the market trends inherited from the ILC approach . PLC and ILC are terms that are used interchangeably throughout strategic management (Lieberman and Montgomery, 1998). For instance, tape cassettes, betamax video tapes and diskettes, which are examples of products that have become extinct PLC uses such examples to keep track on market trends.
Strength, weakness, opportunity and threat (SWOT) analysis is a model that is uses to aid managers in identifying internal and external strategy factors which are important to achieving the organizations objectives. The internal factors are the strengths and weaknesses of the organisation, the external factors are the opportunities and threats associated by outside factors to the organisation. The internal factors can be seen as both strengths and weaknesses but this depends on the organizations objectives, one objectives strength can be another objectives weakness. The internal factors can include the 4P's; plan "how to get from here to there", pattern "actions over time", position "reflects decisions of products and services in particular markets" and perspective "vision and direction" (Mintzberg, 1994) as well as finance, manufacturing capabilities and personnel. The external factors can include legislation, cultural changes, technological changes, marketplace changes and competitive position changes. A SWOT item that produces valuable strategies is important. SWOT items that generates no strategies in not important (Humphrey, 1960).
Porters Five Forces
This essay will now introduce Porters Five Forces which is a strategic model developed by M E. Porter in a book he wrote in the 1980's "Techniques for Analyzing Industries and Competitors". The Models and ideas which came to light during the 1980's where all based upon the ideas which stated in business, competitive advantages had come from an ability in earning a return from an investment which was much better than an average for a particular sector in industry (Thurlby,1998).
Since that past time Porters Five Forces has become a very important business tool when analyzing any organisations industries structure in the strategic process.
The Five Forces strategic model is based upon the thinking that any corporate strategy must meet the threats and opportunities from the organisations outside environment. Especially the knowledge that competitive strategies should be based on the understanding of industry structures and the way industry structures can change.
As the Five Forces Model analysis deals with external factors from outside an organisations industry that can influence the very nature of its competition within, the inside forces of an organizations industry which influence the many ways organisations compete, and therefore the industry's most likely profitability comes from using Porters Five Forces strategic model. A business needs to understand the complex dynamics from its industry and its market so it can compete as effectively as it can in the market place. Ported has defined which of the forces are driving the competition, suggesting that a competitive environment has been created with the interaction of the five forces acting with business. Also in addition to this rivalry throughout existing organisations and with the treats of new organisations into the marketplace, there are also the supplier power forces, buying power forces, and threats from substitute services and products. Porter indicates that intense competition is wholly determined through the strengths of such forces (Porter, 1980).
Porter believes he has identified the five competitive forces that do shape every market and industry. It's these forces he believes determines competition intensity and therefore the attractiveness and the profitability of any industry. Corporate strategies objectives should be to adapt and modify these competing forces in such a way to improve an organisations position. Porter's strategic model supports the driving forces of industry through analysis. Based on information obtained from using the Five Forces strategic model analysis, management teams can make decisions on how to exploit or influence different characteristics of their particular industry(Porter, 1980).
Below is a basic overview diagram of Porters Five Forces model (themarketers.com, 2010)
Porters Five Forces strategic model are generally described as the following;
Suppliers bargaining power
'Supplier' the term is used when providing goods and services.
Supplier bargaining powers are most likely to be at its highest when;
Markets are dominated by just a few larger suppliers instead of larger amounts of smaller suppliers.
There is no substitution for any particular product or service.
Supplier's customers are few or far between and therefore bargaining power is very low.
The costs involved in switching from one supplier to another.
The supplier forward integration so they can obtain higher margins and prices. This kind of threat is high when; Buying industries have a higher profitability compared with the supplying industry, Integrating forwards produces economies of large scale for a supplier, and the industry who is buying hinders the industry who is supplying development, an example of this can be when the buyers are not wanting to accept a new product.
The industry who is buying has low entry barriers.
In these situations the industry who is buying is sometimes faced with pressure for margins from its suppliers. A relationship with a powerful supplier can reduce the strategic options for an organisation(Porter, 1980).
Customers bargaining power
Customers bargaining power determines the pressure customers can impose on volumes and margins.
Customers bargaining power is most likely to be at its highest when;
The industry who is supplying is comprised of a very large number of smaller operations.
The industry who is supplying is operating with fixed high costs.
A product can be replaced by a substitute product.
Switching from one product to another product is simple and is not relevant to higher costs.
Customers are price sensitive and have lower margins.
Customers could in fact produce the product for themselves.
A product is has no strategic importance to any costumer.
A customer could know the cost of producing a product.
The customer could integrate backwards(Porter, 1980).
The New Entrants threat
If the competition of an industry is high, it's easier for another organisation to enter into that competition. In these situations, these new entrants could change factors that determine the market environment, for instance; prices, shares in a market and the loyalty of customers. This can be done at anytime. Also, there is the reaction and the adjustments the existing organisation players need to make in that industry.
The new entry threats will depend on the entry barriers, which are usually;
Large scale economies.
High fixed costs and high investments.
Advantages of cost from existing organisation players due to the experience of curve effects of the operation with depreciated assets.
Customer brand loyalties.
Intellectual property rights protection, for example, licences, copyrights etc.
Important resource scarcity, for example, professional qualified staff.
Raw material access is controlled by existing organisation players.
Channels of distribution are controlled by existing organisation players.
Existing organisation players have good close relationships with customers, for example, from a contact long term.
Customer high switching costs.
Government and legislation action(Porter, 1980).
A substitution treat exists only if there's an alternative product with better performance and lower cost exists as an alternative to an existing product. This kind of substitution can potentially attract a major proportion of the existing market volumes and therefore reduce the sale volumes of the existing organisation players. This category can also relate to the complementary products.
Substitution threats are similar to the new entrant threats and are determined by such factors as;
Customer brand loyalties.
Customer close relationships.
Customer switching costs.
The current trends.
Performance price for relative substitutes(Porter, 1980).
Rivalry from competition between existing organisation players
This force from the five forces describes the intense competition between existing organisation players with in an industry. With high competitive pressure comes pressure on margins, prices and therefore on the profitability on any organisation with in an industry.
Rivalry competitions are most likely to be at its highest when;
Organisation players are of equal size.
Organisation players have nearly the same strategies.
There isn't a difference or not much difference of products and prices between organisation players, and therefore there are fierce pricing competitions.
Low market rates of growth, the growth of one company is at the expense of another company.
Exit barriers are high(Porter, 1980).
Five Forces Analysis
The five forces analysis may provide information which is valuable using three aspects, Static analysis, dynamic analysis and options of analysis for corporate planning;
The five forces analysis can determine industry attractiveness. It can provide much needed insight into profitability. Therefore, it can support entry or exit decisions from a market or industry segment. Moreover, this model can compare competitive forces and its own impact of an organisation with its competitors. Competitors can have different options when reacting to change with competitive forces from their different competences and resources. This can influence the whole industry structure(Porter, 1980).
When combined with the PESTEL analysis which can reveal changes in anyone industry, the five forces analysis may reveal the attractiveness and insight into a future industry. Expected economics, technology and political changes may influence the five forces and therefore have a big impact on the industry structure(Porter, 1980).
A useful tool when determine changes in forces are the scenarios.
Options of analysis;
Armed with knowledge of power and intensity of the competitive five forces, organisations may develop rules and options that can influence them in such a way it improves its own competitive position. This can result in a new direction strategically(Porter, 1980).
Therefore, Porters five forces model can allow a structured and systematic analysis of the market structure and the competitiveness of the situation. This model may be used in a particular market, organisation, region or industry, and therefore, it should be necessary to determine what scope the market is to be analysed with a first step. Following with, all the related forces for the market analysed and identified. So, it isn't a necessity to analyse all the elements of the five forces using the same amount of depth(Porter, 1980).
The Five Forces
Porters five forces is microeconomics based. Supply and demand are taken into account as are substitutes and complementary products, production costs and the volume of production relationships, the market structures and competition.
After a manager has used the five forces analysis to analyse future and current potential, they can then search for available options that can influence the forces in the interest of the organisation. Although specific industry models for business can limit options, its own strategy may change the competitive forces impact in its own organisation.
Porters five forces model is very much a strategic tool which is used when identifying if services, products and business have potential in being profitable.
Porter has argued that his five forces can determine profitability of a given industry. In the centre of any industry are rivalry and its competitive strategies which link to advertising and pricing, but, he states, it's a must that an organisation looks beyond its immediate competition from substitute services and products. These alternatives can be seen by buyers as substitutes even they are from a different industry. One example is with cans, plastic bottles and glass bottles which are used with producing soft drinks. There can be a potential treat from new entrants, some organisations may see this as an opportunity rather that a threat by trying to ensure customer loyalty. Finally, it is very important to understand that organisations buy from suppliers and sell to its buyers. If an organisation is powerful it can bargain its profits by reducing margins, this can be through cost decrease or price increase. This can relate to a strategic option through vertical integration, this is when a company mergers , or acquires a customer of supplier and gains control over the activity chain which can lead from the first basic materials, all the way to its final product (Luffman ,1996. Wheelen, 1998).
The limitations of the five forces model
The five forces model has limitations when used in today's business environment as it was based on a static market structures. It was originally based on the economic system and situation of the 1980's; in those days there was a reasonable stable market structure and string healthy competition. It isn't able to account for new models for business or the dynamic new industries such as technology advances and the new dynamic market entrants from the new start ups that may change business models in such a short time span. For example the software and computer industry is thought to be very competitive with the industry constantly changing and being revolutionised by new innovations that in turn indicate that the five forces having limited value and therefore making it a must not to solely use the five forces model as the basis of an organisations strategy but to incorporate other strategic models such as SWOT or PESTEL analysis to aid the five forces with strategic planning ( Haberberg and Rieple. 2001 Kippenberger, 1998).
But having said that it doesn't mean Porters five forces theory is not valid. What should be done through adapting the five forces model using knowledge of its limitations to produce a much larger framework for management through theories, techniques and tool's. This kind of approach is advisable in every application business model (Recklies, 2001).
Porters five forces model has been subject to much criticism. With the main weakness coming from its historical 1980's context from when it was first developed. In the 1980's the global economy was characterised by cyclical growth and therefore the corporate primary objective only consisted of survival and profitability. A prerequisite of achieving such objectives had been strategically optimised in relation to its external environment. During that time the development of industries has been predictable and stable when compared with today's business dynamics.
Overall the meaningfulness of the five forces model more reduced by the factors following;
The economic meaning of the model assumes there is a perfect classic market. The more regulation an industry has the less insight this model will deliver.
This model is best suited for analysing simple market structures. A detailed analysis and description of the five forces gets somewhat complicated with complex industries using multiple channels, segments and product groups. Its narrow particular focus on segments of a particular industry can inherit risk of missing very important points.
The five forces model does assume that there's a static market structure. This is not the case in today's markets with technology advances and the dynamic market entrants. The forces model can have some later analysis use of any new situation but it won't provide preventive advice for meaningful actions.
The five forces model is competition based. It does assume organisations are trying to advantages over competitiveness of other existing organisation players in the markets and over suppliers and customers. With this in mind it doesn't take into account considerations for strategies such as strategic alliance, electronic information linking of company systems along the value chain, enterprise networks and others.
The five forces model overall has limitations when used in today's dynamic market environments. It can't take into account new models for business and the new dynamic markets. The value behind Porters five forces model enables managers of all types to clearly think about a current situation of its industry using a structured, easy to understand means of a starting point for further analysis.
Criticism of Porters five forces
Over the past decade or two, there has been other factor forces introduced such as technology, globalisation and deregulation, all these new factors can have a great impact on an organisation. The strategies involved with corporate decision making should involve these new internal and external factors when considering strategies.
The framework of Porters five forces has repeatedly been challenged many strategist and academics, challenges from Kevin Coyne, Somu Subramaniam and Stewart Neill who have all stated that they believe there are three assumptions that are dubious which underline the five forces.
The competitors, buyers and suppliers don't interact or collude and are unrelated.
The value of source is a structural advantage which creates barriers for entry.
Uncertainty is very low which in turn can allow its market participants to respond to any competitive market behaviour.
They also suggest Porters five forces model lacks justification when it comes to the choices of the five forces they believe it to be arbitrary and has not an exhaustive or exclusive list. They suggest Porter does not indicate how to assess the powers of the five forces and how to counteract the powers of the five forces. Critics do feel Porters five forces lacks supporting evidence to support his findings and they believe he is reluctant to supply evidence which they suggest the five forces has not been well researched.
Most of the criticism is aimed at the five forces and not at three strategies of analysis. The focus and differentiation concepts have had a long history in marketing which can be justified through a number of publications and articles before Porters five forces was produced. Some critics feel that leadership costs isn't a strategy because when operated on alone it hasn't any value and therefore it mustn't be considered similar to the other two. Porter also describes industry as a bunch of organisations which produce products which have substitutes for one another. A major weakness according to Winfrey, Acar and Michalism is the frame works which identify the boundaries of industry is a process that hasn't considered the closeness of competitive threats. But many critics believe that Porters five forces model is very static and doesn't capture things that occur during times of rapid ever changing periods in environments of industry and many also argue there is no equilibrium within any industries.
The sixth force
There has been an extension to Porters five forces by Nalebuff and Brandenburger during the middle of the 1990's. This was achieved using game theory and by adding the new concept complementors, this was also known as a sixth force which was to explain the idea behind strategic alliances. This idea of the sixth force complementors has been credited to Intel Corp's CEO which is Andrew Grove (Grove, 1996). A strategic alliance can exist as a mutual beneficial relationship over a significant long term between two parties or more with goals agreed upon to meet everyday business needs while they remain independent organisations.
The sixth force model is not more popular than Porters five force model with the five force model being more widely accepted. The sixth force model is basically the same s the five force model but the sixth force just has an additional force in its frame works. The sixth force is termed as a force that has power of the other stakeholders and can also be referred to many other entities or groups, this depending on factors which have the most influence, these include;
Complementors - This school of thinking looks to the sixth force as a complementor, which can be complementary goods offerings to a business sector which is in focus and is being analysed (Grove, 1996). This author stated that such complementary business as the sixth force can affect industry changes through changes in these businesses, with new technologies, approaches and techniques; these can affect the dynamics between complementors and industries.
Government- Another form of thinking suggests the sixth force to be the government, which is included in the frame works if there is potential it can impact on the other five forces (Gordon, 1997). So in turn the government can impact in an industry directly as the sixth force, but at the same time can indirectly have influence or impact the five forces whether this was unfavourable or favourably.
Public - And again another form of thinking suggests t the sixth force to be the public. This is if the public have a very strong influence in a sectors dynamics which resulted in changes to the existing forces or changes in a sector as a whole.
Shareholders - Also shareholders can also be seen as a sixth force. This has become more important during recent years as shareholders have increase activities significantly in its boardrooms, also management of organisations have been much more scrutinised and sometimes issued with threats if favoured shareholder actions didn't get pursued.
Employees - And finally Employees can be considered to be a sixth force if they have power or influence over an organisation in a sector. Employees statuses follow similar certain rules in some sectors, and therefore this can be considered in being a strong influence in those sectors, an example can be seen with the Royal Mail as the major majority are in a workers union and therefore in this case the employees can be seen as the sixth force and not the government.
Even though this sixth force has been added to Porters five forces model, the sixth force has limited acceptance. This may be because, firstly, there is not a specific and defined sixth force in all of the industry sectors. Secondly, if the sixth force can be defined in all the industry sectors, its influence from this factor may also be captured with the other five forces and therefore making the sixth force a necessity is not as compelling.
It's also not advisable to evaluate and industries attractiveness independent from the resources an organisation brings to that sector of industry. It has been agreed that the above theory when used with the resource based view will give an organisation a much better sounding strategy. The resource based view is a tool of economics used when determining the recourses available for an organisation, which should be exploited for an organisation to develop its strategy to achieve its competitive advantages.
There are many strategic management models that can aid managers make decisions. These models range from the swot analysis to the product Life Cycle model and all aid in strategic management planning.
And Finally with the use of Porters Five Forces an organisation should seek the understanding and the nature of the competitive environment it exists in if it wants to successfully succeed in achieving its organisations objectives and to achieve its corporate strategies. If an organisation understands fully the five forces or even the six forces and does appreciates which force is the most important for that organisation, it will hold a stronger position in the markets and it will defend its self from threats and influence the forces with its strategies. The relative power from the forces can and will change all the time and in turn the forces strategies need to be monitored continuously. The issues which arise from implementing the five forces or the six forces are important to build a long term business strategy and to sustain its competitive advantages for any organisation.