Porters Five Force Theory
There is a constant interest in the study of the forces that impact a company via the usage of competitive advantage. Porter is a recognized leader in competitive analysis elaboration, who has elaborated five forces theory, which states that competitive advantage comes from the ability to gain profit via investment in an industry sector with higher than the average return. He is the author of main models on determination of main competitive forces and variants of competitive strategies.
Porter believes that the market share, the profit level of a company depends on how well it can react to effective competitive forces: new competitors with similar products; threat of substitute products; existing competitors; impact of suppliers and impact of buyers. His examination of the industry profitability and competitive forces is a valuable contribution to the market examination. The Five Forces of Competition framework by Porter stays one of the most popular tools of industrial analysis.
Porter’s five forces model has contributed to the study of competition as it suggests that rivalry is only one of several forces that determine industry’s attractiveness with its high rate in the industries with the possibility of substitute products introduction. Nevertheless, these five forces are not the only ones that define the way companies compete in an industry. It should be pointed out that the whole structure of the industry plays a significant role. However, Porter’s five forces theory has its weak points along with strong ones.
Porter’s theory does not include such important parts of competition as innovation, benchmarking, brand popularity, innovation circle and development of technology. Porter’s theory has been elaborated for a product of his time, when there was a relatively stable environment. Five forces theory does not point out what competitors are described – actual or potential and what substituted are meant – internal or external. Porter’s five forces theory does not have a very clear taxonomy. Moreover, his theory does not make much emphasis on technology and innovation, which are very important nowadays.
