“Strategy is defined as the act of establishing a business direction that will successfully lead an organization into profit” (Kaplan and Norton, 1996). Kaplan and Norton (1996) argue that the focal point of strategy formulation is how to effectively draw on business intelligence acquired from an organisation’s internal and external environment. An organization’s unique capabilities, resources and processes are considered its core competences. These core competences determine the organization’s unique position against its competitors within its external business environment (Prahalad and Hamel, 1990). The first step towards analysing an organization’s position within a business environment is to consider an overview of the surrounding environment. Such an analysis, identifies the general factors that impact on all market segments that operate under the same economic, technological, political and social environment (Daft, Sormunen and Parks, 1988). While knowledge of these factors provides an indication of the extent that these forces can impact on an organization, a more narrow approach is vital to assess the immediate competitive environment. Porter’s five forces model (1979) was introduced as a strategy tool aiming to analyze the immediate competitive environment of individual industries. Having been developed as an industry analysis framework, the five forces model, considers the specific forces that determine competition. The impact of these five factors facilitates the competitiveness and economic potential of an industry. This paper aims to critically 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.
An industry is described as a cluster of organizations sharing the same characteristics and competing in the same business environment (Lummus, Krumwiede and Vokurka, 2001). As industries share the same characteristics, the need to create a strategy tool that would enable the assessment of their profit potential, the impact of underlying drivers and their investment attractiveness was identified. In 1979, Porter recognised this need and proposed a framework which analyses the basic structure which can be extended to every industry. This foundation, constitutes of five essential factors that summarise the most important criteria to consider in order to analyse a particular sector’s key drivers of success. Based on such an analysis, a strategy can be formulated proposed on growth factors and certainty rather than scenarios and forecasts. The first force of Porter’s framework refers to the threat of entry and is concerned with the ease or perplexity to enter a particular industry. It should be clear that when an industry is difficult to enter, competition is high and existing competitors are very strong. Once potential newcomers decide to enter such an industry, they will not pose a significant threat to existing competitors as they will rather need to overcome existing barriers. Typically, these barriers fall under a set of factors including economies of scale,
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