Michael Porter's Five Forces Model and the Entrepreneur

A book entitled Competitive Strategy published in 1980 has profoundly shaped the business paradigm of the current and future managers and academics. Michael Porter, the author of the book, presented the five forces model that significantly affected all business and traced the influencers of profit in an industry. The five forces model of Porter continues to evolve that in 2008, the model was used to understand the strategic repercussions of a business in the industry.

Consequently, strategic management was catapulted to the center of management. Mr. Porter's five forces model becomes more applicable at the macro level especially, for the economies trying to develop their competitive advantage. Although there were several resource-based theories, there are quite several criticisms against the five forces model. Sadly, after more than a decade, only very few managers have considerable awareness of the concept of the model. Comparably most managers are aware of the use of the SWOT analysis. Ironically, many academicians claimed that the five forces model significantly advanced the strategic awareness of the manager, but it leaves little use for the practicing managers. There were several reasons identified:

• The five forces model is too abstract and analytical.

• Although the five force model distinctively explained the five competitive forces that shape the industry, Mr. Porter used the language of economics, which are mostly hard to understand among practicing managers.

• The five force model is highly dogmatic and rigid, which leaves the manager no room to exercise their innovativeness and intuition in how to apply the model.

• The model succeeded in simplifying microeconomics, but the visual framework is hard to integrate and the logic rather implicit. The presentation of the model was highly academic, which lost its appeal to the manager who liked the framework presented in simple terms.

Arguably the five forces model is an essential concept and deserves attention to entrepreneurs. Over several years there is an exponential growth of small businesses established in the country. Nonetheless, it is vital to examine the evolution of the five forces model towards creating strategic management for small businesses.

The five forces model depicted in the figure below, illustrate the objective of Porter, to show the differences in the profitability of the business in different industries. According to Porter's five forces model, these variances among industries are through the following forces: the power of the buyers, entry barriers to the industry, the intensity of competition, substitutes, and power of the suppliers.

The five forces model furnishes valuable information for three criteria of business planning.

In terms of statistical analysis, the model determines the attractiveness of an industry. It furnishes an understanding of the forces influencing the industry's profitability. Hence the entrepreneur has support on their decision to enter or exit in the industry. Further, the framework measures the effect of the competitors on the business. The various reactions of competitors can direct the course of the sector.

In the area of dynamic analysis using the PEST, which divulges changes in the industry, the model provides awareness to the possible future appeal of the industry to attract new entrants. Hence the model framework provides a methodical and organized analysis of the market structure and existing competition. Also, the model is applicable to a specific business, market niche, and competitive situation. Hence it is essential to decide the scope of the market entrepreneurs wanted to analyze as the initial step. Next, after all, pertinent forces are known and evaluated; it is not required to assess all elements of competition.

As much as Porter provides narrative assistance for evaluating the five forces, a robust visual format is absent. For instance, in a competitive rivalry, Porter invites readers to think about the concentration of rivals about the number of players. The serious analyst usually treats competition as separate from the analysis of competitors, while others include the government as the sixth force. In small and medium enterprises (SMEs), the policy government adopts a significant effect on the direction of small businesses. At certain times the role of the government is even dominant compared to the five forces. However, if the government is a buyer, supplier, or substitute, it is part of the five forces. Such is the vital role of the government in the SMEs that any government policy associated with trade, competition, consumer rights, regulations, taxation, and subsidies impact small businesses.

A serious analysis of the industry must include the assessment on the level of uncertainty small business confronts. A highly vibrant sector is more difficult to forecast due to its constant heightened unpredictability. For instance, the health and wellness industry is currently in a volatile environment, accompanied by a high level of risk and uncertainty. The intricacy of the industry should be deliberated when making critical decisions.

References:

Ehsan, S.D., 2005. Business Strategy. MANAGEMENT.

Grundy, T., 2006. Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15(5), pp.213-229.

http://www.mbatools.co.uk/Articles/p5f.pdf