PART A: CRITICAL REVIEW OF PORTER FIVE FORCES STRATEGY FRAMEWORK
Porter’s five forces strategy framework shows the position of a firm within an industry and how it fits to the business landscape. It has allowed businesses to create unique products and services that have made them successful. Although it has been effective in the traditional business environment, its relevancy today has been controversial. Most industries have changed significantly due to innovative solutions such as the digitalisation, deregulation and globalisation. The modifications have tilted the balance against Porter’s five forces due to increased information access, reduced cost of doing business, willingness to pay for information, and outsourcing of services. In addition, competitors are collaborating, consumers and organisations are working together to make superior products and services, and governments are avoiding interference in most industries. These factors have not only made Porter’s five forces ineffective but also raise questions about its relevance today. The effectiveness of the framework can be enhanced by updating it to consider the changes that have taken place after its inception or using it together with other analytical management tools.
Porter’s five forces framework has been instrumental in analysing industries and devising sustainable strategies. It has provided a level ground for all firms to succeed regardless of whether they are new or veteran. The framework has allowed some firms to determine gaps and create products and services to address them, as was the case with Apple’s iTunes and iPod. The framework applies to all industries even with emergent factors that were unavailable at the time such as technological innovation. However, the new techniques, processes, and systems have raised questions about the relevance of the framework today. The globalisation, digitisation, and deregulation changes witnessed in most industries have made the five forces largely ineffective. Moreover, it was based on the fact that industries and influencing factors would remain constant over time. It has also emerged that many managers do not understand the framework. Its analytical nature makes its application a major challenge. Thus, Porter’s five forces framework needs amendments to make it effective in the relatively modern business environment today.
Michael Porter’s 1979 article, ‘How Competitive Forces Shape Strategy,’ is revolutionary ideology in business management. When Porter joined Harvard business school as an associate professor, he realised that the frameworks used at the time were incomplete and inconsistent with the business environment at the time. He concluded that Jon Bain’s work only focused on the element of barrier entries (Porter, 2008).
In addition, there were independent models and frameworks for the business and economic schools of thought (Magretta & Porter, 2012). While the business school of thought focused on unique products, services, and customers, the economic one analysed the data mathematically (Magretta & Porter, 2012). The use of different models for different yet related sectors made it impossible to analyse most of the industries and individual firms successfully. The frustration encouraged Porter to come up with a better framework that included all factors that could influence a firm’s operations. Porter focused on industrial organisation concepts such as Jon Bain’s barriers of entry and SWOT analysis to determine what had been left out. He wanted to create a standardised method that complemented others such as the SWOT analysis (Porter, et al., 2002). The framework that Porter came up with consisted competition among firms, the threat of new entrants, bargaining power of the suppliers, the bargaining power of the buyers, and availability of substitutes (see figure 01). Porter has always resisted the suggestions to include the government factors as the sixth force. He claims that the government and business do not have a monotonic relationship (Porter, et al., 2002). In addition, it is impossible to quantify “government is high, industry profitability is low,” or “government is low, industry profitability is high” (Porter, et al., 2002).
Image 1. Porter’s five forces
Porter’s five forces remains the most influential analytical strategy for businesses across the world. The framework is the only way to growth and prosperity of a firm even in today’s market characterised by hyper-competition (Magretta & Porter, 2012). It is possible to compare an organisation with the competitors as well as its position in the industry. In addition, Porter’s five forces framework provides the entire business outlook by focusing on the owners, the suppliers, and the customers (Brandenburger, 2002). It also shows the role businesses have in creating value, buyer’s willingness to purchase, and supplier’s willingness accept opportunity cost (Brandenburger, 2002). The information gathered assists the managers to come up with a strategy they can use to remain in the market. They have to understand the floor and ceiling of the value and determine how their organisation fits (Brandenburger, 2002). Managers should always focus on opportunity cost (higher value or lower cost) compared to the competition to remain relevant in an industry.
Firms can use the information gathered from Porter’s five forces framework to determine exploitable weaknesses and create successful products (Porter, 2008). Apple successfully identified the portable music gadget gap in the mid-1990s (Porter, 2008). The music producers, media platforms, and other stakeholders in the music industry could not do it independently but they could also not work collaboratively. Another major factor at the time was the threat of pirated music that would undermine the hard work of the musicians (Porter, 2008). Apple iTunes became popular instantly across the world and it has been almost impossible to create a product that can displace it. Moreover, Apple was the first company to introduce the service well ahead of possible competitors and new entrants. Apple succeeded further after introducing iPod to offer iTunes service better in 2003. Apple’s accomplishment underscores that Porter’s five forces can assist a firm come up with new products and services successfully.
The main reason the Porter’s five forces remains relevant over decades is its theoretical and practical approach. Students can learn about the concept and successfully use it to analyse organisations as long as they can access the relevant information, which is easy with the internet today. The data gathered requires the manager to be proactive to successfully take advantage of the forces. In addition, they need to avoid the misconceptions about Porter’s five forces (Magretta & Porter, 2012). Many organisations rely on the assumption that they need to beat their rivals, which is somewhat a fallacy. Moreover, Porter claims that the main objective of a firm is to make profits regardless of whether there are rivals or not (Magretta & Porter, 2012). In addition, it is impossible to eliminate competition entirely even in industries that demand higher capital expenditure (Magretta & Porter, 2012).
Positioning a firm successfully in an industry is an important aspect of Porter’s five forces (Porter, 2008). The framework helps determine the nature of an industry, including the strengths and weaknesses. Novel firms targeting a certain industry benefit immensely by determining what is available and what is lacking. The best entry strategy for the new firms is capitalizing on what is lacking or the weakest link in the industry. In addition, they should intentionally change the Porter’s five forces to their favour by exploiting economies of scale, pursuing costs controls, avoiding customers with little value, differentiating products and services, and focusing resources to addressing the weakness identified (Lehmann, 2012). The new firms must define themselves uniquely by being distinct, timely, and understandable. They must communicate their mission and vision to the clientele by coming up with a unique slogan that relates to their expectations (Lehmann, 2012). All the actions of the firm should be based on extensive knowledge of the target market, the industry, as well as possible future changes (Duhaime, et al., 2012). A firm should focus on getting as much market share as possible in the case the products or services are new. The first mover strategy has been successful with major global brands such as Ford, Apple, IBM, MySpace, and Amazon (Boone & Kurtz, 2014).
It is possible for a single firm to move the industry it operates in certain direction. The aim of such changes is to improve efficiencies while increasing profitability. When the market leader makes some changes to be more productive or profitable, there are higher chances that all other firms in the industry will follow suit to accrue the perceived benefits (Porter, 2008). The industry mindset changes through innovation, restructuring, balancing demand and supply, downstream development and sometimes firm-level unique activities (Grundy & Brown, 2002). The alterations by market leaders are mostly successful as underscored by increased profits for all firms that take the initiative. An industry can become so attractive that it encourages new entrants from related industries to enter the market, for example suppliers developing products and trying to connect with the clients directly. However, the copy cat syndrome may have short-term negative effects such as price wars (Grundy & Brown, 2002). The industry mindset and associated changes can be underscored by Sysco’s value-added services such as inventory management, planned menu, and credit, which changed the entire industry (Porter, 2008).
Porter’s five forces framework is instrumental in determining the value of an industry and its investment worthiness. It assists incumbent and new firms evaluate the attractiveness of an industry, the short-term and long-term shifts likely to occur, and the untapped opportunities (Porter, 2008). These factors are dependent on data gathering, mission generation, objective setting, and strategy establishment (Ahlstrom & Bruton, 2009). The data gathering procedure evaluates the capabilities of the firm and the nature of the external environment. An organisation should conduct self-appraisals and combine them with customers’ and stakeholders’ views to have a comprehensive image. The information gathered is used to generate a mission statement followed by the objective (Ahlstrom & Bruton, 2009). The final planning step involves developing a three-tier strategy that includes corporate, business, and functional levels. The first part of the strategy dictates the market areas and regions, the second includes the processes used to complete successfully while the third consist of the activities of the various departments (Ahlstrom & Bruton, 2009). An organisation can implement the strategy once these processes have been completed. It should have methods to measure whether the strategy is working or not. In the case it has not met the goals set, it should review the entire strategy to determine the problem and institute corrective actions.
Porter’s five forces framework has been the most dominant in business management in the last five decades (Grundy, 2006). Although largely successful, it has serious issues that have generated controversies and criticism. Implementing the framework successfully requires experienced managers who may be lacking in new firms. Moreover, such organisations are usually founded by younger individuals who may not have the required expertise and the capacity and resources to hire experienced managers. Porter’s five forces framework is abstract and analytical at the same time. Its prescriptive nature demands critical thinking for successful application in the various industrial contexts (Grundy, 2006). The requirement may be a challenge to even veteran managers who usually prefer simplified micro-economic concepts that are easy to understand and integrate in organisational strategies (Grundy, 2006). Any Porter’s five forces framework analysis they conduct would be inconclusive, shallow, and inaccurate. Consequently, a firm would be blind about the business environment, especially the competitors, potential customers, and possible impact of emergent factors (Dobbs, 2014).
The lack of depth of Porter’s five forces framework is due to shallow coverage in higher learning institutions (Dobbs, 2014). An analysis of the widely used management books shows that only about ten percent cover the framework comprehensively. In addition, the framework is not structured well for learners to understand it well (Dobbs, 2014). Porter provided case studies of the five forces at work but did not clearly indicate them and their impact on the respective firms (Dobbs, 2014). Those that use the framework just take cues from the list, which may vary depending on individual understanding. The lack of standardisation may lead to different outcomes of the analysis despite following the superficial list of items to cover (Dobbs, 2014). Most of the students do not understand the strategy well by the time they graduate. It is impossible for them to make good and effective managers considering the analytical demands of the Porter’s five forces (Dobbs, 2014).
Porter’s five forces framework focuses on the analysis of an industry but not individual firms. It does not provide strategic insights that can assist organisations succeed. In addition, the data may be inaccurate considering that industries are at different levels at any given time (Dobbs, 2014). There are also variations in different geographic regions, for example, a sector could be growing in one location but declining in another. Some critics state that “Porter’s framework is a very ethnocentric US way of looking at the world (Narayanan & Fahey, 2005).” Developed nations have self regulating advanced industries with little government influence but that is not the case in developing countries such as China, Czech Republic, Russia, Chile, and Brazil (Narayanan & Fahey, 2005). Market supporting formal institutions lack in most of these emerging economies, which compromises the perceived standard environment that Porter’s framework can assess successfully (Narayanan & Fahey, 2005). It is impossible to access accurate data about transaction cost and capital flows as well as laws governing competition and rivalry of firms (Narayanan & Fahey, 2005). These factors may force the managers to be proactive but they may still be unsuccessful, especially if they do not understand the framework well.
Porter’s five forces emphasize products and markets but overlook the resources and capabilities, which are more important (Zack, 1999). In addition, the framework avoids the common issue of hyper competition today. Some organizations destabilize the market or an industry to successfully displace others and discourage new entrants (Henry, 2011). The conglomerate monopolies disrupt the normal market conditions and make it challenging to predict the market. Such conditions would provide inaccurate data about the market considering Porter’s five forces focus on estimating future business environment. It would be even more challenging if a firm operates in different regions with varying cultural aspects (Groucutt, et al., 2004). The turbulent and ever-changing business environment today can also lead to inaccurate Porter’s five forces analysis. Managers may try to incorporate the ‘time factor’ in their strategies but their efforts are usually futile (Groucutt, et al., 2004).
6. PORTER’S FIVE FORCES IN TODAY’S BUSINESS ENVIRONMENT
The relevance of Porter’s five forces has been controversial since its inception. The criterion Porter used to come up with the framework is unknown and cannot be verified and authenticated (Dälken, 2014). Porter was under the impression that the model and industries would remain constant. In the last two decades, the internet and other technological innovation have changed all industries significantly (Karagiannopoulos, et al., 2005). The bargaining power of buyers has increased considerably today compared to the late 1970s and early 1990s (Dälken, 2014). Customers can access information about providers of specific goods and services and choose the ones that meet their expectations (Dälken, 2014). Most people are willing to pay for information about products and services that interest them. Similarly, businesses have devised strategies to collect, package, and transfer information to customers (Karagiannopoulos, et al., 2005). The approach has reduced the cost of accessing information significantly for consumers and businesses. Firms that provide comprehensive information about their products and services have a competitive advantage. Such businesses may succeed even if they are unable to use the Porter’s five forces (Karagiannopoulos, et al., 2005). Porter understands the influence of internet on business environment as underscored by his statement, ‘‘the great paradox of the internet is that its very benefits – making information widely available; reducing the difficulty of purchasing, marketing, and distribution; allowing buyers and sellers to find and transact business with one another more easily – also make it more difficult for companies to capture those benefits (Karagiannopoulos, et al., 2005).’’
Porter did not envision internationalisation of businesses, collaboration of competitors through mergers and acquisitions, outsourcing of business operations, and intensive economic reforms (Dälken, 2014). Most industries today are characterised by low trade barriers, lower communication costs, lower transportation costs, widespread use of technology, and more ICT developments (Dälken, 2014). In addition, organisations are reaching out to their customers to understand them better and customise products and services according to their tastes and preferences (Ural, 2014). Such situations were impossible and unforeseeable by Porter when he developed the five forces framework.
Government deregulation processes that started in the late 1980s and early 1990s in American and Europe made Porter’s five forces relevance questionable. He had devised the framework at a time when government regulated mostly industries strictly. Deregulation altered the aviation industry by eliminating the barriers of entry. Competition increased while prices decreased, which forced most firms to come up with proactive strategies to survive (Dälken, 2014). Deregulation of industries confirms that the government may affect the business environment despite Porter’s rebuttal. The process increases the buyer’s bargaining power significantly as there were more alternatives available (Dälken, 2014). Additionally, novel firms got the opportunity to fill in the gaps not met by the major airlines at the time. Deregulation led to the introduction of low budget carriers that changed the industry structure in Europe and America (Dälken, 2014). Therefore, Porter’s five forces would only remain relevant if the same conditions of the old economy exist or if it is used together with other management strategies.
Porter’s five forces has been an important management tool for decades. Some firms have used the framework to determine market needs and solutions, which has influenced their success. However, others have had challenges, especially those that have managers that do not understand the framework well. Nonetheless, its current utilisation requires the input of other management strategies for effective analysis of an industry and a firm. Moreover, internal and external factors are important, especially in determining issues that influence the performance, productivity, and profitability of a firm. The challenges of Porter’s five forces necessitate a review of the framework to make it applicable in the current business era.
Uber is a riding app conceived in December 2008 in Paris by Travis Kalanick and Garrett Camp after they failed to get a taxi (Uber, 2019). Frustrated, they thought of an idea that would make it easier for taxi and riders to connect with ease. They developed an app four months after the frustrating experience in Paris (Uber, 2019). The first ever request was made on 5 July 2010. Uber had more than one billion trips In December 2015 and more than five billion by May 2017 (Uber, 2019). A year later, Uber recorded more than 10 billion trips in twenty one countries in five continents. Based on Porter’s five forces framework, the founders determined a weakness in the market at the time and came up with a way to position the unique solution in the market (Porter, 2008). Uber was a first mover as there were no such services at the time. In addition, the company differentiated its services into luxury and economy categories to cater for at least two markets depending on their affordability capacity (Padgett & Loos, 2019). Uber also become popular in 2009 and was able to take a larger market share from the start, which is the reason it is impossible to displace it. The idea was copied by other firms that have become uber competitors. The company also faces litigation issues in different countries across the world.
Uber customers have access to other transport hailing applications and alternative means of transport such as trains, buses, and traditional taxis. These alternatives have the potential to disrupt Uber’s marker share, especially because its customers have information about similar applications and services. However, the firm has a better value proposition with lower prices, shorter waiting times, and lower transaction costs (Henderson & Churi, 2019). In addition, the distribution platform is equal to all applications, in which case none would have an advantage over Uber. Nonetheless, the firm can enhance its market position by providing complementary services, such as the newly introduced Uber Eats.
Uber drivers operate individually, which keeps their bargaining power low. In addition, most of them prefer to use other applications rather than shifting from uber altogether. Although discouraged, using Uber and competing apps such as Lyft together keeps possible switching costs lower (Meyer & Shaheen, 2017). Uber offers low idling times, especially in larger cities, which encourages drivers to stick with the firm. In addition, there are low barriers to using the application. Any person with the relevant qualifications can apply to become a rider almost immediately. However, the bargaining power of drivers is increasing with the proposed unionisation to protect their interests. The need to have a common voice started after Travis Kalanick was seen in a video arguing with an Uber driver. If successful, drivers will have a significant influence in the decision-making process. They may demand a larger percentage of the revenues, which will affect Uber’s profitability.
It is almost impossible to create an application and scale it up to the level Uber is today. It would be very costly to fund such an initiative, which would also face serious uncertainties such as getting customers. Uber already has a good value proposition that is almost impossible to beat. In addition, it has large economies of scale with millions of drivers across the world. Trying to enter a market dominated by a large firm is a big challenge as Uber learned when it invested billions of dollars to outdo Didi in China. Uber had to give up the quest and accept the huge financial loss (Dyer, et al., 2017). Similarly, it would be impossible to outdo Uber in the markets it is well established, especially the United States. However, the firm should be ready since influential companies such as Microsoft, Apple, and Amazon may decide to invest in the industry. These organisations have the money and loyal customers, and operate in the same business environment.
There are no substitutes that have a significant influence on Uber operations. Although car sharing applications such as Zipcar may encourage some customers, they cannot disrupt the firm’s operations (Candelo, 2019). Self-driving cars are a worthy adversary but may be in the future. Many people are skeptical using them and are likely to use what they know now (Schermerhorn & Bachrach, 2016). Uber understands that self-driving cars may become popular in future, which is the reason it is investing a lot in the technology. The provision of better public transport, which may have a significant impact on Uber’s operations, is highly unlikely in most countries. Therefore, Uber stands a chance to keep growing in different nations.
There are many riding applications in nations Uber operates, for example, Lyft in US, Ola in India, and Didi in China among others (Yang & Ju, 2019). These firms have already eaten into Uber’s market share and they seem relentless. In addition, they engage in price wars with Uber, which may force the firm to revise its charges further. Drivers also contribute as they are now using several applications, most of which compete with Uber. Other rivals are emerging all over and they may have a significant impact on the firm. Moreover, there is a consensus that many people would prefer local applications to Uber.
Although Porter claimed that government influence was insignificant, Uber’s case proves otherwise. In 2015, A French constitutional court banned Uber in the country after normal taxi drivers protested stating that the application made their vehicles non-competitive (Mehdi, 2019). In 2017, an Israeli court banned the use of application because of claims that the firm had stolen the technology (Mehdi, 2019). It was also banned in Italy in 2017 by an Italian court over unfair competition (Mehdi, 2019). The classification of the drivers is a persistent legal issue in the last five years. While Uber deems them independent contracts, some feel that they should be considered employees. The issue has been subject to numerous litigation issues, such as Rojas vs. Uber technologies, Hood vs. Uber Technologies, inc, and Razak vs. Uber Technologies, inc, in the United States in 2017 (Perritt, 2018). In September 2019, the California governor Gavin Newsom assented the A5 bill in to law (Campbell, 2019). The new legislation requires Uber, Lyft, and other taxi applications to hire drivers as employees. The ruling by a New Jersey Court on 14 November 2019 has changed the outlook completely. The court has fined Uber 649 million dollars for claiming that drivers are not employees (Haag & McGeehan, 2019). There are also concerns that most Uber drivers make less than the minimum wage (Miller, 2019).
The challenges Uber is facing show a failure in strategic analysis of the markets it operates. It will have to reconstitute it operational procedures, which may create a gap that other firms may fill. It also faces intense competition from local firms in the countries it operates. Using Porter’s five forces alone is insufficient, especially now it plans to start operations in more countries. The most plausible strategy is combining Porter’s five forces with other management strategies to get a better outlook on the various business environments. The best addition would be the Political, Economic, Social, Technological, Environmental, and Legal (PESTEL) analysis. The framework will allow the firm to determine political environment, government actions, change in legislation, the nature of potential customers, growth facilitating and impeding factors, ethical values, stereotypes, religion, nature of technological uptake, laws that regulate business operations, as well as pollution concerns (Perera, 2017). It will also need to look at the geographical characteristics of the different nations, such as resources, infrastructure, and weather conditions (Perera, 2017). The framework is more comprehensive and more suited to Uber, especially now that the company wants to extend its services to other nations that have varying characteristics. The major advantage of PESTLE analysis is it allows firms to foresee many issues and plan ahead in the ever-changing business environment (Pilinkienė, et al., 2016).
It is evident that Uber used Porter’s five forces framework before it started operations. The founders successfully determined a weakness that needed a solution fast. The remedy, connecting riders and drivers, has made the company successful in more than twenty countries across the world. It seems the firm was confident and still is that there is little government influence. However, that is changing even in its home country where legislations that have the potential to influence it negatively have been introduced. The landmark ruling made by a New Jersey court on 14 November will change its operations significantly. The firm needs to use other management strategies such as PESTLE to understand the countries it wants to operate better.
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