Assess the usefulness of Porter’s theory of competitive strategy for understanding the competitive behaviour of companies, giving examples.
Porter’s theory of competitive strategy is a very important managerial tool for analyzing companies’ industry structure in strategic process. The competitive theory of strategy is shaped by five forces which Michael E. Porter has developed in his book “Competitive Strategy: Techniques for Analyzing Industries and Companies” in 1980.
These five forces are:
1. The bargaining power of buyers
2. The bargaining power of suppliers
3. The ...view middle of the document...
* There are many similar products that suppliers are willing to supply in the market.
* The switching cost for a company is high. (e.g. the company uses a specific product from a supplier)
Conclusion: The number of suppliers is big and the companies depend on them. So they have power.
The Rivalry Amongst The Existing Competitors
* There are many competitors in the market.
* The cost of leaving the market is quite high.
* Products’ switching costs are low so customers can easily switch to a cheaper product.
Conclusion: This market is extremely competitive. This means that if somebody raises the prices, then they will be reduced quickly. Intense competition exerts downward pressure on prices.
The Threat Of Substitute Products
* Some cross-products substitutes.
* Potential technological changes which will allow to competitors to import food in the market.
* Possibility of buyers to switch their habits.
Conclusion: There is threat of substitution but not too big.
The Ability Of New Competitors To Entry The Industry
* It is not too expensive to entry this industry.
* It is good for companies to have experience before their entrance in the industry but they can be trained easily.
* The entry’s barriers are low, so the entry it is quite easy.
Conclusion: It very easy for a new company to entry this industry and by doing this they will reduce the profits for the existing companies.
Overall Conclusion: Unless this situation changes, this industry is easy for a new company to entry but very tough survive. If he still wants to entry this market and starts a career as farmer, he has to find a business that exist in this market and have high shares of the market, so he can work for this company. But still he will not be his own boss.
Having considered the previous example, we can see that Porter’s theory can be applied in simple markets like this one. But this is not enough, because in today’s industries many things have changed since the eighties when Porter’s theory for competitive strategy has been developed.
Porter’s model developed in times where the markets were classic, stable and simple. The competition was strong and the developments were cyclical, in contrast with the industries in the 21st century that are complex, dynamic and with multiple interrelations. Another, very strong, characteristic of today’s industries is the technological breakthroughs that happen almost every day. This characteristic, combined with the dynamic structure of industries, tends to change the business models that were in the past. Porter’s model was made to analyze simple situations and predictable developments. So the five forces model could better be used on a later stage on this new situation, where things would be more static and simple than they would be on the start.
According to a financial analyst, Dagmar Recklies, during the last ten years Porter’s ideas became subject of critique because of the...