Critical Analysis of Porter’s Five Forces Model – Information Technology (IT) Industry
In order to appropriately formulate their corporate strategies and distinctively compete in the market, organizations are in a need for a framework that would help them in understanding industry structure and in overcoming rivalry. This essay aims at discussing, analyzing, and criticizing Porter’s Five Forces model using a wide variety of academic literature. The first part introduces the model, discusses its benefits, and provides a detailed discussion of the five forces and their underlying influential factors. The second part criticizes the validity of this model in today’s rapidly changing environment especially in the IT industry. The third and final part applies the model in the IT industry in order to determine its attractiveness and profitability level. For a critical analysis of Porter’s Value Chain Analysis (VCA) framework, kindly check out my article Critical Analysis of Porter’s Value Chain Analysis (VCA) Framework.
It would be important first to have a clear perception of what an industry is before proceeding with Porter’s Five Forces analysis. An industry can be defined as a group of organizations offering comparable products or services (substitutes), or satisfying the same basic customer needs, which means it is the supply side of the market. These customer needs help in defining industry boundaries (Charles Hill & Jones 2009). Strategists need not fall into the trap of defining industry too narrowly by overlooking crucial linkages and patterns across products and markets or too broadly by obfuscating differences among products, customers, and geographical regions. Strategists are also required to correctly draw industry boundaries in terms of both the product/service scope and the geographic scope (Porter 2008).
Strategists nowadays should go beyond the conventional idea of considering solely the positions of their direct rivals when trying to understand industry competition and profitability (Porter 1980; Hubbard & Beamish 2011). Economist and Associate Professor, Michael E. Porter, developed a model, which describes five basic competitive forces to be considered by organizations when developing their business strategies (Porter 2008). These forces, which constitute the micro external environment, include the threat of new entrants, the power of suppliers to the industry, the power of buyers or customers from the industry, the power of substitutes, and the rivalry among competitors (Grant, Butler et al. 2011; Hubbard & Beamish 2011). The collective strength and configuration of these forces, which differ by industry, determine the overall potential for profitability and attractiveness (Porter 1980). As the intensity of these forces decreases, industry profitability and attractiveness becomes higher (Hubbard & Beamish 2011). The strongest of these forces has the highest impact on industry profitability (Porter 1980).
The strategist’s goal is to analyze the sources, factors, or drivers influencing these forces to be able to shape them in his favor as part of his strategy formulation (Porter 1980). New entrants, who introduce new capacities, interests in gaining market share, and pressures on prices, tend to instigate restructuring and shakedowns in industry competition. The seriousness of their threat depends on the strength of the industry barriers, the strategic decisions impacting the industry, and the reaction of the incumbents (Porter 1980; Porter 2008). Porter mentions several factors influencing this threat which include economies of scale, product differences, brand identity, buyer switching costs, capital requirements, access to distribution, cost advantages, government policy, and expected retaliation (Hubbard & Beamish 2011). The height of barriers to entry has been proven constantly to be the most important predictor to industry profitability (Frank 2008).