Critique Porters Five Forces Framework - Paper Example

Porters model lists five factors that strategists must consider while seeking to improve the strategic position of their businesses. Porter identifies competition of established firms, customers, suppliers, the potential of new entrants, and substitute products as the critical factors strategic decision makers must continuously modify to sustain business operations. Over the years, this framework has been used by business organizations to position themselves against unfavorable market forces. However, due to the complexities of the modern business environment, the framework yields several weaknesses that must be strengthened for better outcomes of strategic business decisions.

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Underlying Assumptions of Porters Five Forces Model

The framework assumes that the primary goal of business organizations is long-term profitability. Firms engage in various strategies with a sole intention of creating long-term value for the shareholders. As such, decisions that seek to portray business organizations as profitable in the short-term do not apply as the framework entails a sophisticated analysis of the interplay of the five forces, whose results might not be felt under short-term considerations.

The fight for the market share is not manifested only in the pressure a particular organization faces as generated from other players in the same industry. The competition is rooted in the economic structure, and competitive forces expand beyond the firms that are considered as the established players of a given industry. In this regard, customers, potential entrants, suppliers, and substitute products represent some form of competition depending on the nature of the industry.

The model assumes that organizations exist in a perfect market. Competitors, buyers, and suppliers have no relationship with each other and do not interact with each other in regards to the creation of a favorable environment for business activities. Therefore, practices such as collusion between the mentioned players do not occur.

The framework also assumes that markets are relatively static over a long period of time

The model further assumes that uncertainty is marginally low, an environment that allows players to design responses to competitive situations of the market (Porter, 2008).

Shortcomings of Porters Five Forces Framework

As noted in the preceding discussion, Porters framework may not be a perfect platform upon which all strategic decisions of an organization should be based. This is the case due to the complexity of the modern business environment. According to Grundy (2006), the models assumption of a classic, perfect market may not be applicable in the current business environment. Factors such as neither regulation nor deregulation, as exercised by governments, can alter the operating environment and should be analyzed too in the process of strategic planning.

Another shortcoming of Porters model is that it can be best-applied in simple market formations. As Grundy (2006), explains, analysis of the market based on the five forces may be misleading in complex industries which exhibit several interrelationships, product groups, and segments. Difficulties in the market analysis may result from the approach of the model which tends to put more emphasis on the macroeconomic aspect of the market as opposed to the analysis of more specific product-market segments at a micro level (p.215).As a result, strategic decision-makers may run the risk of missing essential elements of the market which could, in turn, lead to poor investment decisions.

Porters analysis of profitability and attractiveness of the current industry from an inward-looking perspective may not be the best approach to strategic decision making. Today, digitalization plays a significant role in driving business activities. Through technology, businesses have globalized through digital platforms hence altering the industry structure from the ones evidenced in the 1980s. Partly, the global reach results from the internal resources of the businesses in the form of business processes and employees intellectual capital. It follows then that such factors be considered in outlining the strategic plan for the business (Frynas & Mellahi, 2015). This aspect is given little attention when an inward-looking approach is employed in the analysis.

The assumption that markets are relatively static may not be relevant in todays business environment. Technological advancements and entry of new and dynamic players may completely alter business models, weaken or tighten entry barriers, and change business relationships along the supply chain within a short period (Frynas & Mellahi, 2015). As a result, the framework would only deliver an analysis based on a new situation, and thus, may not be reliable when strategists want to institute preventive actions. However, this assumption was more relevant in the 1980s when cyclical growth was typical of the global economy.

Porter bases his analysis on the notion that business entities engage in competition for business opportunities. Business organizations are always in a fierce competition over customers or suppliers. According to Grundy (2006), the model tends to propagate a scenario of an industry as a specific entity with certain boundaries that must be maintained in the course of business transactions. As such, it does not take into consideration business collaborative efforts such as strategic alliances, benefits of new entrants, and linkages of information systems of all players in a value chain. This may not be the case as modern industries appear fluid and less sensitive to the boundaries alluded in the model.

Although the framework provides a technique for conducting an analysis of a particular industry, it fails to offer the course of action for managers given that they have little influence on the five factors mentioned in the model. For this reason, the results of this model appear abstract and may be viewed by practicing managers as mere economic jargon that has little relevance in the practical business environment (Grundy, 2006). The apathy in the application of the framework makes it difficult for the strategic function to achieve the management objectives envisaged by Porter.

The Fall of Nokia and Porters Framework

Since the advent of mobile telephony in the early 1990s, Nokia continued to be the dominant player in the mobile market until the mid-2000s. For more than 12 years, Nokia generated huge revenues from mobile business more than any other telecommunication company during that time. For instance, in 2007, Nokia enjoyed 49.4% of the market share. This market share fell in subsequent years as more players entered the market, plummeting to a record low of 3% in the second quarter of 2013(Lee,2013).During the mentioned period, the company experienced a series of challenges that culminated in its sell-off to Microsoft in the third quarter of 2013.

Some scholars have attributed the decline and fall of Nokia to strategic blunders that can be linked to Porters management prescription. One of the underlying assumptions of Porter is that the markets are relatively static or they undergo slow changes that allow companies to adjust (Frynas & Mellahi, 2015). However, this was not the case with Nokia. In his book, The Decline and Fall of Nokia, Cord (2014) finds that employees and other stakeholders of Nokia blamed the then CEO of the company for promoting an approach that operated on the premise that the mobile phones industry was fairly static. Cord describes the CEO as too conservative and pursued a strategy of mass production of consumer products as though it was operating in a stable business environment. Instead, the CEO should have acted as leader of an entrepreneurial entity and pursued a strategy that recognized that the company was operating in a fast-moving industry. This conservative approach allowed the company to suffer from the adverse effects of new entrants into the telecommunication market.

The static approach to the business environment has also been cited in the agreements that the company signed with other players along the value chain. For instance, Nokia made strategic decisions to move to Windows but took long to launch Windows products. Although the move was meant to compete with Android and IOS, the delay in execution worked against the company. Additionally, Nokia signed a long-term deal to use Windows. This deal tied the company as it denied it a contingency plan to offer a robust competition against start-ups (Cord, 2014).Again, this strategy points to the argument that decisions were made on the premise of a relatively static business environment.

Another cause that has been mooted for Nokias collapse is the failure by the organization to use its internal resources. As noted earlier, the company concentrated on mass production and ignored the established fact that technology alters an industrys structure. As Lee (2013) reveals, the company was swallowed in complacency and failed to capitalize on its internal capabilities. This position has been reinforced in other studies. According to Cord (2014), the inward looking policy was to blame for the slow reaction of Nokia to digitalization of the mobile phones market. In his book, he reveals that the company had anticipated the internet to move to cell phones, and, thus, initiated business relationships with app developers before other players such as Google and Apple did. Yet the organization failed to act early due to the bureaucratic nature of the organization. This culture failed to accept the input of employees as decision-making was a preserve of top-level management. On the overall, the collapse resulted from an inward looking policy-making approach which is the hallmark of Porters framework.

How Porters Framework can be improved to enhance its Applicability

For improved applicability of the model, broadening of its analysis to include systems inter-dependencies may go a long way in breaking the boundaries alluded in Porters argument (Grundy, 2006). This improvement would neutralize the effects of Porters proposition of boundaries. In effect, the model would recognize that in a digitized economy, all firms in a given industry may work together due to the necessity of linking information systems.

As cited in the preceding discussion, the broad nature of the framework creates room for analysts to ignore some essential elements of strategic planning. Grundy (2006) suggests that examination of the sub-forces of the model might improve the function of strategic planning in organizations. Due to profound dynamism in todays business environment, other forces have emerged and need to be considered for business leaders to make better strategic decisions. In this ever-changing environment, governments play a significant role in influencing business activities both within a countrys borders as well as on the international stage. For instance, it may prohibit, limit or delimit the threat of entry of new players in a given market (McGinn, 2010).

Despite the significance of government in influencing business activities, McGinn (2010) argues that the government constitutes a sub-force that need to be considered in the process of strategic decision-making. Such an approach would give a more accurate position relating to the profitability and attractiveness of a particular industry.

For effective application of Porters framework, the consequences of new entrants should be viewed from both ends. As proved in the high-tech industry, entry of new players may bring positive impact in the industry. If strategists make decisions based on this concept, they would encourage innovation which would, in turn, enhance profitability. Additionally,...