Assignment1: Advantages and Limitations of Porter’s Five-Force Model
Chaitanya K Mandyam
American Public University System
Michael Porter observed and explained the different levels of profitability across firms and industries by his “Porter’s Five - Forces”. The main factors that affect the difference are:
1. Threat of Substitutes,
2. Buyer Power,
3. Supplier Power,
4. Barriers to Entry/Threat of Entry and
He analyzed the importance of all these forces minutely and provided the reason why these are useful and has to be considered in the strategy of companies growth in respective industry. We should consider “Threat of Substitutes” because this may affect the future of the company we don’t look over the substitutes that can be a threat of replacement for our product. Porter even explains the ‘Price Elasticity’ where the proportionate change in quantity of demanded goods is always reverse to the proportionate change of price. “Buyer Power” plays an important role in the strategic analysis of product consumption and production to the end user. There shouldn’t be any monopsony where the user can decide the price of the product, which can be more complicated when it comes to competition with rivalries and meeting the user price. “Supplier Power” is considered to analyze the profits made by the supplier versus the company and there can be a possibility where company can even consider forward integration to maintain the equilibrium of profits and user demands. “Barriers to Entry” is also important to restrict new investors to join the industry and inhibit the profits of the present companies in competition by causing more rivalry and weaken the market. Porter also explains different ways of restricting the new reluctant investors.
And the new investors can face barriers from Government making only a single company responsible to some areas/counties. Companies can themselves have patents by which it can...
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