Analysis of Porter's 5 Forces Model and Its Application in E-Commerce Based Economy

2658 Words Aug 13th, 2010 11 Pages
Topic of the Assignment

ANALYSIS OF PORTER’S FIVE FORCES MODEL AND ITS APPLICATION IN E-COMMERCE BASED ECONOMY

PORTER’S FIVE FORCES FRAMEWORK:

A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Michael Porter has postulated that the intensity of competition in an industry is determined by its underlying economic structure. Porter (1985) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and
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The Porter’s Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firm’s current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simpleness of its application inspired numerous companies as well as business schools to adopt its use.

LIMITATIONS OF THE FIVE FORCES MODEL:

Porter’s model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations. Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond one’s immediate competitors as there are other determines of profitability. Specifically, there might be competition from substitute’s products or services. These alternatives
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