Porter’s Five Forces Essay Example

Question 1: List and give a brief description of the five models/tools we have learnt about so far. Identify One Strength and one weakness of each.

1. PESTLE Analysis

PESTLE is a strategic market analysis model that is used to identify key drivers of change in an industry. PESTLE is an acronym which stands for Political, Economic, Socio-cultural Technology, Legal and Environmental factors. The six factors form the external environment in which a business operates. The main strength of the PESTEL model is that it gives a realistic view of a business’ external factors, which influence its performance. A major weakness of PESTLE analysis is that not all businesses may need all the information from external factors. This is true for small businesses, which may not even have enough resources to conduct a detailed analysis of their external environments (Sumru & Jagjit, 2003).

2. SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats and is business model that analyses a firm’s microeconomic environment. The purpose of SWOT analysis is to identify the strategies that can be used to create a firm’s business model. A key strength of SWOT analysis is that it helps match a firm’s resources and capabilities to the competitive environment it operates in. As such, the model can provide insight for developing competitive strategies. A major limitation of SWOT analysis is that the model may cause organizations to overlook key strategic contacts which may occur. In addition, the model does not account for some factors that are not in control of a firm such as government legislations and changes in economic environment (Sumru & Jagjit, 2003).

3. Competitive Market Position Tool

This model relates to how a business positions itself in the market by differentiating its products. The model focuses primarily on carving out a spot in the competitive market landscape and focussing resources to deliver on that strategy. A good positioning strategy must take into account market profile, customer segments, value proposition and competitive analysis. The main strength of this model is that it enables firms to understand their market positions. Hence the firms can develop strategies for capitalising on their market strengths. However, the model does not give guidelines on how businesses can defend and increase the sizes of their current market shares.

4. Portfolio Model

The portfolio model focuses on the elements of a business’s product mix that can be used to determine the optimum allocation of resources. Two of the most common measures used in portfolio analysis are relative market share and market growth rate. Primarily, the model attempts to maximise an investment’s expected return and minimise risks by carefully selecting the proportions of assets. A key strength of this model is that it can be used as a basis for diversifying a business’ investment portfolio. Its main weakness is that its view of financial markets does not match trends in the real world. The model assumes that correlations between different investment returns are constant and fixed which is not practical (Sumru & Jagjit, 2003).

5. Porter’s Five Forces Model

Porter’s five forces model attempts to explain the dynamics of competition in an industry. In this model, Porter explains that there are five forces which determine the attractiveness of an industry and long run profitability. The five forces are:

1. Threat of entry of new market entrants.
2. Threat of substitutes.
3. The bargaining power of suppliers.
4. Degree of rivalry between existing market players.
5. Bargaining power of buyers (customers).

One of the advantages of porters five forces model is that it can be used as an ideal tool for qualitative evaluation of a company’s strategic position. Its weakness is that the model can only be used for industry level analysis and not for an analysis of industry sector.

Question 2: Identify the two you would choose to use in your business and justify your choice using material from the textbook and examples from the workplace.

I currently work in a cement manufacturing factory. The industry is highly competitive and has a high demand for its products. The most ideal models that can be used in my company are SWOT analysis and Porters Five Forces Analysis. Porters five forces model is ideal to use in a business because it provides a strategy that can be used to analyse the attractiveness of an industry structure. The model captures key elements of an industry competition and provides a criterion for taking a defensive strategy to create a strategic market position for coping successfully with competitive forces. Since the model considers industry level analysis, it eliminates unnecessary analysis of non-vital business factors, which may require commitment of resources.

The strength of using SWOT analysis in business lies in its ability to identify key opportunities and threats facing a firm. SWOT analysis is a valuable tool for businesses to assess market environment and develop strategies to remain competitive. He model provides a simple way to focus a firm’s resources and to organise findings to evaluate a firm’s current market position and future prospects. Essentially, the model provides an realistic view of a firm’s micro-economic environment and hence a basis for setting strategic objectives

Reference

Sumru, A. and Jagjit C. (2003). Dynamic Macroeconomic Analysis: Theory and Policy in General Equilibrium. Cambridge: Cambridge University Press