The five-force model can be used as the basis for conducting an industry analysis. The goal of an industry analysis is to understand the dynamics of competition and to ascertain how the five forces influence profitability. The following steps are used for conducting an industry analysis:
- Develop a brief description of the target industry
- Identify the competitors, buyers, suppliers, potential entrants, and potential substitutes
- Determine the strength and weaknesses of the forces
- Identify any recent changes in the dynamics of the forces
- Determine the potential for short- and long-term profitability
- Ascertain who in the industry is positioned to be profitable
- Determine where the organization should invest.
Porter’s five-force model provides an overarching view of the competitive environment and is extremely helpful for understanding the competitive environment. It does, however, have several deficiencies. First of all, it takes a long time to conduct a full-blown exposé of the five forces because many devotees to the approach tend to overanalyze the industry and the competition. This in turn leads to organizational fatigue. Over analysis is related to the second deficiency. The ideas are very abstract and broad, and the technique requires consulting expertise in order to be applied effectively. Finally, it takes too long to implement for small organizations. For the entrepreneur working under extreme pressure, under the umbrella of monopolistic competition, there is very little time to attend to apply the approach effectively. Even though Porter’s ideas are very powerful, they do not resonate with the entrepreneur because they are abstract and difficult to apply.
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