A critical evaluation of Michael Porter’s five forces framework. Case study of the Vietnamese textile industry

Content

II Abbreviations

III Figures

1. Introduction

2. An analysis of Michael Porters Five Forces model and their underlying theories

3. Evaluation of a market entry decision in the textile industry in Vietnam according to Porter
3.1 Brief description of Vietnam
3.2 Assessment of Vietnam according to Porters five forces model
3.2.1 Power of the industry suppliers
3.2.2 Local versus international buyers
3.2.3 Substitutes for the textile industry
3.2.4 Threat of new market entries
3.2.5 Internal rivalry
3.3 Concluding investment proposal

4. Critical evaluation and further development of the five forces model
4.1 Factors versus forces
4.2 Interdependencies of the five forces

5. Conclusion

6. References

Appendix

II Abbreviations

illustration not visible in this excerpt

III Figures

Figure 1: Illustration of the five forces model by Michael Porter

Figure 2: Strategic positioning within an industry

Figure 3: Vietnamese textile exports from 2000 to 2009 in US$ billion with the percentage of the total exports of Vietnam

Figure 4: List of garment imports from Vietnam in 2008

1. Introduction

In times of globalisation strategic decisions like diversification and international expansion become more and more important. As the economic world is developing into an increasingly intertwined network managers need strategic tools to facilitate their decisions. One of these models is the Five Forces model of Michael Porter. He developed this approach in 1980 in his book Competitive Strategy – Techniques for analysing industries and competitors. He claims that any industry has five basic forces that shape the internal competition.

This essay will analyse the underlying theories of the model and the its structure itself and apply it to a case study. The case study portraits the Vietnamese textile industry and their association with the government. By analysing the case study this paper will show the models insufficiencies and how it can be improved.

2. An analysis of Michael Porters Five Forces model and their underlying theories

The Porters five forces (P5F) model provides a structure with which the intensity of competition within an industry can be analysed. The structure of P5F is illustrated in Figure 1.

Figure 1: Illustration of the five forces model by Michael Porter

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Source: Authors’ own illustration of P5F (Porter, 1980)

Porter defines an industry as a “group of firms producing products that are close substitutes for each other” (Porter 1980, p. 4). For the matter of simplicity services will also be referred to as products. The definition of substitutes however is rather difficult. It is a matter of whether certain products are regarded as substitutes or competitors, e.g. in the authors opinion eBay can be seen as a competitor or as a substitute for Amazon.

Porter (1980) argues that in any industry competition is lowering the return on investment. Profitability plays the key role in his model as it is the most fundamental measure of success. This was a new approach to strategic positioning of companies within an industry as compared to the market gap model described in figure 2. This approach is designed to find gaps or niches in the market which can be exploited by a firm. However, as it can be seen the gap in figure 2 the market gap identified by this approach is rather unprofitable as it suggests a high priced product with low customer value. As mentioned before the P5F approach does not take market gaps into account but rather the profitability of the market (Porter, 1980).

Figure 2: Strategic positioning within an industry

illustration not visible in this excerpt

Source: Own illustration after the model of Bradley Gale cited in Sinha and DeSarbo (1998)

The other fundamental component of his model is pressure which is exercised by the five forces.

He divides the competitive forces into direct competitors like BMW and Mercedes and into extended competitive forces like customers, suppliers, substitutes and new market entrants. These forces determine the extent of the industry level of rivalry. Rising competitive pressure will ultimately reach a point at which investors will withdraw their money and/or the company becomes unprofitable. Every single one of the forces can have enough impact to lower the return of a company significantly without the other forces being a major threat (Porter, 1980).

A more detailed look at the individual forces of the P5F model is found in the Appendix.

Porter (1980) argues that the strategies which are derived after an in-depth analysis could either be defensive as in a positioning strategy or aggressive as in an approach to shape the forces through R&D or product marketing. This implies that the forces are not constant but can be changed by the actions of the single factors within an industry.

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