What is the strategy? According to Oxford business dictionary, strategy is a planned action designed to achieve long-term or overall aim. Ohmae (1983) say, “Over the past decades, quite a few new concepts of business strategy have emerged. Good strategies, however, remain difficult to develop, largely because strategy is so much easier to classify in retrospect than to plan and create.” Strategy is important for a firm because the resources and capabilities which enable the firm to achieve their aim are usually very limited. Furthermore, if a firm desires to achieve their goals, the difficulty they will approach and overcome is not just the management of a firm. There are also many external factors such as buyers, political, substitute goods and many more which may affect the development of the firm. However, the most important things is a firm’s choice of strategy should depend on the competitive environment or the exploitation of the resources under its control although both of them have their own pros and cons.
Firstly, it can be argued that a firm’s choice of strategy depends on the competitive environment is more important than the exploitation of the resources under its control. According to Porter (1980, 1985) and Porter and Millar (1985), a firm develops its business strategies in order to obtain a competitive advantage over its competitors.
Porter (2008) says, “The job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, substitute products.”
In addition, most of the products are easily standardized or undifferentiated so the buyers always believe that they can find another substitute goods and switch to it. For example, in the era of science and technology developments, the rise of internet video sites like YouTube has made video rental outlets struggling with online video rental services such as Netflix. Besides that, a firm depends on a variety of suppliers for input. The power of the suppliers are strong if its product can be differentiated from others and no substitute for the product. An example is travels agents, who depend on airlines as the key suppliers. However, nowadays consumers can directly buy their tickets through the internet from the airline company so this increased the airline company’s power to bargain down the commissions of the agent. The threat of entry also puts a cap on the profit potential of an industry. When there is high threat, to compete with the new competitors, a firm should cut down their prices and boost investment, for example, Starbucks tend to invest aggressively in modernizing stores and menus to compete with other competitors.
Porter says “awareness of these factors can help a company stake out a position in its industry that is less vulnerable to attack”. According to Tony Grundy, Porter’s frame work is relatively abstract and highly analytical. In fact, Porter’s original framework explained the criteria for estimating the five competitive forces, he did so in micro-economic theory, rather than its practicalities. His model was prescriptive and the framework can simplify micro economics because its structure is difficult to take up. It went beyond a more simplistic focus on market growth rates and emphasized the importance of negotiating power and bargaining arrangements in determining market attractiveness.
On the contrary, according to Barney (1995), “Porter’s works on the five forces model, the relationship between industry structure and strategic opportunities, and strategic groups can be all understood as an effort to unpack the concepts of environmental opportunities and threats in a theoretically rigorous, yet highly applicable way. However, the SWOT framework tells us that environmental analysis —is only half the story.”
There are several limitations to the Porter’s framework. It oversimplifies industry value chains, as an example, market segmentation should be done and also differentiated between channels and end consumers. Furthermore, it fails to link directly to management action. If a firm has low influence over any of the five forces, then how can they put one’s hand to overcome the obstacles. Porter’s framework was thus a valuable and workable concept, but had some drawbacks, unless the model can be developed more in the future.