Why is it important for firms to analyze the industry environment and how is Michael Porter's five forces model useful as an analytical tool.

Question

What will be an ideal response?

Answer 1

Michael Porter's five forces model is a comprehensive look at the industry environment.  Instead of viewing competition from a narrow view, the five forces framework looks at a number of forces in the industry environment that have the potential to impact the profit potential of firms operating within the industry.  The combined strength of competitive rivalry, threat of new entrants, bargaining power of suppliers, bargaining power of customers, and the threat of substitute products goes a long way toward determining a firm's profitability. 

By understanding the forces firms can position themselves within an industry to maximize their ability to earn profits.  Firms considering entry into an industry need to understand these forces so they can decide if there is enough profit potential to warrant entry into the industry.