Question

Describe one major limitation of each of the following models for competitive analysis: the five forces model, the strategic groups’ model, and the industry life cycle model. Does the existence of these limitations mean that the models are not useful? Why or why not

Answer 1

The limitation of five forces model is that it considers the vertical of substitution of the industry which is seen very rarely and emerges once in a decade. Example Banking had no substitute for the past 200 years, however with the changing environment Fintech is taking over.

The limitation of the Strategic Group's Model is that it is difficult to align companies under a single group in spite of them being from the same industry due to the difference in their risk appetite, growth and cash flow generating efficiency. The growth of a startup company is much high as compared to a matured company in a similar sector.

The limitation of the Industry Life Cycle says that the industry will come to an end, however, there are innovations that keep on happening in the industry, like the basic phone turning into a smartphone. It keeps on innovating through continuous research and development.

These limitations, however, does not mean that the models are not appropriate to be used. they provide a bird's eye view on the importance of these factors. They help us in understanding the nitty-gritty of the industry in great detail.