The Determinants of the Attractiveness of an Industry: An Extension of The Porter’s Five-Forces Framework

Abstract

In this paper, I review and provide a more extensive theoretical grounding for Porter’s five-forces model for the determination of the attractiveness of an industry. I argue that the model is incomplete given its implicit assumptions about a firm’s financing activities in implementing its competitive strategy. I would suggest that an absolute paradigm for the determination of the attractiveness of an industry must take into consideration the industry’s optimal capital structure as well as the tendency for the power of providers of debt capital to vary across industries and to be crucial in the formation of industry profitability. Therefore, I propose an extended model for the determination of the potential profit of an industry, incorporating the industry’s optimal capital structure and the power of lenders. The pivotal connotation of this extended model is that the efforts of firm managers in formulating effective competitive strategies or in establishing a strategic position must not only consider ways of dealing with the bargaining power of buyers, the threat of entry, the negotiating power of suppliers, industry rivalry, and the threat of substitutes but must also account for the profit-contributory roles of both the optimal structure of the capital with which those strategies must be implemented and the power of lenders in setting constraints on the utilization of the firm’s capital, culminating in the proposition of a seven-structure paradigm for the determination of the attractiveness of an industry.