Global Journal of Management and Business Research, B: Economics and Commerce, Volume 22 Issue 4

prepared to pay for the shares of the firm. They further stipulated that agency costs can also arise when outside investors invest in the debt of a firm managed by insider owners. Debt financing engenders a motivation for asset substitution for the reason that debt enables equity to become a call option on the firm. Debt financing has other agency costs, including costs of monitoring and enforcing contractual covenant provisions as well as costs of bankruptcy and re- organization. However, Jensen (1986) pointed out that debt may also have an advantageous effect on agency costs in the manager - shareholders relationship since debt commits the firm to pay out free cash flows and therefore introduces a constraint on the volume of funds accessible to the manager for spending on perquisites. Finally, I summarize the works of Bowen, Daley & Huber (1982). Bowen, Daley & Huber (1982) deduced four main inferences from their research study. Firstly, there is a statistically significant variance between average industry capital structures. Secondly, that the rankings of average financial structures of industries were characterized by a statistically substantial steadiness over the complete period of time examined. Thirdly, that companies demonstrate a statistically substantial propensity to navigate towards their industry average over both five-year and ten-year periods of time. Finally, they furnished evidence consistent with the DeAngelo-Masulis postulation that the level of tax shields (made available by depreciation, tax credit emanating from the firm’s investment activities, and tax loss carry forward generated from the firm’s operating activities) contributes substantially in shaping the optimal utilization of debt in the financial structure of unregulated firms at the industry level. c) Implicit Assumptions of the Porter’s Five-Forces Framework Porter’s five-forces framework recognizes the power of suppliers in the determination of the likely profitability of an industry. I would believe the intention of Porter (1980) in incorporating suppliers into his model was not to associate or integrate suppliers of capital in his denotation of the concept of suppliers because there was no detailed description of the potential role of debt capital providers in the determination of the fate of an industry in his model. However, the ability of a firm to raise debt capital can significantly alter its profitability circumstances and the value of the firm (Modigliani and Miller, 1958). More so the nature and size of providers of debt capital can vary from industry to industry. For instance, in the banking industry, I would argue that the plethora of savings account holders can be viewed as providing debt capital but characterized by minimal bargaining power. However, in other industries, absent trade credit, debt capital is predominantly sourced from financial institutions. Thus, the power of providers of debt capital is fundamental in shaping the attractiveness of an industry and the magnitude of that power can vary across industries (Broberg, Tagesson & Collin, 2010; Sengupta, 1998). In the worst-case scenario, lenders can wholly shut down the competitive activities of a firm in the event of bankruptcy and take over the entire assets of the firm to the extent that it can support the recovery of their debt investments (Berk and DeMarzo, 2006). We can therefore understand that the power of lenders is a force that cannot be overlooked in the assessment of the potential profitability of an industry. This tendency of lenders or providers of liability to facilitate or debilitate the outcome of an industry in terms of profitability was not accounted for in Porter’s five-forces framework. Thus, by not accounting for the role of capital structure and or liabilities (debt) in the determination of the future fortunes of an industry, Porter’s framework makes two implicit assumptions, including the following. Taking into consideration the applicable theories of corporate finance, any theory that accounts for the determinants of the future potential profitability of an industry should incorporate a reflection of the optimal capital structure of the industry (OC) and the power of lenders (PL) within that industry as demonstrated in the functional relationship shown below. Industry Attractiveness, A = f ( B, SS, E, R, S, OC, PL ) III. E xtending the P orter’s M odel of I ndustry A ttractiveness (the I nitial S teps) a) The Power of Buyers Porter (1980) undertook a thorough evaluation of the power of buyers. He posited that buyers embody a competitive force given that they can exert a downward pressure on prices, make an order for superior quality or additional services, and influence rivalry among competitors. Numerous other scholars corroborate the proclamations of Porter (1980). Kelly & Gosman (2000) observed that buyer concentration reduces profitability primarily in competitive industries as against in oligopolistic industries. Cowley (1986) observed that the profitability of a sample of business units was unfavorably connected to buyer concentration. Cool & Henderson (1998) demonstrated that buyer power elucidates a considerably larger fraction of the variance in the profitability of sellers than The Determinants of the Attractiveness of an Industry: An Extension of The Porter’s Five-Forces Framework 83 Global Journal of Management and Business Research Volume XXII Issue IV Version I Year 2022 ( ) B © 2022 Global Journals 1. The optimal capital structure of the industry has, at best, peripheral explicit effect both on the performance of a firm as well as the success of its strategy and on the attractiveness of an industry. 2. The firms in an industry always possess sufficient financial resources to implement their chosen strategy or can always finance the implementation of their strategy or the execution of their projects through the issuance of equity.