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

Osiebuni Collins OBU 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. Keywords: industry attractiveness, competitive forces, optimal industry capital structure, power of lenders. I. I ntroduction he extent of profitability of an industry varies from one industry to another industry and the profitability of a specific industry can be accounted for on the premise of the strength of competitive forces that are prevalent in that industry (Porter, 1980). Porter (1980) developed a model that strived to identify and explain the economic structures that shape the overall impending profit potential of a given industry. Specifically, Porter (1980) established the five forces framework that sought to account for the factors that underpinned the ability of a firm to create and capture profits within an industry. According to Porter (1980), the attractiveness of an industry( A) is a function of the bargaining power of buyers ( B ), the bargaining power of suppliers ( SS ), the threat of new entrants ( E ), Author: NHH Norwegian School of Economics, Dept of Economics and Business Administration Bergen, Norway. e-mail: Osiebuni.obu@student.nhh.no the intensity of industry rivalry ( R ), and the threat of substitutes ( S ). The functional form representation of this theory can be expressed as follows. Industry Attractiveness, A = f ( B, SS, E, R, S ) Ensuing work implemented by several other researchers has corroborated or provided supplementary evidence that substantially lends credence to the model of industry attractiveness as proposed by Porter (1980). Notwithstanding the significance and appeal of the paradigm projected by Porter (1980), I would argue that it is not comprehensive. I maintain that there is at least one other variable that impacts on the fortunes of industries to a varying degree and thus possesses the capability to bear a tremendous threat on the long-run potential profitability of an industry. More explicitly, Porter’s model does not incorporate the fact that in non-perfect capital markets the value of a firm is dependent on its capital structure (Modigliani and Miller, 1958) and by implication the maximum value or attractiveness of an industry is also dependent on the optimal average capital structure of the industry. Modigliani and Miller (1958) posited that given perfect capital market conditions, the market value of any economic organization does not dependent on its capital structure and is derived by discounting its expected cash flows at the discount rate suitable for the firm's risk. The market value of an industry is analogous to and/or is one tool that can be applied in evaluating the attractiveness of an industry (Ceccagnoli, 2009). Porter’s model invariably provided grounds for explaining how the value of the expected cash flows of the firm emanates but clearly did not account for the role of capital structure in assessing the attractiveness of an industry under natural capital market conditions. Furthermore, Porter’s model did not consider the role of the power of lenders, who the firm may elect to leverage upon to implement its strategy and maximize the value of the organization, in the determination of the attractiveness of the industry. In a bid to plug this orifice, this essay attempts to integrate corporate finance theory in accounting for the determinants of the attractiveness of an industry in consistency with the propositions of Myers (1974) for simultaneity in making company financing decisions and corporate investment choices given the high level of T The Determinants of the Attractiveness of an Industry: An Extension of The Porter’s Five- Forces Framework 81 Global Journal of Management and Business Research Volume XXII Issue IV Version I Year 2022 ( ) B © 2022 Global Journals