Wednesday, March 30, 2016

The Limitations of Porter's Five Forces Model

In The Five Competitive Forces That Shape Strategy, Michael E. Porter discussed the factors that shape the influence that each of the Five Factors has on an industry. He goes on to explain the implications that these forces have on an industry in terms of positioning the company, taking advantage of change in the industry, and exerting one’s own influence on the industry. It is described that this model is a snapshot of an industry at a point in time, but what are the other limitations presented by the Porter’s Five Force model?

The model was developed in the 1970’s and the market has changed notably since that period. Industries are just not as static as they used to be. For example, technological breakthroughs create disruptions that are almost instant in the market place. The time between a product’s conception and maturity has changed since the 1970’s due to changes in marketing strategy and rate of technological development. In order for Porter’s Five Force model to keep up, it as to be updated regularly.

Porter’s Five Force model fails to incorporate the complex dynamics of some corporations. For example, a corporation like Walmart has several different product lines. How can it choose which industry to position itself in? Should compare itself in every industry? And if so, to what end? The risk of pigeonholing a corporation into an industry is high when analysis should be done at the product level.

Finally, organizations need to prepare for the effects of forces beyond those of entrants, suppliers, buyers, substitutes, and competitors.  Porter’s Five Force model does not take into account corporate responsibility, social awareness, industry culture, or legislation. For example, an industry may appear attractive due to benign forces, but there may be very demanding corporate responsibility standards that need to be met in order to be acceptable.

In conclusion, Porter’s Five Force model presents a critical and thorough examination of an industry at a particular instant of time. It helps a firm analyze the profitability of its industry and the strategies it must employ to leverage industry strengths. That being said, it is important to remember that industries are more dynamic than ever before, and there are many complex relationships and dynamics that are overlooked by the model.

Sources

The Five Competitive Forces That Shape Strategy (Porter, Harvard Business Review, January 2008)

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