Table of Contents
Using the Five Forces framework: Before discussing Inherent Limitations of Porter’s Five Forces Model, let us see how and where this model can be applied. The Five Forces framework should be used to identify the key forces affecting an organization and hence the opportunities available and threats to be considered. The key forces will tend to differ by industry so, for example, for manufacturers of own-branded products the power of the buyers (of large retailers e.g. Sainsbury’s, Tesco, ASDA, Marks & Spencer, etc.) will be very important.
Consideration should be given to whether the forces will change over time and if so, how. Strategies will
need to be developed to adapt to these changes. It is essential for an organization to determine not only how it stands in relation to the forces but also how its competitors stand.
Competitive strategy will be concerned with how an organization can influence the competitive forces, e.g. can competitive rivalry be diminished? Can barriers to entry be created? Porter’s Five forces model can help to assess the attractiveness of an industry, and highlight the areas where one can adjust his strategy to improve profitability.
The ideal market, in which profits are easiest to make, is one where there is:
Low supplier power
Low customer power
Little prospect of substitutes emerging
High barriers to entry
Weak inter-firm competition.
Inherent Limitations of Porter’s Five Forces Model
Here, we have discussed eight major limitations of Porter’s Five Forces Model:
Ignores the role of the state: In many countries, the state is a positive actor in the industry via ownership, subsidy, or presentation or regulation of competition. The Five Forces model seems to
present government as just as a rule setter which is country-specific and reflects the US experience.
However, another view is that the government can influence each of the other forces by legislation
and economic policies.
Not helpful for not-for-profit organizations: The Five Forces are those which determine industry profitability. If profitability is not a key objective for managers, they might not consider five forces
analysis to be helpful.
Positioning view and not resource-based: assumes profitability will be determined by dealing better with the five forces i.e. outside-in. Individual business’, strategic decision-makers should focus on product-market strategy. This ignores competence building for innovation to enter new industries.
Assumes management are required to maximize shareholders’ wealth: In some countries, companies pursue market share objectives instead, as has been the case in Japan, traditionally, and South Korea, where large groups, with easy access to credit (and in the 1980s in Japan almost zero cost of capital) did not overtly pursue profit objectives.
Ignores potential for collaboration to raise profitability: The model underplays the potential for collaboration (e.g. supply chain collaboration) to build long-term relationships with suppliers, customers or distributors, joint ventures, to avoid substitutes, and so on.
Dynamic industries: The model is less useful in industries that are rapidly changing as it is difficult to predict how the forces may change. Dynamic industries may require a greater focus on risk
management.
Backward looking: The model is backward-looking, making its findings mostly relevant only in the short term; that limitation is compounded by the impact of globalization.
Prefect Competition: The model assumes perfect competition in the market place, and does not take into account that some markets are highly regulated, creating imbalances and reduced competitive forces are at play.
Besides the Limitations of Porter’s Five Forces Model, the model cannot be said outdated. The basic idea that each company is operating in a network of Buyers, Suppliers, Substitutes, New Entrants and Competitors is still valid and will remain valid for years to come.
