A critique of the model: value and limitations
Porter’s five competitive forces are depicted in Figure 1. Porter’s starting point was that he wanted to account for long-term variances in the economic returns of one industry versus another. His genius resided in distilling the complex micro-economic literature into five explanatory or causal variables to explain superior and inferior performance, through:
1. The bargaining power of the buyers. 2. Entry barriers. 3. Rivalry. 4. Substitutes. 5. The bargaining power of the suppliers.
The value of Porter’s model was thus that it appeared to offer the following attributes:
Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc
� It simplified micro-economic theory into just five major influences.
� It effectively and before its time applied ‘systems thinking’.
� It showed how ‘competitive rivalry’ — the central box of the model — is very much a function of the other four forces.
� It helped to predict the long-run rate of returns in a particular industry.
� It went beyond a more simplistic focus on relative market growth rates in determining industry attractiveness.
� It helped combine input–output analysis of a specific industry with industry boundaries via entry barriers and substitutes.
� It emphasized the importance of searching for imperfect markets, which offer more national opportunities for superior returns.
� It emphasized the importance of negotiat- ing power and bargaining arrangements in determining relative market attractiveness.
� It focused managers on the external envi- ronment for more than traditional ‘SWOT’ analysis.
There are, however, several limitations to Porter’s framework, such as:
� It tends to over-stress macro analysis, i.e. at the industry level, as opposed to the analysis of more specific product-market segments at a micro level.
� It oversimplifies industry value chains: for example, invariably ‘buyers’ may need to be both segmented and also differentiated between channels, intermediate buyers and end consumers.
� It fails to link directly to possible manage- ment action: for example, where companies have apparently low influence over any of the five forces, how can they set about dealing with them?
� It tends to encourage the mind-set of an ‘industry’ as a specific entity with ongoing boundaries. This is perhaps less appropriate now where industry boundaries appear to be far more fluid.
� It appears to be self-contained, thus not being specifically related, for example, to ‘PEST’ factors, or the dynamics of growth in a particular market.
� It is couched in economic terminology, which may be perceived to be too much jargon from a practising manager’s perspective and indeed, it could be argued that it is over-branded.
Porter’s model was thus a valuable and work- able concept but one that had some significant practical drawbacks, unless of course the model was developed further. This paper now argues that Porter’s concept merely scratches the surface of its full potential.
Perhaps the very success of Porter’s origi- nal model led to it not being adequately
Porter’s five forces model 215
Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc
Substitutes
Suppliers Buyers
Potential Entrants
Threat of substitute products or service
Threat of new entrant
Bargaining power
of suppliers
Bargaining power
of buyers
Source: Competitive Strategy, Porter
Rivalry among existing firms
Industry Competitors
Figure 1. These forces determine industry profitability.
216 Tony Grundy
challenged or developed further, and indeed it could be claimed that this process is now well overdue. The five competitive forces are inter- dependent with other strategic analysis tools, which deal with the external environment and with each other, and this can be developed into a more comprehensive and coherent ‘system’. Suggestions for further analysis include:
1. The model can be prioritized within a force field analysis format.
2. The individual forces can be broken down at a micro level.
3. The framework can be transformed into a more dynamic model, both at the industry level and at a more micro, transactional level.
4. The five forces analysis needs to be applied, segment by segment, across the business.
The following subsections seek to develop Porter’s model, both to improve its analytical power and to increase its range of applica- tions. This is illustrated in the context of a fast- changing market — the health club industry.
Interdependencies of the model
The influences on the five competitive forces are examined first. Conventional strategy lit- erature highlights the need to think about factors outside the industry. Indeed, PEST (or political, economic, social and technological factors) is possibly the second most widely-
known strategy technique after SWOT analy- sis. However, there is a profound gap between PEST and SWOT analysis, and this is only partly met by Porter’s five forces. A linking technique is that of Grundy’s ‘growth drivers’ (Grundy, 2004).
Figure 2 gives an example of growth driver analysis, helping us to represent the forces that, directly or indirectly, cause or inhibit market growth over a particular time period. Space precludes an in-depth development of this model here, but this will be used in con- junction with the five competitive forces later in the paper in the analysis of the health club industry. However, an important feature to note here is that it is part of a system (see Figure 3 below).
Figure 3 captures, in an ‘onion’ model format, the key domains that need to be thought through, within the overall competi- tive climate, beginning with:
� PEST factors � growth drivers � Porter’s five competitive forces � competitive position.
These layers of the onion are highly interde- pendent, which might be a very useful phe- nomenon for managers to learn about and to apply. For example, where the PEST factors are generally hospitable, growth is encouraged and the full impact of the five competitive forces may not be felt and may thus be latent. However, where the PEST factors become
Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, August 2006 DOI: 10.1002/jsc
Internet takes off
Expectations bubble bursts
Self-fulfilling disaster
Uncertainty – about the
future
growth drivers
growth brakesDot com
losses