Porter’s Five-force Model and it’s continued validity as a strategic management tool Porter’s Five-force model is a theoretical guide to understanding the pressures that are felt by an industry, and by analogy, on a company. It can be used in such a way as to allow “the strategic business manager seeking to develop an edge over rival firms … to better understand the industry context in which the firm operates” (Porter, 1999).
The key to any successful (e. g. profitable) business venture is an understanding of the differentiating factors that contribute to a higher-profit, lower-cost operation. Porter’s model, while helpful, is not flawless, and is not able to escape the need for modern interpretation. However, with inclusion of modern factors Porter’s is still a viable tool for the business strategist of today.
Originally part of Porter’s 1980 book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” (Industry Handbook, 2011), the five-force model is a method of analysis of a business position that allows an understanding of “where power lies in a business situation” (Porter’s Five Forces, 2011). If a manager of an organization can understand this about his/her business, he/she can focus effort on areas of competition that are weak and can also better anticipate the structures needed to incorporate a new change. With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps” (Porter’s Five Forces, 2011). The model can be applied to current business operations and industry understanding in order to give a strategic business manager an overview of the organization in a way that enables the him/her to make decisions that will maintain profit levels and competitive position.
Porter’s model states that part of the phenomenon that “numerous economic studies have affirmed that different industries can sustain different levels of profitability” (Porter, 1999) can be explained by an understanding of industry structure and, by extension, the position of influence held by an organization in that industry. Every business is subject to resistance to success caused by rivalry. Porter explains that the degree of rivalry is nfluenced by things like the number of firms competing for customers, the market’s rate of growth, costs of production and overhead, and the barriers to exiting a business niche (Porter, 1999). An understanding of the degree of rivalry to which a business is subject allows the strategic manager to understand the rapidity of change in an industry and allows him/her to understand how best to pursue an advantage over the business’s rivals by changing prices, differentiating, modifying distribution and other competitive moves (Porter, 1999).
The degree or magnitude of rivalry in an industry helps a strategist to make decisions but does not explain where the rivalry pressure comes from in and of itself; for that Porter presents four other forces that act on an industry and therefore on an organization within that industry. Supplier power, buyer power, threat of new entrants, and threat of substitutes (Porter, 1999) all act on the business in a way that creates and sustains a competitive industry climate.
Each of these forces act on industries today in the same way as they did in 1980 when Porter’s book was published. However, the global industrial climate has changed in ways unexplained by the five-force model and brings several limitations of the model to light. In my view, the limitations of Porter’s model have to do with the time period Porter was in when his book was published. While many of the examples of forces that act on an industry still exist 30 years later, Porter could not have known what changes were in-store as a result of the digital revolution.
Porter’s time “was characterized by strong competition, cyclical developments, and relatively stable market structures” (Recklies, 2001). The economic trends and tools of the trade have changed in important and meaningful ways since then. Today, information on substitute products or new organizations entering the market can be had in a fraction of the time it took in 1980. The differences in costs of goods and materials can be obtained from websites and digital RSS feeds at a moment’s notice.
Supplier and buyer needs and price constraints can be categorized and filtered to meet the specific research needs of an organization’s strategists and any changes in information update in the blink of an eye. The strategist of today needs information faster and more completely than ever before and is under increased pressure to react and act quickly to maintain profit, product or service availability, and viability in any market. Dagmar Recklies in her 2001 article “Beyond Porter – A Critique of the Critique of Porter” refers to the work of Larry Downes in his article “Beyond Porter” by stating that Mr.
Downes “identifies three new forces that require a new strategic framework, and a set of very different analytic and business design tools : digitalization, globalization, and deregulation. ” Digitalization is described by stating “as power of information technology grows, all players in a market will have access to far more information” and “new business models will emerge in which players from outside the industry are able to vastly change the basis of competition in a market” (Recklies, 2001).
Globalization can be explained by observing the relative ease of communication and distribution world-wide. As technology develops and modern transportation becomes more universal, more people and places are brought into contact with each other than ever before. This effect changes the potential reach and impact of any organization or industry. Recklies (2001) says “It is not enough any more to position oneself as a price-leader of quality-leader… ather competitive advantages emerge now from the ability to develop lasting relationships to more mobile customers and to manager far-reaching networks of partners for mutual advantage. ” Recklies (2001) goes on to describe the effect that government deregulation has had by offering that organizations “fueled by the new opportunities of information technology” are “able and forced to completely restructure their businesses and to look out for alternatives”
In conclusion, the fact that the global industrial world has undergone a digital transformation since Porter’s writing in 1980 is not news to business leaders. Despite these changes, Porter’s claim that “the strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates” is still valid today (Porter, 1999). The limitations of Porter’s model are not, in my opinion, such that it need be thrown out or disregarded, but rather studied and applied with input from his modern contemporaries.
In this way, the economic understanding Porter translated into the five-force model can be understood in a very different industrial climate influenced at every turn by technological advancements and new business pressures. Indeed, notwithstanding the limitations of the model, the practical contribution of Porter’s work remains “one of the most important business strategy tools” (Porter’s Five Forces, 2011) and the modern strategist should not neglect it’s value in the strategic toolbox of today’s business world. References
Industry Handbook: Porter’s 5 Forces Analysis. (2011) Retrieved October 6, 2011 from http://www. investopedia. com/features/industryhandbook/porter. asp#axzz1aFowNGdY Porter, M. (2010). Porter’s five forces. Retrieved October 5, 2011 from http://www. quickmba. com/strategy/porter. shtml Porter’s Five Forces. (2011) Retrieved October 5, 2011 from http://www. mindtools. com/pages/article/newTMC_08. htm Recklies, D. (2001) Beyond Porter – A Critique of the Critique of Porter. Retrieved October 7, 2011 from http://www. themanager. org/pdf/BeyondPorter. PDF