In the past 30 years, Porter’s five forces model has been recognized as one of the most useful strategic management tools which can be used to analysis organization external environment, so as to help organization build up competitive advantages. However, with the development of the world, the five forces model has been challenged that it cannot be continued use to adapt today’s dynamic environment. This essay aims to challenge Porter’s five forces model and to identify the problems which hide behind in this model.Meanwhile, some feasible solutions to refine the strategic model will also be explored.
Some Linkedin participants believe that Porter’s five forces model is based on the ideal competition. It has also been criticized for viewing competition between suppliers and buyers as a zero sum game meaning only one can succeed in the expense of other players, which suggests an ongoing ‘war’ between stakeholders and other organizations. As Stefania(2013) points out, It thus ignores the value that other companies may bring through alliances and partnership.According to Thompson (et al 2013), corporations can gain benefits through strategic alliance and partnerships from the perspective of vertical integration, outsourcing and horizontal merges while minimizing the associated problems. For example, in 2008, Ferrero company became partner with South Africa local farmers, this move provided company with a new direction to grow as allying with raw material supplier not only guarantee the continuity of raw material supply, but also avoid the volatility of the raw material price (Thompson et al 2013).The ignorance of cooperation between companies would constrain the use of the five-forces model in practice.
As Kyle(2013) pointed out in Linkedin debate, the model is not completely universally applicable. Goold (1997, cited in Cafferky, 2005) has argued that the Porter five-forces framework for industry analysis is not applicable to nonprofit organisations. Thus limiting its use to private businesses. Cafferky(2005) states that Porter? s framework is based on an assumption that the external environment is a significant influence in strategy development.However, the structure and characteristics of external environment would be totally different between nonprofit organization and for-profit firms. For example,Cafferky(2005) states that both the strategy of for-profit and non-profit organizations are influenced by mission dominance and environment dominance.
Strategy for non-profits organizations tend to be more mission dominance and less environment dominance, while for-profit firms are at the opposite extreme. For example, Hence, porter’s five force model cannot be applied appropriately to non-profit organizations.Another weakness of five forces model is that it cannot be implied in monopoly organization. From Porter’s view,to get excess profit, what you should do is to increase buyers, increase suppliers, boycott the new products and substitutes and hit the competitors.
However, in a monopoly industry, it seems hard to apply this model in practice. Within monopoly industry, there is only one supplier of a particular commodity and no close substitutes. A monopoly industry has ability to raise price and exclude competitors. (abrar).Thus, In a monopoly industry, the forces like threat of new entrants, threat of substitutes, rivalry in the industry,bargaining power of customers and bargaining power of suppliers do not exist as there is one or maximum two firms in the industry and it is next to impossible for new entrants to penetrate the market. For example, De Beers used to be control more than 80% of the world supply of rough stones, With its near monopoly as a trader of rough stones, De Beers has been able to maintain and increase the prices of diamonds by regulating their supply as there are no substitutes and very few rivalry (Johannesburg and Windhoek, 2004).
Hence, porter’s five forces model would be hard to put into practice within monopoly industry, such as state-own company. Also, there are lots of people participated in Lindedin debate believe that the five force model is over simplified and is limiting for dynamic industries. In today’s dynamic markets, technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times.For example, In the light of technology enablement of business to e-business, the five forces, as depicted by Porter are significantly affected. The bargaining power of both suppliers and customers increase as the information accessibility is increased and the information gap is narrowed.
This leads to lower bargaining power for the firm, and may transcend into lower profits. Again as e-business enablement increases customer reach, the bargaining power of the customers are negatively impacted by this change.Also, e-business models will enable easier entry into the industry, as now, companies may only look to perform very few activities in-house, and outsource the rest to other firms in the value chain. This decreases the management complexity among new entrants, and thus the threat of new entrants may go up.
The influencing factors of five forces model thus hindering the implementation of this model. One problem surrounding five forces model is the definition of ‘industry’.In order to apply the model in the real world it is essential to define the boundaries of the firm in terms of what industry they actually operate in. This task has become increasingly difficult in today’s environment due to the impact of globalisation, with many organisations not operating in one, clearly defined industry.
This proves problematic in applying PFF model because there become no clear competitors, buyers or suppliers for the undefined industry(tom,2013). Also, · The model is best applicable for analysis of simple market structures.A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements(alxe,2003). To make porter’s five forces model more adaptable in today’s economic environment, it is widely believe that adjustments are needed.
Casely(2013) states that the value of five forces model is not being a complete construct, thus it would be dangerous if rely on it too much.Lots of Linkedin participants believe that the five forces model can be used together with other strategic tools. Since macro-environment such as technology factors, social-culture factors, political factors, have a significant influence in today’s organizations, thus, it would be better to combine with PEST and SWOT tool when using the five forces model. By using them together, can help managers analysis holistic external environment and compensate the weakness of being static. Also, Jasmin(2013)suggests that five forces model can combine with Trajectories of Industry Change.Alex(2013) points out that Trajectories of Industry Change model is a useful approach which can combat the dynamic or hyper competitive environment that companies compete in.
as the future is too uncertain, the Trajectories of Industry Change model can help companies to be more adaptive in today’s dynamic market. Some Linkedin participants also pointed out that it is a feasible method to develop a sixth force to refined five forces model. Brandenburger and Nalebuff(1995, cited in Thompson, et al, 2013) have argued that regulation should be added as a sixth force.They pointed out that government is a powerful force in shaping corporate strategy. Brandenburger and Nalebuff(1995, cited in Thompson, et al, 2013) state that complementors can be the sixth force as in today’s complex market environment, complementors whose products would have a significant improvement in the value of the organization, such as apps improve the value of Iphone and Ipad.
However, some Linkedin Participants argued that adding the sixth force would make the model more complicated as different organizations may have different influence factors or forces.Nonetheless, as (Cai, 2013) points out, each organization should add the sixth force base on the specific context. For example,The cigarettes or alcohol industryis hugely affected by the actions taken by government, thus government should consider as the sixth force. In non-profit organisation, donors would be considered as one of the most important forces. Adding the sixth force to some extend make the five forces model more suitable for each individual organization as it combine one of the most important influencing factors or forces of the organization. This makes the five forces model more flexible and practical.
It cannot be deny that porter’s five-forces model provides an useful framework to company to analysis external environment, however, there are some major limitations in today’s market environment. Admittedly, the five-forces model is not a tigerbalm, it would not be able to fix all organizations. Thus, The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting point for further analysis. The adjustments to porter’s five force model make it more adaptive to today’s environment.
