I have previously covered strategic thinking and this blog post is a continuation of the topic.
I've also mentioned that there are numerous strategic thinking models that are applicable to business environments that can be used to examine and uncover important information that when used correctly will positively influence the success of a business.
However, many of the existing models were designed and developed before the turn of the century, and as the number of models available continues to increase, it is important to review the legitimacy and appropriability of existing models in the current business environments.
Porter's 5 Forces Model
Porter's 5 forces mode, first developed by Michael Porter and published in Harvard Business Review in 1979 is a model focused on 5 key factors that influence the success of a business or market.
These 5 forces include -
- Industry Competitors
- Potential entrants
By creating awareness of the customers leverage, threat of substitutes, leverage from staff, and threat of new entrants, business can make informed decisions towards their strategy and as a result implement tactics that increase their success.
Advantages of Using Porter’s 5 Forces Model
Porter’s 5 forces is a strategic model that exists and is often taught to MBA courses; the model holds a high reputation and is often cited in essential academic reading. The popularity of the model is largely part in due to the benefits it offers, such as it:
- Streamlines relevant economic ideologies into only five noteworthy efforts – Reducing the scope of analysis, for a focused conclusion on internal & external environments at play
- Highlights the power found in negotiating and bargaining systems, from two perspectives (buyers and suppliers)
- Brings attention to the longevity of an industry, in time and profitability
- With a focus on ‘Industry Competitors’ as a central force, the model highlights how the remaining four forces influence the force with the highest detriment
Drawbacks of Using Porter’s 5 Forces Model
As popular as Porter’s 5 forces model is in academia, it is not without its critiques. Tony Grundy, leading author of several strategic model books, challenged Porter’s Five competitive forces.
In his book ‘Demystifying Strategic Thinking: Lessons from Leading CEOs’, Tony picked apart the model in the appendices of the book, looking at why one would want to rethink and reinvent Porter’s five forces.
Tony does not see Porter’s Model as a failure, but rather a start in the development of a model which is yet to reach its full potential.
"Porter's concept merely scratches the surface of its full potential"
Many of the critiques of Porter’s model include that it:
- Reduces complex customer relationships where buyers are grouped under one umbrella force. Businesses in recent years have developed intricate CRM systems due to increase in power of marketing tools, these systems assess customers needs, and at times require a number of different sales channels
- Creates excessive accentuation on industry examination rather than investigation of focused factors at a lower level
- The original Porter's 5 forces model fails to present information in a dynamic visualisation; the model appears to most as a one-off model that you would revisit monthly, or periodically at most.
- Inspires a fruitless examination of industries with set variables that could be argued are outdated, and don’t account for new industry variables presented by advancements in technology and technology directly related to businesses
- Again, the model inspires an examination which focuses on factors which are inherently directly related to businesses. However due to the increased focus on business factors, it fails to include and implement factors such as ‘PEST’ forces which can indirectly influence an industry or specific business
Rethinking Porter’s 5 Forces Model
Porter’s 5 forces model, as with every strategic thinking model, is a starting point for motivating reflective examination of both external and internal factors that influence a business. However, at first glance, Porter’s 5 forces model is static and linear. With a focus on one primary force and four forces that influence the primary force.
Andrew Beattie, editor at Investopedia lists valuing each force equally as the biggest pitfall business strategists fall in to. To solve this issue, Porter has gone on the record to say that each force should be evaluated with a ‘ticking’ system. This ‘ticking’ system involves allocating a number of ticks per force to indicate the level of influence or importance the force may have.
Some argue that this ‘ticking’ system is again subject to a linear process to which that the original model is restricted to. This is due to the fact that the tick allocated doesn’t account for the gaps in between the information.
What’s the difference between a force with two ticks and a force with three ticks?
It’s not exactly possible or fair to ask to draw two and a half ticks for those you see that fits somewhere in between the two round integers. It is instead recommended that to filter the importance of each factor, that one should rank the factors on a scaled graph. From the graph, you can clearly identify the importance of each factor, and with the new information Porter’s 5 forces can be mapped accordingly.
Conclusion - Moving The Model Forward
Porter's five forces model is a beneficial framework to investigate the internal and external factors at play for any business.
It does seem, however, that the model fails to open doors, to ask deeper questions, that when answered would expand on the introduction to strategic thinking the model currently provides.
As Tony Grundel said, the model only scratches the surface of its full potential.
Business academics need to look at how the model can grow, through examining the relationships between the forces, how the forces can and should be prioritized on a case by case basis, and by breaking the forces down to a micro level.
There is no business model which can present all relevant information required for strategic thinking decisions. Nobody is arguing that Porter’s 5 model needs to be the model that does encompass all of that information.
However, as environments have aged and changed, so should the Porter’s 5 model.