Pitfalls of Porter's Five Forces

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Watch out for the traps when applying Porter's Five Forces model.

Despite its enduring popularity, Porter's Five Forces has come in for considerable criticism in recent years.

The model is an important business tool that allows organizations to identify competitive pressures within an industry or market. It was devised by Michael E. Porter and published in his 1979 Harvard Business Review article, "How Competitive Forces Shape Strategy." [1] He described these forces in detail in his later HBR article, "The Five Competitive Forces That Shape Strategy."

In this article, we briefly summarize the model, explore problems that might arise from not using it correctly, and outline other weaknesses it may have.

A Brief Summary of Porter's Five Forces

Here, we summarize the basics of the model, but you can gain a full understanding by reading our guide, Porter's Five Forces – The Framework Explained   .

According to Porter, five forces represent the key sources of competitive pressure in any industry. They are:

1. Competitive Rivalry: the number and strength of your competitors.
2. Supplier Power: the fewer suppliers you have, the more power they have to raise their prices, and vice versa.
3. Buyer Power: if the number of buyers is low compared to the number of suppliers in an industry, they will likely find it easy to switch to new, cheaper competitors.
4. Threat of Substitution: if your customers find an easier, cheaper way of doing what you do, it can weaken your position and threaten your profitability.
5. Threat of New Entry: your position can be affected by people's ability to enter your market. If it takes little money and effort, rivals can quickly move in and weaken your position.

Using Porter's Five Forces Accurately

Porter's Five Forces is often misused by organizations as a way of assessing internal strengths. That's not what it's for. It's a tool for analyzing the characteristics of an industry or market. It can help an organization to decide whether to move into a particular industry only by delivering a snapshot of that industry.

If you want to better understand your organization's particular strengths and weaknesses, SWOT Analysis   and the TOWS Matrix   are more suitable tools.

Some economists and strategists believe that the attractiveness of an industry cannot be assessed without considering the resources that the organization brings to that industry – as well as the industry's inherent characteristics.

This would suggest that "the attractiveness of an industry" is best assessed by using the Five Forces approach alongside an "inside out" or "resource-based" view of the organization. That is, where competitive advantage is derived from leveraging resources and competencies within the organization.

You could do this by assessing the strengths and weaknesses of your own business, using tools such as USP Analysis   , Core Competencies Analysis   or VRIO Analysis   .

Is Porter's Five Forces Still Relevant?

A frequent criticism of Porter's Five Forces is that it's no longer relevant to modern business conditions. You can read more about this in Isabelle et al's 2020 article, "Is Porter's Five Forces Still Relevant?" [2] But the main argument is as follows:

Michael Porter's model was devised during the late 1970s and early 1980s. This was largely a period of:

• Strong competition.
• Relative market stability.
• Steady rates of technological change.

Today, however, three relatively new developments have reshaped business, and have called the usefulness of Porter's Five Forces into question. They are:

• Digitalization: as IT gains in power, everyone in every industry can access and use huge quantities of data, instantly. New business models can appear almost overnight, disrupting markets and rendering the competition obsolete.
• Globalization: businesses are no longer reliant on local supply chains. Competitive advantage now comes from managing relationships with customers who are globally distributed and have greater flexibility in their buying options.
• Deregulation: a liberalized economic outlook has reduced government influence over a number of industries. Organizations can reinvent their businesses and exploit new opportunities more easily than in the 1980s.

Indeed, according to business academic and consultant Richard D'Aveni, many organizations now operate in a "hypercompetitive" environment, where they consistently need to be dynamic, relentless and aggressive in order to stay on top. This can lead to a constant state of flux and market instability   . [3]

In an ever-shifting business environment, many strategists believe that the rather inflexible Five Forces Model is of little help in anticipating what lies ahead or where competitive advantage can be gained.

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However, Porter insists that it is important not to confuse the Five Forces with more fleeting factors, such as industry growth rates, government interventions, and technological innovations. He says that these are examples of temporary factors, while the Five Forces are permanent parts of an industry's structure.

Is Porter's Five Forces Flexible Enough?

Porter's Five Forces cover only certain aspects of an industry, mostly involving competition. But the model doesn't allow for other factors that can have far-reaching effects – and influence the decision to enter a particular market.

External forces such as government policies, political volatility, and environmental impact are left out. These can all affect investment decisions profoundly. It's therefore a good idea to conduct a PEST Analysis   to account for these forces.

Porter's Five Forces model doesn't provide any quantitative analysis of the impact of each force, either. So it can be difficult to decide which force should be given the most weight.

Perhaps most significantly, Porter's Five Forces can only deliver insights from the recent past. These can become outdated very quickly, which can be a problem when an organization is carrying out several different analyses, but still needs to act fast.

Finally, Porter's Five Forces can only really be useful when focusing on one market or industry segment. A large company looking to make strategic decisions in several different markets at the same time would have to conduct a separate analysis of each.