Porter’s 5 forces model is one of the most recognized framework for the analysis of business strategy. Porter, the guru of modern day business strategy, used theoretical frameworks derived from Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. This theoretical framework, based on 5 forces, describes the attributes of an attractive industry and thus suggests when opportunities will be greater, and threats less, in these of industries.
Attractiveness in this context refers to the overall industry profitability and also reflects upon the profitability of the firm under analysis. An “unattractive” industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”, from the perspective of pure industrial economics theory.
Despite its limitations in the technology enabled business era, Porter’s 5 forces model is still the leading framework for the analysis of industry attractiveness. The limitations of the Porter’s 5 forces model induced the introduction of the 6th Force, namely the Complementors.
This model comprises of an analysis dependent on 4 entities external to the firm and the fifth force: the Industry structure. These forces are defined as follows:
- The threat of the entry of new competitors
- The intensity of competitive rivalry
- The threat of substitute products or services
- The bargaining power of customers
- The bargaining power of suppliers
A detailed explanation of what these forces comprise of is provided in the diagrammatic representation of these 5 forces next.
The 5 forces model has been developed as a response to the SWOT analysis of competitiveness of firms, and has continued to remain the most popular framework in business strategy.
The individual dimensions of the 5 forces has been described in details in the diagrammatic representation of the five forces model. The individual scores on theses dimensions may be mapped to a 7 point Likert Scale. Likert scale basically is an ordered, one-dimensional scale from which respondents choose one option that best aligns with their view.The linguistic values for the same would be Very Strongly agree, Strongly agree, Tend to agree, Neither agree nor disagree, Tend to disagree, Strongly disagree and Very strongly disagree.
These responses on the Likert Scale can then mapped quantitatively to -3 to +3 on the extreme points. The mean of the score can be reconverted in the linguistic variables on the Likert Scale and then expressed as whether the particular force is Very Strong, Strong, Slightly strong, Neither strong nor weak, Slightly weak, Weak, Very Weak.
Although the Porter’s Five forces model is very popular in terms of usage, one must be aware of the limitations of this framework. No framework can be comprehensively understood unless its limitations are understood as well.
By the way do you know what framework you should consider while deciding on a market entry strategy?