Analysis and Development of Porter's Five Forces Model.

by taotaoyinli (student)

University Degree Business and Administrative studies

Introduction

Since Michael Porter first developed the five forces model (see the detailed model in Figure 1) in the 1970s (Bamford & West, 2010), the model is applied to assess attractiveness of a specific market and industry through looking at the five competitive forces: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among existing competitors (Porter, 2004). Thus, this model is an important concept which merits the attention of all practising senior managers, while it is still necessary to do the further development of the model so that the model could be applied more effectively in the real business environment and marketing (Grundy, 2006).

In the following part, primarily, historical development, critical analysis and the practical application of the original Porter’s Five Forces Model are described logically. After that, through new approaches, a further development of five forces model by Grundy (2006) which is beneficial for most organisation to analyse the industry market rather than the original model which can only help some company to analyse the market in some certain situations.

Original Model of Porter’s Five Forces: Historical Development, Critical Analysis and Practical Application

Historical Development

Before Michael Porter developed Five Forces Model, some researchers studied the relationships between industry structure and performance based on the empirical work within limited structural variables, and then introduced industrial organization (IO) economics (Karagiannopoulos et al., 2005). However, IO had limitations that it focused on public policy and it had inadequate structural variables so that it slighted business strategy when explaining the industry profitability (Ghemawat et al., 2001). Based on the theory of IO, Michael Porter firstly attempted to emphases the business policy rather than the public policy on profit maximization; he then published his first book in 1980 and got success in the five forces model (Karagiannopoulos et al., 2005).

The Value of the Model

Although the original Porter’s Five Forces Model has some drawbacks and limitations, some research show that it is still a valuable concept which is appeared in the following several aspects:

Firstly, the model focuses on the significance of searching for imperfect markets offering more opportunities and superior returns (Grundy, 2006).

Secondly, the model guides the existing companies and provides the direction of where to expand. If all these five forces are low in a specific industry, there is high possibility for the company to get successful after its expansion (Kirchner, 2012).

Additionally, Grundy (2006) mentions that this model emphasizes that bargaining power of the suppliers and buyers also have important effects on market attractiveness.

Due to the value of Porter’s Five Forces model, it is still used in some cases.

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Firstly, the model focuses on the significance of searching for imperfect markets offering more opportunities and superior returns (Grundy, 2006).

Additionally, Grundy (2006) mentions that this model emphasizes that bargaining power of the suppliers and buyers also have important effects on market attractiveness.

Due to the value of Porter’s Five Forces model, it is still used in some cases.

Practical Application of Porter’s Five Forces Model

Original five forces model can be applied to business practices in some certain conditions.

During the 1980s, the development of most companies at time was more stable and predictable than it in today’s dynamic markets; therefore, Five Forces Model is more appropriate to analyse these companies which focused on gaining profitability at that time (Carter et al., 2011). In addition, Carter et al. (2011) also suggest that this model is applicable to analyse some industries with more simple market structures with fewer regulations.

Moreover, in the following part, a good example of the application of the original five forces model into a food company called ABC in Turkey by (Oraman, Azabagaoglu and Inan, 2011) demonstrates in detail why and how the company were adapted the original five forces model in that time.

ABC is a food company in Fast-Moving Consumer Goods (FMCG) sector in Turkey which intended to expand its global markets to survive. After the globalization, organizations like WTO and GATT encouraged free trade, therefore, barriers to cross border transactions were removed. ABC could be beneficial from free trade so as to expand its business in the global area. Consequently, it is obvious that Porter’s Five Forces Model is appropriately adapted in the macro environment which has fewer regulations (trade barriers in this example). Furthermore, ABC is one of the biggest food companies in Turkey with long history and it also has the marketing experience in Turkey as well as global area; thus, the threat of new entrants into this market is low as a result of requiring huge capital investments to be competitive in the market. In this example, the Five Forces Model was used to assess the potential attractiveness and profit of food industry in FMGG sector in the global area so that the company can make effective strategy plan and access to larger globalization markets. Due to low trade barriers, bargaining power of supplier and threat of new entrants, the company has some advantages to gain the successful global expansion through its proper marketing strategy based on the five force analysis.

Overall, the original five forces model is applicable to a company in the condition that the industry are less influenced by the macro environment factors such as political factor or economic factor, and the company also has some significant competitive advantages in that market. Additionally, the five forces model is more applicable to analyse industries with simple market structures.

Limitations of Porter’s Five Forces Model

Based on the above application of original five forces model, many limitations and disadvantages of the model could be observed. This part discusses more demerits of this model.

Firstly, it is a key limitation that Five Forces Model proposes an assumption that the markets are perfect in the economic sense (Carter et al., 2011). However, in today’s dynamic market, many industries are regulated due to political factors (Carter et al., 2011). Therefore, it is difficult to apply the original five forces analysis in complex industries with multiple interrelations and product groups.

Secondly, opposite Porter’s five forces analysis, in the reality, most organisations co-operate with other organisations instead of competing with rivals (Porter, 1985). However, this situation is not considered in the five forces model.

Additionally, the model does not take into account situation that the companies have low effect on any of the five forces. Thus, it is very difficult for the companies conduct corresponding possible actions according to the five force analysis.

Furthermore, Karagiannopoulos et al. (2005) mention that only five forces may not enough to analysis the current market in the current internet era; they provide insufficient guidance for preventive actions in dynamic environments ( et al., 2011). Therefore, Karagiannopoulos et al. (2005) also suggest that the sixth force – power of innovation should be considered as an additional factor to the five forces model.

Overall, these limitations of Porter’s Five Forced Model make it difficult for a majority of current organizations to use so as to draw effective marketing strategy plan. As a result, a further development of this model with more comprehensive consideration and fewer limitations should be introduced and applied to most of the organizations in the real business environment.

Further Development of Porter’s Five Forces Model

In this part, some new approaches created by Grundy (2006) are introduced to further develop Porter’s Five Forces Model.

High interdependencies in the Porter’s Five Forces Model

Grundy (2006, p217) mentions that the ‘five competitive forces are themselves highly interdependent with each other’ instead of ‘being relatively stand-alone’. The main interdependencies are shown in the Figure 2 which displays the clear internal interdependencies in the five forces model.

Look at Figure 2 clockwise from interdependent relationship between entry barriers and bargaining power of buyers: firstly, when new entrants are encouraged by buyers actively, entry barriers could be reduced; secondly, buyers can search for substitutes and therefore encourage them; thirdly, suppliers can also seek substitutes market and sell substitutes; fourthly, new entrants through getting suppliers or via alliances may seek to enter the market by backward integration.

Competitive Climate ‘Onion’

Grundy (2006) mentions an ‘onion’ model format (see Figure 3) including several significant aspects which should be considered in the overall competitive climate. The layers of onion begin with: PEST factors, growth drivers, Porter’s five forces and competitive position. If PEST factors are negative, growth drives within a particular market will be tightening, therefore, will put pressure on the five forces, especially in the bargaining power of buyers and rivalry (Grundy, 2006). However, only based on the Porter’s Five Forces Model, PEST factors’ effect on the five forces cannot be observed by the managers. Thus, the onion provides more comprehensive understanding of competitive climate in order to apply to analyse nowadays market.

Competitive dynamics

A dynamic perspec

COMPETETIVE DYNAMICS

Table 1 Porter’s five forces: “from-to” analysis.

Bamford, C. E. & West G. P. (2010), Strategic Management: Value Creation, Sustainability, and Performance, 1st Ed, South-Western Cengage Learning

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Grundy, T. (2006), “Rethinking and reinventing Michael Porter’s five forces model”, Strategic Change, Volume 15, Issue 5, pp.213-229

Karagiannopoulos, G. D.; Georgopoulos, N.; Nikolopoulos, K. (2005). "Fathoming Porter's five forces model in the internet era", info, Vol. 7 Iss: 6 pp. 66 – 76

Kirchner, M. (2012), “Porter’s Five Forces in the Finishing Industry”, Products Finishing Magazine, available at: [Accessed: 11/11/2012]

Oraman, Y.; Azabagaoglu M. O.; Inan I. H. (2011), “The Firms’ Survival and Competition through Global Expansion: A Case Study from Food Industry in FMCG Sector”, Procedia - Social and Behavioral Sciences, Vol.24, pp.188-197

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Porter, M. E. (2004), Competitive Advantage: Creating and Sustaining Superior Performance, New Edition, Free Press