Porter’s model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today’s dynamics.
In general, the meaningfulness of this model is reduced by the following factors:
In the economic sense,
the model assumes a classic perfect market. The more an industry is regulated,
the less meaningful insights the model can deliver.
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.
The model assumes
relatively static market structures. This is hardly the case 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.
The Five Forces model may have some use for later analysis of the new
situation; but it will hardly provide much meaningful advice for preventive
actions.
The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.
Overall, Porters Five Forces Model has some major limitations in today’s market environment. It is not able to take into account new business models and the dynamics of markets. 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.
Source: TheManager.org