See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/340771629

Should Porters Five Forces have value in Businesses today?

Article · April 2020

CITATIONS READS
0 598

1 author:

Andrew Adelakun
Aston University
1 PUBLICATION   0 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Andrew Adelakun on 19 April 2020.

The user has requested enhancement of the downloaded file.

 Should Porters Five Forces have value in
Businesses today?
Andrew Adelakun,
Computing for Business (BSC)
Aston University
Birmingham
Adelakua@aston.ac.uk
ABSTRACT
Porter’s five forces model is a powerful framework
tool for analysing current company profitability and
attractiveness such as employing the outside-in
perspective. For decades now, this model has
attracted many critics due to the development of the
internet economy. The new economy is not similar
to the old economy, which is the premise of the five
forces model. However, information technology has
become a lot more important and a crucial driver for
change. I believe Porter’s five forces should not be
considered as outdated but substantial. The idea that
companies are operating in a matrix of Buyers,
Suppliers, Substitutes, New Entrants and
Competitors still has value today.
KEYWORDS
Five Forces, Framework, Industry Structure,
Digitalisation, Globalisation, Deregulation,
Competitive Advantage, Information Technology.
Human factor.
INTRODUCTION
Competitiveness proved to be a critical impact in
the operations of many companies regardless of
their companies’ acceptance. Although tools for
analysing the competitive environment varies such
as the five forces analysis, game plan, chain model
and the strategic analysis. Michael E. Porter of
Harvard Business School developed the five forces
model in the late 1970s. The Five Forces model is a
straightforward but influential tool for the
identification where power lies in a certain business
situation by using the outside-in perspective [1].
The framework recognises five forces in the
microenvironment that drive competition and
threatens a company’s ability to make a profit.
Example Microsoft’s symbiotic relationships with
application developers and Intel are the most visible
[2], the purpose is that the attractiveness of the
market and its overall profitability can mainly be
interpreted by the market structure [3].
Following Porter, “The awareness of these forces
can help a company stake out a position in its
industry that is less vulnerable to attack” [4].
However, it is necessary to mention that the Five
Forces have diverse degrees of impact in certain
industries, such as figuring out what your industry
is and what implications it has.
It was questionable if the forces are still relevant due
to the model being developed in the late 1070s.
Which seems doubtful that the five forces, which is
available for more than 35 years without any
changes, is still relevant for examining the stability
of power within a particular organisation.
DEVELOPMENT
Over recent years, information technology (IT)
became much more important in order to achieve a
competitive edge in the industry. Today’s
companies have unprecedented access to far more
information about their customers that is depending
on agreements and contracts signed, suppliers or
their competitors. This evidently increases the
likelihood, partnership, or competition [5].
However, looking into porters five forces, it does
not include information technology as a competitive
force “Information technology was adopted in order
to give a supporting hand” [6][8]. Maybe a reason
for this was that the old economy used information
technology add changes. Technology is now an
important driver for change [5]. Over the past
year’s governmental influence on industries
decreased steadily. Therefore, most of the
concerned industries (airlines, communication, or
banking industry) were able and constrained to
search for alternatives and to structure their
business in a new way [7].
FRAMEWORK
Porter five forces basis on the industrial
organisation (IO). Assumptions that the
attractiveness of an industry, which a company has
an active part in, is determined by the structure of
the market because the structure is affected by its
participant [8]. The framework is a useful starting
point and in order to create a strategy is important
to have sufficient knowledge about the industry in
which a company operates. There are many factors
that could influence a company within its industry,
and this can be varied, however, it is important to
consider all the factors and companies participating
in the industry.
Amongst all the competitor’s, Porter’s five forces
framework identifies four force which distinguishes
competition in an industry such as a threat of new
entrants, bargaining power of customers, threat of
new products and bargaining power [9]
Figure 1: Five Forces Framework [9]
At the centre of the framework ‘completion from
rivals' includes various forms for competition [10]
example the introduction of new market products,
advertising, services and discounting price in order
to gain that market advantage even if it is dropping
a product by a certain percentage ‘customers love
bargain’. The rivalry between existing competitors
can influence the profitability of an industry to be it
music, banking or technological. It depends on the
“intensity with which companies compete and,
second, on the basis on which they compete” [10].
The framework could be influenced by growth rate,
cost, and differentiation in products or exit bar [11].
The existent of barrier reduces the number of
companies in the industry further enhancing the
rivalry among existing competitors [11]. Now
companies that advance to an existing market
directly have an effect on the advantages existing
companies have, demand then decrease the profit of
the market participants. The lower the barriers to
entry are, the higher the threat of new entrants is.
“The height of barriers to entry has been found
consistently to be the most significant predictor of
industry profitability” [12] Porter differentiates
between the barriers of entry such as the economic
scale, differentiation of product, how much money
is required, the disadvantages, how products are to
be distributed and most important in any business
governmental bodies. The power of customers can
be described as the “flip side of powerful suppliers”
[13]. If the buyers have high market power, they are
able to push prices downward, conquer better
quality or they can force expanded services. These
also reduction in the profitability of the industry.
The Bargaining Power of Buyers becomes high if
the buyers are large, which allows them to switch to
another supplier and they are limited in numbers.
All business in an industry compete to all produce
substitute, Substitutes products and services limit
the potential profit of an industry by defining a cap
for the prices of their products or services [4]
example food industries, there always s substitutes.
It limits profits but there is a positive advantage to
this if products are to the consumers liking.
According to Hubbard and Beamish (2011), there
are several factors that influence the
The threat of Substitutes, e.g. switching costs
between substitute products/services and industry
product (Klemperer, 1995), or buyers’ addiction to
buy substitutes.
Organisations need to consider, the behaviour of
current competitors but also the potential for other
organisations to enter the market. The important
matter is assessing the level of barriers to entry. For
example, in sectors where brand recognition is
important with such companies as ASOS, or well
know designer clothing brands GUCCI, or FENDI,
new entrants need to spend heavily to build a brand.
In other sectors, the minimum economic scale of
operations may be high, thereby requiring heavy
capital investment by new entrants.
Companies need to consider competitors that not
only offer the same products and services but also
offering the same service that is likely to act as
substitute [21] for example, cheaper restaurants now
suffer considerable competition from supermarkets
such as Tesco or Asda selling high-quality, easily
prepared ‘ready meals’ to eat at home as a substitute
for dining out.
ADVANTAGES OF THE FIVE FORCE MODEL IN
BUSINESSES (APPLE)
After careful analysis of the five forces, a company,
for example, Apple is able to state profitability with
a strategist in the company being able to come up
with a plan to hold a strong position within the
industry. Porters Forces oversimplified the
microeconomic theory by using only Five Forces,
which provides the opportunity to examine and
evaluate compound interactions of competitors in
an industry in a structured way [13]. Porter’s
framework went beyond “simplistic focus on
relative market growth rates [14]. Which he
believed was an advantage because managers in set
higher goals compare to using the SWOT analysis.
In my opinion, I believe Porter’s framework was
not only to assess an industries intake/profitability
but also finding the root cause of profitability.
DISADVANTAGES AND CRITICISMS OF THE FIVE
FORCE MODEL
Going through different papers, journals,
testimonials and many more the five-force model is
widely known for its management models in
practice today. The several critics became
increasingly acute over the recent years [15]. One of
the first criticism I read was the fact that porter has
no justification for the choice of the five
environmental force which proves the validity of
porter’s choice [15]. In addition, the model provides
snapshots. According to researcher Thurlby (1998),
he believed that porters’ model is static and does
not take time into account with business meaning it
is a lot more difficult to determine the markets with
high dynamic competition due to quick changes.
My opinion Taking time into account might not be
favourable for managers in businesses. If managers
were to take care of the time dimension, they will
be better able to consider trends and changing the
environment in the market. However, including the
five-force framework does not warrant for an
advantage that is infringed [8]. Today's goal is not
only to protect against the Five Forces, but it also
becomes more important to start collaboration and
maintain innovation due to the increasing power of
the Internet and other information technologies.
DEVELOPMENT
In order to understand whether the five forces have
value in businesses, this section of the paper
analyses the industry concerning the structural
changes because of increasing digitalisation. With
digitalisation, further forces gain more importance
and also significantly affect the competition. Many
companies have businesses internationally because
of the progress and improvement of communication
and transport route [17]. There are some effects of
globalisation are which are noticeable in areas of an
organisation today and also at the stage of the
lifecycle. Just as important as globalisation is
deregulation this is the removal of regulations or
restrictions. Over the last few years’ government
rulings have been mitigated. Especially Europe
withdrawing from many industries [18]. An
example of deregulation is the aviation industry
such as KLM, Air France, or SKY or the energy
industry. Innovation and IT reconstructed the
industry structure allowing existing companies to
change the direction of activities [17] similarly with
new organisations entering an existing market.
IMPACT OF GLOBALISATION ON THE INDUSTRY
TODAY
Today’s companies that are regionally focused,
have to combine in a wide scale environment
meaning globally, even if an organisation does not
import or export product. The progress in the
logistics and communication field enables
collaborations and acquiring product. Although
customers have to also benefit from this process
meaning that they are able to compare prices much
easier and faster, this increases the requirements
that surpass price and quality consideration. With
customers, the main focus regards to loyalty and
networks with partners [17]. A researcher by the
name of Friedman (2005) states that globalisation
still has an
increasing impact on business organisation and
practice. The globalisation of production refers to
the tendency of the companies to find suppliers of
goods and services from locations around the world,
in order to realise the advantage of national
differences in price and quality of the factors of
production. Companies do this in order to reduce
overall costs and thereby to improve the quality or
to improve the functionality of their product
offering to compete more
effectively.
IMPACT OF DEREGULATION ON THE INDUSTRY
TODAY
Today governments withdraw from business areas.
The outcome is increasing deregulation.
Deregulation entails the removal of controls raised
by the government on the operation of industries.
Throughout the operation of liberalisation, residual
risk is dissolved, and which allowed a restructuring
of the affected areas. This can cause incorporation
of the business relationship, rejection, or
outsourcing [17]. In order to explain the results of
Deregulation, For example, the aviation industry.
The aviation industry is enormously dynamic and
intriguing. Even other industries are affected by the
industry, for example, the ‘travel and tourism’
industry, which is one of the largest industries
worldwide. The results of the deregulation are
structural changes in the business that have to be
considered. Example Ryanair, they had to change
their strategies in order to face the new competitive
environment such as dropping their ticket prices to
favoured holiday destinations around the UK.
Further implications are a strong development of
the ‘hub-and spoke-system’, tougher competition
among the existing competitors, and decreasing
prices. When it came to the airline industry it was
difficult for a new airline to enter a market before
deregulation, reason was; entry barriers were high
and some countries introduced something called
protectionism, this is when shielding a country's
domestic industries from foreign competition using
tax for importing as part of managing the intensity
of rivalry in an industry.
Figure 2: Porters Five Forces vs. Downes’ Three
Forces? [17]
Downes gave a convincing argument. With beliefs
that digitalisation, globalisation and deregulation
have become powerful forces during the last years,
but Porter’s models rarely take them into
consideration. Today markets are highly influenced
by technological progress, especially in IT [19].
Therefore, it is not wise if not to say impossible to
develop a strategy solely on the basis of Porters
models. Downes forces made this framework more
stable, dynamic and complex. Even careful market
observation cannot anticipate all potential new
entrants or substitutes that might enter the market
virtually overnight, driven by technological
headway [20]. Many organisations have to modify
their structures, processes, business models and
strategies for this new enterprise. However, it is not
less predominant to think about the own bargaining
power towards suppliers or customers.
CONCLUSION
The purpose of this survey paper was to know if
Porters Five Forces have value in Businesses today?
Firstly, I believe it was important to analyse the
impact of the forces on the industry structure today.
Since Porter’s framework relies on the principals of
microeconomics, the challenge of the integrity of
the model is limited. The three new forces
Digitalisation, Globalisation and Deregulation make
the network unstable, more extensive, and more
dynamic. Nowadays it is a matter of direction for
many companies to think and act globally.
Direction will expand continuously in the coming
years. On the one side, today's technological
progress in the areas of logistics, distribution or
communication allowing many companies to buy
and sell products at a global level. Furthermore,
organisations are able to cooperate better with other
organisations. To answer the overall question there
is a certain value today to Porter’s framework
within the industry today all that is needed is to
audition them with an understanding of the
limitation.
My answer is yes porters five forces do still have
significant value in businesses today.
ACKNOWLEDGEMENT
This paper is based on research work for the
Enterprise Computing Systems module for
Undergraduates studying Computing for Business at
Aston University.
. Available at
REFERENCES
1. 48 SPOUDAI Journal of Economics and
Business, Vol.68 (2018), Issue 2-3, pp. 48-61
2. Andrew A. King, Michael J. Lenox and Ann
Terlaak Journal: Academy of Management
Journal, 2005, Volume 48, Number 6, Page
1091
3. Botwin, M. D., Buss, D. M. 1989. The structure
of act report data: Is the five-factor model of
personality recaptured? J. Pers. Soc. Psycho!
56:988-1001
4. Brandenburger, A., and B. Nalebuff. 1996. Co-
opetition. New York: Currency Doubleday.
5. Church, J. R., & Ware, R. (2000). Industrial
organization: a strategic approach. McGraw-
Hill.
6. Downes, L. (1997). Beyond Porter. Context
Magazine.
7. Floyd, S. W. and Wooldridge, B. (1997)
‘Middle management's strategic influence and
organizational performance’, Journal of
Management Studies, Vol. 34, No. 3, pp. 465–
85
8. Frank T. Rothaermel. (2016), Competitive
Advantage in Technology-Intensive Industries,
in Marie C. Thursby (ed.) Technological
Innovation: Generating Economic Results
(Advances in the Study of Entrepreneurship,
Innovation & Economic Growth, Volume
26) Emerald Group Publishing Limited, pp.233
– 256
9. Grundy AN. 2001. Competitive strategy and
strategic agendas. Strategic Change 10(5): 247–
260
10. Harrison, Jeffrey S., Michael A. Hitt, Robert E.
Hoskisson, R. Duane Ireland. (2008)
“Competing for Advantage”, Thomson South-
Western, United States, 2008.
11. Larry D: Beyond Porter. In Context Magazine.
12. Martin, M. (September 25, 2018). Porter's Five
Forces: Analysing the Competition. 1 (1-2), 1-3.
13. Michael E. Porter. (2008). THE FIVE
COMPETITIVE FORCES THAT by Michael
E. Porter hbr.org | January 2008 | Harvard
Business Review 79 SHAPE, IN ESSENCE, the
job of the strategist is to under STRATEGY
STRATEGY. In: Marie C. Thursby .. USA:
Emerald Group Publishing Limited. 81-93.
14. Porter, M.: Competitive Strategy: Techniques
for Analysing Industries and Competitors.
15. Shapiro, C. & Varian, H.: Information Rules: A
Strategic Guide to the Network Economy.
16. Shapiro, C. & Varian, H.: Information Rules.
Porter, M.: Competitive Strategy
17. Slater, S. F., & Olson, E. M. (2002). A fresh
look at industry and market analysis. Business
Horizons, 45(1), 15-22.
18. Thurlby, B. (1998). Competitive forces are also
subject to change. Management decision, 36(1),
15-30.
19. Ward, J, Peppard, J (2002). Strategic planning
for information. UK: Wiley series. 2-8.
20. YouTube. (2018). The Five Competitive Forces
That Shape Strategy. [Online Video]. 30 June
2016. Available from:
https://www.youtube.com/watch?v=mYF2_FB
CvXw. [Accessed: 23 November 2018].
21. Zhuge, H. (n.d.). Competition Model.

View publication stats