One of the very best known strategy models is the Five Forces Of Industry Profitability that has been developed and promoted by Professor Michael Porter.
Background To The Five Forces Analysis Model
The Five Forces Analysis model was first introduced in the Harvard Business Review in 1979 in an article by Michael Porter called “How Competitive Forces Shape Strategy.”
It was then a major element in Michael Porter’s book, Competitive Strategy.
In 2008 Michael Porter returned to the Five Forces Model with an updated article in the Harvard Business Review called “The Five Competitive Forces That Shape Strategy.”
Even Michael Porter Didn’t Believe In The Five Forces
I found this article in Forbes.
It says that Michael Porter’s own strategy consultancy firm, Monitor, had stopped using the Five Forces Analysis.
That’s a big shock when the Five Forces are still a big part of the strategy courses that are taught on many MBA courses.
Sadly I didn’t feel the article went into too much more detail about the five forces and talked more about why the strategy firm failed.
I’ve said before, criticising the ideas of Michael Porter is very popular because of his preeminence but that criticism is often made based on a misrepresentation or simplification of Porter’s basic ideas to promote the “next big thing”.
Where’s The Customer In The Five Forces?
In my article, What Is Strategy, I define strategy as
“Strategy is how you achieve your own objectives by winning the hearts, minds and business of customers by out-thinking and outmanoeuvring competitors.”
While customers aren’t entirely ignored in the Five Forces model, there is little attention given to them. In fact big customers are seen as a negative force because of their enhanced bargaining power.
The Five Forces Analysis Isn’t Strategy
The Five Forces are one tool that takes a supply side approach to strategy.
Its focus tends to be on the industry – the companies who supply the products to meet customer demand – and the aim is to operate in an industry where there is enough profit to avoid the pitfalls of severe competitive rivalry.
You won’t get a winning strategy from just doing your Five Forces analysis.
No matter who much time and attention you give it.
But that’s not to say that it doesn’t serve a purpose to give insights into the competitive process.
My definition of strategy recognises that you need to understand your competitors and what they want to do and can do.
I’ve seen far too many hockey-stick style financial forecasts (where profit dips in the short term and then rises quickly in the future) to know that many businesses ignore competition. You need to accept the fact that competitors also want to grow and increase profitability.
I’m not going to criticise a tool that shines a light on competitors and how the industry fits together.
The five forces exist.
It’s a huge risk to ignore them and especially if there is a developing trend.
The Problem With The Five Forces
The big problem I see with a very detailed five forces analysis is finding the answers.
It’s much better at identifying problems than coming up with solutions.
Substitutes are a growing threat – so what do I do?
Bargaining power of customers and suppliers is growing – so what do I do?
New competitors are entering the market with much lower factor costs of products – so what do I do?
The slashed profits in the industry have caused competitive rivalry to become cut-throat – so what do I do?
I find it’s a better tool for asking:
- Should I go into this product-market (industry)?
- Should I look to diversify away from this product-market?
- Should I exit this product-market?
than for answering the question:
- How do I make more money in this product-market?
Those three questions are very valid in certain situations but the fourth question is the universal question of strategy that every business wants to answer.
The truth is that sometimes you can’t expect to make good profits in a product-market.
I think it’s useful to know that so that you don’t waste precious resources trying to do the impossible.
The Five Forces analysis does help. It wouldn’t have been accepted so readily when it first came out and it wouldn’t have stood the test of time.
The Five Forces are based on industrial economics which looked to explain why all markets weren’t perfectly efficient. The economists saw perfect competition as the ideal but as I explain in my article, It’s Not Perfect If I Can’t Make A Profit, entrepreneurs and business managers took a different view.
It’s just not the panacea to all strategy questions.
What Do You Think About The Five Forces Model?
I’d like to know your thoughts about the five forces.
Have you found the model helpful or do you think it’s a waste of time?