Porter’s Five Forces was established as a tool to aid businesses in their overall effectiveness in their market. According to Porter (1979) all new entrants that enter an industry brings with it a new capacity. They often have substantial resources and a desire to gain the market share. The strength of rivalry among existing competitors involves many forms of competition. Porter (2008) states that this includes service improvements, price discounting, advertising campaigns, and the introduction of new products. There is a high level of challenge among existing competitors and how they influence the profitability of a given industry. According to Porter (2008) the real competition is dependent upon the intensity that the company is competing with and the basis in how they compete. The purpose of the framework in the Five Forces is to assess industry attractiveness and profitability, but also to understand the underlying competition and the reasons for their profitability. Despite the effectiveness of Porter’s design, it is important to consider the evolution of business it may have it lost effectiveness for which it was designed.
The challenge in today’s business is determining if a model, such as Porter’s Five Forces is still effective even though the evolution of business practices has advanced significantly. Mohapatra (2012) believes that information technology is changing the rules of in the means of competition. The new technologies are affecting the existing business models. It results in a change in the characteristics of the industry. There are many other model theories that also challenge the effectiveness of Porter’s model. Take for example the PESTLE analysis. The theory is based on political, economic, socio-culture, technology, legal and environmental. PESTLE theory is gauged on weighing business factors that are evolving with the modern day business.
Porter’s Five Forces analyzes the bargaining power of suppliers, a threat of substitutes, bargaining power of buyers, the threat of new entrants, and industry rivals. However, the model has not been changed to consider technology and how it affects these five forces. Therefore, it shows the concerns that have recently surfaced and the need to critically analyze the effectiveness of this old model theory. Porter’s Five Forces uses an industrial organization theory approach. Raible (2013) believes the industrial organization basis the assumption of the industry attractiveness in which it operates, is dependent upon the market structure that is due to the reason a market structure directly affects the marketplace participants behavior. When the market structure changes, it is assumed that the means used to gauge that structure would have to change too. However, there is the argument that the model that Porter’s Five Forces was designed from will withstand changes in all market industries.
The largest shift in business is the growth and implementation of technology and IT systems. Porter (2001) found that using IT provides a way to differentiate the services and products, creating more value for the consumer. It also establishes a way to create new products and to improve the efficiency of production and cost advantages. Hemmatfar, Salehi, and Bayat (2010) believed that the internet affected not only the nature in which we do business but also the nature of competition. Solid theories such as Porter’s and Henry Mintzberg’s theory will evolve with the business. Mintzberg’s theory expands to the management’s roles, workplace organizations, management’s responsibilities will also change with business practices. Therefore, the theories associated with the power of suppliers, the threat of substitutes, bargaining power of buyers, a threat of new entrants, and industry rivals are all expanded from the traditional business practices. Technology, nowadays, is far higher in status in the business world than it has ever been in the past. Therefore, it is important to consider that information technology is a driver and factor for change. Downes, (1997) found that technology is the problem, not the solution. Digitalization fundamentally creates a change in the basic nature of the industry. Many argue that the Porter’s Five Force model is not flexible to adapt to the changes.
Porter’s Five Forces are influenced by storage cost/ fixed costs, growth rate, exit barriers, differentiation, switching cost between competitors, or the number of competitor balance/ firms. The Porter’s theory is still effective in today’s business practices. The basis of Porter’s still focusing on the five main forces that influence business operation. Dälken (2014) found that the Porter’s Five Forces cannot be ruled as outdated or ineffective. Despite the revolution that is changing business and operations, it does not challenge the validity of the model and its structure. The basis of its usefulness is that companies are still operating with a network of buyers, substitutes, suppliers, new market entrants, and competitors. The entire theory presented by Porter is valid for a competition based economy. Companies today and in the past are expected to offer services and products which are competitive in regards to their quality, price, and after-sales service. The effectiveness of Porters Five Forces is not dependent upon an old economy or a new one. The only variation is that nowadays there are more management tools available to aid in the overall process.
- Dälken, F. (2014). Are Porter’s Five Competitive Forces still Applicable? A Critical Examination concerning the Relevance for Today’s Business. University of Twente, pp.2-9.
- Downes, L. (1997). Beyond Porter. Context Magazine.
- Hemmatfar, M., Salehi, M., & Bayat, M. (2010). Competitive advantages and strategic information systems. International Journal of Business and Management, 5(7), P158.
- Mohapatra, S. (2012). IT and Porter’s Competitive Forces Model and Strategies. In Information Systems Theory, pp. 265-281. Springer New York.
- Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, pp. 21-38.
- Porter, M. E. (2001). Strategy and the Internet. Harvard Business Review.
- Porter E.M. (2008). The five competitive forces that shape strategy. Harvard Business Review.
- Raible, M. (2013). Industrial Organization theory and its contribution to decision-making in purchasing.