Understanding the industry environment

Understanding the industry environment – Porter’s Five Forces

On the MBA course, I’m currently studying a module on strategy which looks into understanding the industry; understanding the organisation, resources and capabilities; risk and corporate responsibility; and culture.

I’m finding it an incredibly interesting subject, even if I am struggling to keep up with my studies. It doesn’t help that I’m absorbing every piece of information and ‘suggested’ reading out of fascination for the subject – I keep having to drag my inquisitive mind back to the core subject areas.

I’ve been taking elements of these studies and applying them, and not unsurprisingly, it’s those concepts that I can fit to my own organisation that I find myself most interested in. Understanding the industry environment at a macro-environmental level is one such area.

Porter’s Five Forces for analysing the attractiveness of markets and industries

Porter’s 5 Forces (developed by Micheal Porter of Harvard Business School in 1979) is a tool which intends to assist firms in assessing the attractiveness of markets and industries, how how the firm should be ‘placed’ within the market to gain a competitive advantage.

The theory identifies 5 key areas factors that effect the macro-environment:

1. Market for competition
2. Threats of new entrants
3. Power of consumers
4. Potential substitute products and
5. Bargaining power of suppliers for whom you rely

By assessing these factors, the strategist could potentially work out whether it is an attractive market for a firm to enter into and appropriate strategies for managing competition threats.

Limitations of Porter’s Five Forces

Porter’s 5 Forces has come under quite a lot of criticism and debate over how useful it really us. Criticisms include:

• Lack of explicit concern over government interference that can and does affect the wider market environment.
• Interaction between identified forces that can combine, sometimes deliberately, to create a less desirable environment.
• Dynamics of the environment which is constantly changing – while the Five Forces model provides a snapshot at the particular point at which the data and information was gathered, it doesn’t explicitly take into account time (surely this would be a criticism for many theories…? It would be impractical to assess all potential outcomes and complex systems for the purpose of this exercise).

Porter makes a defence of his 5 Forces (which he renames ‘Factors’) in the Harvard Business Review (Porter, M.E. (2008) ‘The five competitive forces that shape strategy, Harvard Business Review, issue 1, pp. 78–93) available here.

There’s also a great interview with Micheal Porter who explains it far better than me! If you can get access to the article itself and you are interested (I get it through the Open University), it’s useful – pretty much Porter telling people to stop nit-picking (in more academic terms), it’s worth a read.

Summary

I find the whole academic debating quite perplexing really, not every theory will work in every situation in the same way that any tool has to be used for the right job. You wouldn’t use a hammer to sand down a mahogany coffee table… well, I wouldn’t…

So I quite like this theory, it gives a good structure to analysis of the macro-environment, but it’s not perfect and I would think it would need to be used in conjunction with other tools (for example, PESTLE shown below) to get a more overall detailed understanding of the market, barriers to entry, competitive environment and desirability for entry.