The Limitations of Porter’s Six Forces Model in Industry

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Managers and strategists are often faced with a dilemma while trying to understand the determinants of profitability of industries they compete in as well as potential industries they may wish to compete. To this effect, several analytical frameworks are employed; the most widely used being the Porter’s Six Forces model. This paper seeks to bring to light the shortcomings of using the Porter’s Six Forces model as an analytical framework to determine which industries are profitable or not. Until the introduction of a “sixth force” in the mid-nineties, the “Porter’s Five Forces Model” as it was originally developed by Michael E. Porter in 1979 explained how “five competitive forces” determine industry attractiveness. Porter opined that in the fight to sustain long-term profitability, a firm must be strategic towards competition, and beyond competition, keep tabs on a broader set of competitive forces; customers who can drive prices down, suppliers who exercise some level of power, new entrants who might come in to compete for profits and substitute products and services that essentially place constraints on the profitability and growth on any industry. With the extension of this model, the sixth force (as shown in exhibit 1) included showed the impact of complimentary products and services on the attractiveness and overall profitability of an industry. In general, the Six Forces model proposes that the underlying structural drivers of any industry determine the performance of the players. To buttress the implication of the model, Porter explained why the airline industry is the least profitable amongst industries owing to the high threat of the competitive forces. The airline industry players compete heavily on price. Most custom... ... middle of paper ... ...012/12/12/us-india-walmart-probe-idUSBRE8BB0A120121212. Last assessed 02/05/2014. • Rumelt, R.P., “How Much Does Industry Matter?” Strategic Management Journal 12 (1991): 167–185. See also Mauri, A. J., Mauri & Michaels, M.P., “Firm and Industry Effects Within Strategic Management: An Empirical Examination,” Strategic Management Journal 19 (1998): 211–219 • Shearman & Sterling LLP: Elevators and Escalators. Available: http://www.carteldigest.com/cartel-detail-page.cfm?itemID=7. Last assessed 02/05/2014. • Wickham, P.A. (2006), Strategic Entrepreneurship, 4 ed, Prentice Hall. • Y. Li and S. Deng, “ A methodology for Competitive Advantage Anaylsis and Strategy Formulation: An Example in a Transitional Economy, European Journal of Operational Research 118 (1999), 259-270. • Yoffie D.B., & Kim K., Cola Wars Continue: Coke and Pepsi in 2010, Harvard Business School, 2011

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