The Beauty of Porter's Five Forces

Kapil Edke explains why Porter's Five Forces Model assumes a special place in management textbooks.

The Porter’s Five Forces Model, developed by Michael Porter, a leading strategist and a management Guru, is very famous amongst the management students. It has been talked about many times and it’s inevitable part of nearly every discussion on strategic management. However, I wish to make this article generic enough for the layman and hence explaining from basics:

Porter’s five forces model is used in assessing the attractiveness of the industry with respect to its profitability. It says, there are five broad forces which decide how attractive the industry is, to make investments:

a) Entry barriers: Higher the entry barriers, more attractive is the industry, as the threat of new entrants is low.

b) Extent of competition: Lower the number of competitors, more attractive is the industry.

c) Bargaining power of suppliers: Lower the bargaining power of suppliers, more attractive is the industry.

d) Bargaining power of customers: Lower the bargaining power of customers, more attractive is the industry.

e) Threat of substitutes: Lower the possibility of replacing the industry products by substitutes, more attractive is the industry.

As an example, consider airlines industry. It ranks low on profitability scale when Porter’s five forces model is used, as the entry barriers are moderate, competition is high, bargaining power of suppliers (oil marketing companies and aircraft manufacturing companies) is high, bargaining power of customers is high (as many options as available) and threat of substitutes is moderate (other modes of transport, especially for domestic travel).

The beauty of Porter’s five forces model lies in its intuitiveness, simplicity and creativity. It is intuitive, logically convincible, as we saw in the example of airlines industry. It is simple to understand. Yet, it is creative. Who else before Porter had considered the suppliers and customers as competitors? No wonder, it assumes a special place in management textbooks.