The Five Forces Model is a business analysis tool that was created by Michael Porter during the 1970s. As a Harvard Professor, Porter came up with this diagnostic tool to measure micro influences in the business environment. This initiative was also intended to augment the analysis tool offered by S.W.O.T., which focused on internal business elements.
Motivation for The Creation of Five Forces Model (FFM)
Where the S.W.O.T. analysis tool concentrated on internal corporate capabilities, Porter saw a gap to develop a method to evaluate micro influences in the business environment. The FFM first earned its stripes in the 1980s when competitive strategies in the corporate environment started to become popular.
These competitive management strategies first began appearing in educational organizations, followed by their implementation in private businesses. The driver behind this approach was the need to promote profit growth. Profit maximization was becoming harder to achieve in an environment that was growing increasingly complex however.
The appearance of the world wide web in business during the 1980s was one element that added to environmental complexity. Another was the pressure to promote shareholder profits.
The FFM model enabled identification of competitor strategies to inform counter-strategies. Counter strategies were desirable to grow profits in areas other than where an organization’s competitors were active.
The three primary competitive strategies consist of cost reduction, the concentrated strategy, differentiation or combined strategies to drive share acquisition in a less saturated market.
Criticism Leveraged Against The FFM
Many business leaders and academic scholars have noted that the FFM has shortcomings. Most business analysis tools are not comprehensive, requiring augmentation by others such as S.W.O.T., the resource-based view, PESTEL, and others. Porter was aware of this when he developed the tool to enhance the internal analysis provided by S.W.O.T.
Other than its shortcomings, scholars have mentioned that this tool is difficult to apply to practical circumstances. They state that it doesn’t possess enough depth, and that the modern generation does not have the mindset to harness its capabilities and access its true worth. A poor analysis of the micro environment results, leading to sub-optimum management decisions being made.
Management in the modern era also aver that the FFM does not offer strategic alternatives to manage change in the present-day business world. Acquiring a greater market share or taking other action to achieve a competitive advantage is not however, confined to being created within the five forces. Competitive advantages should be developed in areas where there is less competition. In this way, the organization gains a foothold in a particular area, which it can grow into a strength not possessed by others.
Many of these scholars have failed to comprehend the thorough level of analysis that this model delivers, when properly applied. Despite major changes in the business world since the inception of the FFM, it remains relevant when these changes are accounted for.
The Business World Has Changed – So Must Analysis Models
The internet has changed how business is conducted since the 1980s. Rapid technological advancements have been made in the past 40 years. Digital marketing and online business are becoming the norm, as are cloud computing services, IaaS, PaaS and SaaS. Innovation and creativity have formed the backbone of many of these environmental variations, prompting major strategic changes.
One adaption suggested for the FFM by Želimir Dulčić, Vladimir Gnjidić and Nikša Alfirevic, is to include a dynamic factor that is associated with the five environmental forces. This modification will enable improved recording of changing industry conditions, the ability to better evaluate the contemporary status and to better forecast changes. With this modification in place, management will have a far more powerful FFM to support their decisions in a dynamic environment, constantly subject to transformation.
Tony Grundy developed certain micro forces to be used in conjunction with the FFM tool. These micro forces included urgency, discretion, importance, mindset and several others. He then suggested that these be alternated in relation to each traditional force, to provide for a greater depth of analysis.
Other micro factors proposed by Gould, Anthony and Desjardins, Guillaume consist of ‘Do it Yourself’, ‘Other Technologies’, ‘Emotional’, and ‘Bundling or unbundling’ – all of which offer new ways to analyze the business environment in conjunction with the FFM.
The traditional five forces of this model comprise rivalry power in the organization’s industry, buyer and supplier power, the threat posed by product substitutes and barriers that discouraged others from entering the market.
Adding other micro forces to each of these elements for further analysis, enables greater worth to be extracted from the analysis of each level in the environment.
A three-dimensional model has also been suggested to enable the FFM to adapt to the contemporary business world. This has been discarded as being too complex and time-consuming to implement.
New Business Strategies for a Modified FFM Model
The FFM model needs to make basic adaptions to accommodate radical progressions in the way that business is done, since the model was conceived. Against this background, four strategies have been proposed for this model to counter competitive technological innovations. The lack of strategies to counter modern business competition was noted as a weakness of this model.
New strategic suggestions encompass the leader strategy. A leader strategy supports success where technological resources and R&D capabilities encourage a position of leadership as the first to enter a market.
This next strategy that management can apply to promote a competitive leverage is the fast follower. The learning curve of its predecessor is harnessed to save time and costs, but the organization must have powerful capabilities and remain flexible to compete against the first mover.
The minimization strategy focuses on cost cutting efforts in its products and processes in relation to its competitor’s efforts. The final strategy proposed by Michael Porter for use to compete in the FFM, is market segmentation.
Market segmentation or the specialization strategy focuses on meeting a specific need. Intense marketing efforts are required to meet that need. A further follow up to this strategy, is to copy the products of technological forerunners to create an individual competitive advantage.
The Ongoing Significance of the FFM in the 2020s
The Five Forces model developed by Michael Porter in the 1980s is still clearly relevant. Using the FFM to develop deep analyses of corporate environments is key to extracting its value.
The typical application of this model has been superficial but comprehension of its worth should help to promote better business environmental analyses in the 21st century. This is particularly true with the adaptions discussed earlier.
The reader should also keep in mind that the shallow application of this FFM, will result in shallow results. Insufficient or incorrect information is the basis for poor management decisions. The opposite is also true. The author therefore recommends that anyone who chooses to use the FFM as a business analysis tool, do so with depth and sincerity.