What are the limitations of porter's five forces model?

1. put emphasis on external factors and ignore firm-specific factors.

2. institutional issue plays an important role in shaping and controlling the industry, but porter just treat it as a factor, no as a influential force.

3. his model is industry-based, how firms can do if revolutionary changes happen in the industry.

4. how to explain multi-industry conglomerate, such as GE.

Competing is like diving in a pool. You can never see what's there near the sea. In my opinion, implementing Blue Ocean Strategy will get you far a head becoming a leader innovating new products thus omitting any chances of becoming a follower.

· The model is best applicable for analysis of simple market structures.Overall, Porters Five Forces Model has some major limitations in today's market environment :

It is not able to take into account new business models and the dynamics of markets.

The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting point for further analysis.

Litrature reveals that Porter's five forces analysis considers the market as static not dynamic, focuses on the idea of competition and how to gain competitive advantages over others without focusing on other factors, sutabile for simple markets.

 What are the limitations of porter's five forces model?

Dear Ashraf

Thank you for your question. You have provided me with a chance to revisit the model. Hats off to Michael Porter the  revered business guru from Harward . The  Five forces model may have limitations, however, In spite of critics and limitations, however, Porter's Five Forces model continues to be taught in most business schools throughout the world as a reliable basis and framework for business analysis and strategy, effectively preparing the next generation of executive management for market strategy decisions.

Porter model’s  five forces consisted of the following five causal variables :

(1) Bargaining Power of Suppliers,

(2). Bargaining Power of Buyers,

(3) Threat of New Entrants,

(4) Threat of Substitutes, and

(5) Intensity of Competitive Rivalry

The above forces have measurable which classify each force as having a "Low", "Moderate", or "High" strength. The collective strength of the five forces then determines how attractive the industry is to potential entrants

The five forces model was developed in1979 and as the  model aged through the ages, analysts and researchers have studied the model ‘s effectives and have formed different views and some have proposed that the model was lacking in its ability to account for the impact of strategic alliances. Porter's model also came under criticism for its lack of consideration regarding the unique resources and capabilities that a firm brings to the industry.

Porter himself writes in his book that the presence of governmental regulation in the market effects the models' reliability; and the presence of increased globalization and technology may have significantly altered the dynamics of economic growth and competition since the model's inception in1979.

In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver. · The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.

· The model assumes relatively static market structures. This is hardly the case in today's dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.

· The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it does not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.

Weakness of Industry Sector Analysis

According to Porter the5 forces model is intended for an industry level analysis and it is not intended to be used for an analysis of an industry sector. For example, pharmaceuticals may be considered one industry and bio-technology another but they both belong to the Life Sciences industry sector. The suggestion is to decompose the industry sector into component industries and then apply the five forces model. Whilst this approach will offer competitive insights it may miss the emergent properties of the sector i.e. the whole may be greater than the sum of the parts.

In addition to industry sector analysis those companies that compete in multiple industries as a conglomerate or multi-industry company such as Berkshire Hathaway, Mitsubishi or GE also present a similar challenge. For these diversified companies the proposed solution is the same again – do the competitive analysis by industry.

Competitive Forces

There is a broad assumption of perfect competition within an industry and this is not always true as some companies have been identified in price fixing scandals for e.g  "British Airways price-fixing scandal involving Virgin Atlantic. Of course some price fixing cartels are normal practice such as Organization of the Petroleum Exporting Countries. and whilst some oil exporting countries such as Saudi Arabia are within the cartel others like Russia are outside of it. Companies may also enter into alliances as either a self-protection mechanism or as an aggressive move to eliminate competition. These “other” competitive forces introduce a further dimension to competitive analysis.

Overall, Porters Five Forces Model  may have some major limitations in today's market environment. It is not able to take into account new business models and the dynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting point for further analysis.

This answer is a compilation from business related literature and not my work. I for one yet to fully comprehend the thoery as it was proposed. thanks again for drawing my attention to this important subject.

with very best wishes to you

amrut desai 

• Pace of change is now more rapid. 
• Market structures were seen as relatively static.
• The model provides you with only a snapshot of your environment.
• It can be difficult to define the industry
• The model does not consider non-market forces
• The model is most applicable for analysis of simple market structures
• The model is based on the idea of competition.

Porter five forces has no limitation and it could be used for new establish business or an exist business. This managemnet strategy to enter new business locally or internationally.

I see that the cost of building the framework in a firm will not be justifiable (cost effective) in most businesses. That requires a didicated workforce to collect the required information (if possible in our region) and validating it. On the other hand, as Dr. Porter indicated, this is a dynamic framework, i.e. it does change over time which requires continuous followup on the collected information.