In case of companies operating in markets there are many forces which affect companies sales as well as profits and once company identifies these factors it can formulate strategies so as to counter those factors and be ahead of its competitors, porter five forces framework or model is one of those frameworks which tries to explain the forces which are at play when the company is operating in the market. The five forces of porter model are the bargaining power of suppliers, bargaining power of buyers, the threat of substitutes, threat of new entrants and industry rivalry among companies. In order to understand this concept better one should look at the advantages and disadvantages of porter five forces model –
Advantages of Porter Five Forces Model
Helps in Gauging Competition
One of the advantages of Porter’s model is that it helps the company in gauging the competition present in the industry in which company is operating because if the company is operating in that industry in which competition is low then it can have pricing power which results in the company earning good profits. In simple words, the pricing power of the company is inversely proportional to the competition present in the industry higher the competition lower the pricing power and vice versa.
Helpful in Planning
Industries which require huge investments are tricky because once company has made investments than it cannot back off and by doing porter analysis company can identify those industries where threat of substitutes as threat of new entrant are less because if new players can easily enter into the industry than it will lead to competition which will not be beneficial for the company besides substitutes for industry products can also lower pricing power of industry as a whole. Hence when the company makes plans to enter into any industry than by doing porter five forces analysis a company can eliminate those industries which have close substitutes or where there are fewer entry barriers for new firms entering into the industry.
Dealing with Buyers and Suppliers
When company is operating in that where bargaining power of suppliers as well as bargaining power of is less than company has dual advantage because on the one side company can get raw materials for production at reasonable rates because when suppliers are more they will compete among themselves to sell their products to the company resulting in company getting good deals from suppliers and on the other side when bargaining power of buyers is weak which is the case when products of the company are inelastic than company can be price maker and not price taker.
Disadvantages of Porter Five Forces Model
Ignore Other Factors
The biggest disadvantage of porter five forces model is that it takes into account only above factors and it ignores other factors which may have bearing on the environment in which the company is operating. Hence for example suppose a company is operating in that industry where all the five factors that are barriers to entry, company products are inelastic, bargaining power of suppliers is weak and there are no substitutes and no competition but if government introduces taxes on industry products or make some amendments regarding products of the industry than the whole porter five forces analysis will be of no use.
No Industry will be Perfect Fit
Another problem with porter five forces framework is that no one industry will be a perfect fit in the sense that you cannot expect one industry to have all positive points and thus as far as the company is concerned if it goes by porter analysis for finding perfect industry than it will not be able to do business. In simple words just like human beings are not perfect and each one of us has some shortcomings in the same way no industry is perfect and every industry has some shortcomings the thing is to ignore those shortcomings and pounce on the opportunities.
Not Useful for All Industries Alike
Another limitation of this model is that that it cannot be applied to all industries, hence for example if you look to apply this framework to industries like technology or fashion where apart from above 5 forces factors like technology, consumer taste, and other factors play a major part than this model may not bring the desired results. Hence in simple words, since it is not useful for all industries alike it cannot be universally applied to all industries.
As one can see from the above advantages and disadvantages of porter five forces model that as far as companies are concerned they cannot ignore this model but at the same time this model suffers from some limitations and that is the reason why a company should take into account other models as well as factors and then decide its strategy.