Porter’s Five Forces: Advantages and Disadvantages
Porter’s Five Forces is a simple framework to analyze the competitive position of the company. This will demonstrate how industry-related forces affect your company’s performance.
Following are the Advantages (Pros / Benefits) and Disadvantages (Cons / Drawbacks) of Porter’s Five Forces,
Advantages (Pros / Benefits) of Porter’s Five Forces
1) Helps to Estimate the Competition in the Industry
Porter’s five forces help to measure the threat of new entrants, the threat of substitution, supplier bargaining power, and buyer bargaining power. All of these will sum up to provide the competitive rivalry of the industry. This will support the company to understand the current competition of the industry to adjust the corporate strategy accordingly.
2) Showcase where the Strengths and Threats Exist
Porter’s five forces provide the output of understanding the supplier and buyer forces with risk of new entrants and substitute products. This will enable the senior management to find out where does the company’s strengths place in and where does the threat exist. Management will be able to take precautionary actions for the threats while enhancing the strengths more.
3) Identify which Entities Holding the Power
There are three entities to which Porter’s Five Forces are related. Those are suppliers, buyers (consumers), and competitors. This analysis will provide insights into which are entities hold more power and less power. This will enable the companies to make decisions on the best strategies to handle these entities.
4) Display Opportunities to Expand the Business
Porter’s five forces provide the power of suppliers and buyers in the industry. This will help the company to make decisions on whether to proceed with verticle integration to acquire suppliers and buyers to reduce their power and expand the business. Simply the business can conduct the forward integration to acquire their consumer side of the value chain, and/or backward integration to acquire their supplier side of the value chain, according to the information provided from the five forces.
Also, this will help the company on having insights into the competitive rivalry, where the company can seek the possibility of conducting horizontal integration to acquire a competitor, to reduce the risk of competition.
5) Assist to Understand the Corporate Risk
Porter’s five forces will provide valuable insights into the power of suppliers, power of consumers, and power of competitors. All of this information will help the company to understand the corporate risk of the business, and make responses to those risks.
6) Helpful in Making Corporate Strategy and Vision
The corporate strategy helps the company to make strategic decisions by looking across all aspects of the business to determine how best possible to create the most value. Porter’s five forces will provide valuable information for this to make the corporate strategy more accurate by considering the impact of the external forces.
Disadvantages (Cons / Drawbacks) of Porter’s Five Forces
1) Limitation on the Composition
Porter’s five forces only concentrate on the power of suppliers, power of consumers, substitution, and new competition. But other technological factors and business strategies that impact the company are not considered. As an example, technological evolvement is one of the biggest threats for all companies across all industries. Also, external forces such as government policies, taxation policies, cross-border business risk, environmental impact, etc are not considered. This can be a major aspect of the growth or else the downfall of the company.
2) Unavailability of Quantitative Dimensions
There is no built-in method to conduct the quantitative analysis of the external factors. This tool does not provide a quantitative idea of the depth and impact of the five forces described. Also, there is no quantitative idea of which forces out of the five are most important and least important.
3) Impractical to use on Large Companies
Practically it is difficult to use this analytical framework for a company that has a large product portfolio and operates in different market segments. This framework is meant to analyze a company in a single industry.
4) Can Be Used as Starting Point for the Analysis
Porter’s five forces is a simple tool that contains five external factors which can be beneficial or else drawback for a company. This can be used only as a tool for the starting point of a deep investigation. This framework provides the initial understanding of the company’s competitive position in an industry. This framework can not alone provide an in-detail investigation of the company.
5) Not Applicable for All Industries Universally
Porter’s five forces practically can not be used for some industries. As an example, not-for-profit companies can not use this method for the analysis. Also, companies conducting activities like R&D will not have much benefit from this.
6) Not Consider Business Risk Factors
External business risk factors like foreign exchange instabilities, natural catastrophes, methods of financing, legal constraints, fast technological evolutions, fluctuations in interest rates, etc not considered for this framework. These are major factors in determining the business risk of the company.
You may refer to the below article contains the In-Depth Explanation of Porter’s Five Forces with Industry Examples: