Used by strategy consultants to assess a firm's strategic position vis-à-vis its competition, Michael Porter believes his seminal Five Forces framework is still as relevant today as it was 30 years ago.
The Five Forces that Porter suggests drive competition are:
- Existing competitive rivalry between suppliers
- Threat of new market entrants
- Bargaining power of buyers
- Power of suppliers
- Threat of substitute products (including technology change)
At the recent World Knowledge Forum in Korea, Porter told INSEAD Knowledge how the framework had been updated.
“I found some areas where we could add depth and actually some additional rigour in a few areas. One example was in the area of barriers to entry. Barriers to entry in 1980 were primarily on the supply side and they had to do with the economies of scale in terms of production or R&D or supply or whatever.”
“What we found as we looked at what's happened since, partly because of the IT revolution, is that there's another really important case of barriers to entry that comes from the demand side around network effects that have to do with the classic Microsoft-type network effects: when many people are using a product on the demand side it creates a tremendous barrier to entry for anybody else to put a new product into that industry.”
Though he hints at the possibility of a Sixth Force, he says that it still comes back full circle to the original Five Forces, because the framework has not required any fundamental modification as of now.
“I’ve spent quite a bit of time over the last couple of years revisiting the industry structure model. We also came to the conclusion that there had been a number of proposals that there should be a Sixth Force. And one of those was government. Another was complementary products. And after a lot of debate and a lot of thinking and a lot of discussions, we really came to the conclusion that actually none of those were actually the Sixth Force and that there was really only five.”
KC 10/08
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