Managers and strategists are often faced with a dilemma while trying to understand the determinants of profitability of industries they compete in as well as potential industries they may wish to compete. To this effect, several analytical frameworks are employed; the most widely used being the Porter’s Six Forces model. This paper seeks to bring to light the shortcomings of using the Porter’s Six Forces model as an analytical framework to determine which industries are profitable or not.
Until the introduction of a “sixth force” in the mid-nineties, the “Porter’s Five Forces Model” as it was originally developed by Michael E. Porter in 1979 explained how “five competitive forces” determine industry attractiveness. Porter opined that in the fight to sustain long-term profitability, a firm must be strategic towards competition, and beyond competition, keep tabs on a broader set of competitive forces; customers who can drive prices down, suppliers who exercise some level of power, new entrants who might come in to compete for profits and substitute products and services that essentially place constraints on the profitability and growth on any industry. With the extension of this model, the sixth force (as shown in exhibit 1) included showed the impact of complimentary products and services on the attractiveness and overall profitability of an industry. In general, the Six Forces model proposes that the underlying structural drivers of any industry determine the performance of the players.
To buttress the implication of the model, Porter explained why the airline industry is the least profitable amongst industries owing to the high threat of the competitive forces. The airline industry players compete heavily on price. Most customers are looking for best deals irrespective of the brand name or carrier. It is difficult to differentiate or get customers to wait one or two extra hours for a flight if they can get a cheaper flight that takes them to their destinations. Suppliers (i.e. airplane and engine producers) coupled with syndicated labor forces erode away the airline’s profit. Constant stream of new entrants coming into airline industry due to low barriers of entry (i.e. a new airline operator can rent a plane, lease a gate, start with one flight between two city pairs, generic technology, etc.). There is a substitute of getting on the train, taking a bus, driving your car or sailing on a ship. Also there are no clear differentiating complements that could change the game in the industry.
Furthermore, he explains that the alignment of the competitive forces changes by industry however, the most salient competitive force or forces are of the greatest value to strategy formulation. That is; there are zero-star industries like the airline industry, there are six-star industries where all the forces are relatively benign and there are industries that have a mix of low, medium and high forces. To this effect, the model gives insights to how...