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12.11.2013
Porter’s 5 forces model is one of the most recognized framework for the analysis of business strategy. Attractiveness in this context refers to the overall industry profitability and also reflects upon the profitability of the firm under analysis.
Despite its limitations in the technology enabled business era, Porter’s 5 forces model is still the leading framework for the analysis of industry attractiveness. This model comprises of an analysis dependent on 4 entities external to the firm and the fifth force: the Industry structure. The threat of the entry of new competitors: This encompasses the challenges surrounding if new competitors were to enter the same industry, how would the profitability be affected? The intensity of competitive rivalry: This is captured by a number of metrics like the growth rate of the industry, the ratio of cost structure to the value added, cost of over-capacity, degree of output differences among competitors, impact of brand and its conversion to sales, switching costs, concentration among the leading players (Herfindal Index), Information flow and complexity, diversity of competing businesses and exit barriers.
A detailed explanation of what these forces comprise of is provided in the diagrammatic representation of these 5 forces next.
The 5 forces model has been developed as a response to the SWOT analysis of competitiveness of firms, and has continued to remain the most popular framework in business strategy. The individual dimensions of the 5 forces has been described in details in the diagrammatic representation of the five forces model.


These responses on the Likert Scale can then mapped quantitatively to -3 to +3 on the extreme points. Although the Porter’s Five forces model is very popular in terms of usage, one must be aware of the limitations of this framework.
By the way do you know what framework you should consider while deciding on a market entry strategy?
Porter, the guru of modern day business strategy, used theoretical frameworks derived from Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. An “unattractive” industry is one where the combination of forces acts to drive down overall profitability. The limitations of the Porter’s 5 forces model induced the introduction of the 6th Force, namely the Complementors.
This is measured by the indicators which are detailed subsequently and is a proxy measure for the degree of attractiveness of the industry.
Factors which predominantly matter in this force are the relative price advantage of the substitutes, relative functional performance advantage of the substitute, switching costs of the customer for moving to the substitute and the customer’s propensity to substitute. The mean of the score can be reconverted in the linguistic variables on the Likert Scale and then expressed as whether the particular force is Very Strong, Strong, Slightly strong, Neither strong nor weak,  Slightly weak, Weak, Very Weak.


No framework can be comprehensively understood unless its limitations are understood as well. Our authors are educators from top QS ranked universities and practitioners from multinational enterprises. This theoretical framework, based on 5 forces, describes the attributes of an attractive industry and thus suggests when opportunities will be greater, and threats less, in these of industries. A very unattractive industry would be one approaching “pure competition”, from the perspective of pure industrial economics theory. Factors couls be issues surrounding economies of scale, proprietory product differences, brand identity, switching costs for the customers, capital intensive nature of the industry, access to distribution channels, absolute cost advantages, government policy surrounding new entrants and potential retaliation or fallouts. Likert scale basically is an ordered, one-dimensional scale from which respondents choose one option that best aligns with their view.The linguistic values for the same would be Very Strongly agree, Strongly agree, Tend to agree, Neither agree nor disagree, Tend to disagree, Strongly disagree and Very strongly disagree. It is important to note that this framework is not for the analysis of individual firms but for the analysis of the industry.



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