Guidelines for applying Porter’s five forces framework: a set of industry analysis templates

Guidelines for applying Porter’s
five forces framework: a set
of industry analysis templates
Michael E. Dobbs
Department of Management, Eastern Illinois University,
Charleston, Illinois, USA
Abstract
Purpose – The purpose of this paper is to provide practitioners and students a practical yet
comprehensive set of templates for applying Michael Porter’s five forces framework for industry
analysis.
Design/methodology/approach – Based on experiences with practicing managers, small business
owners, industry analysts, academics, and students, a set of industry analysis templates that
systematically guides an analyst through a comprehensive assessment of the five forces is presented
with the following: copies of the templates themselves, descriptions of their structure and use, an
example of a completed template (spectator sports industry), and a discussion of possible
modifications and extensions.
Findings – The industry analysis templates described in this paper retain the comprehensiveness of
Porter’s framework but in a format much more student/manager-oriented using graphics, visual cues,
a uniform structure, and straightforward descriptions of concepts. Template users show evidence of
deeper strategic insights and have a sophisticated tool for future analysis.
Practical implications – Managers, analysts, students, and others wanting robust industry analysis
are provided with a comprehensive, structured, and practical set of templates to use in assessing an
industry using the five forces framework.
Originality/value – Leading strategic management texts and other sources provide no
comprehensive, systematic, and robust format for conducting a five forces analysis of an industry.
The set of industry analysis templates described in this paper provides a visually compelling,
user-friendly format that can assist those analyzing industries gain important strategic insights not
only into industry drivers, but also important competitive advantages for individual firms.
Keywords Strategic management, Industry analysis, Five forces framework, Sport industry analysis,
Teaching tools, Templates
Paper type Conceptual paper
In 1980, Michael Porter published Competitive Strategy, a work that shaped the
thinking of a generation of academics and managers (Crowther, 2008; Magretta, 2012).
Included in that foundational text (the first chapter, in fact) was Porter’s description of
“five forces” that shape the structure of all industries and in large part establish the
rules of competition and the root causes of profitability within an industry (Porter,
2008). The five forces are the threats posed by competitive rivalry, powerful buyers,
powerful suppliers, potential new entrants, and substitute products. According to
Porter (1980, p. 3), “the collective strength of the forces determines the ultimate profit
potential in the industry”. But of more interest to Porter, as emphasized in his update of
the five forces in 2008, is the potential to use the five forces framework to understand
strategic implications for individual firms within an industry.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1059-5422.htm
Competitiveness Review
Vol. 24 No. 1, 2014
pp. 32-45
q Emerald Group Publishing Limited
1059-5422
DOI 10.1108/CR-06-2013-0059
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24,1
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Challenges in using the five forces
The practical application of the five forces framework, however, has been more
challenging. Porter (2008) himself admits as much and describes common misapplications
of the framework. Magretta (2012), Allio and Fahey (2012) and Lee et al. (2012) also
describe managerial difficulties. While working with practicing managers, small business
owners, MBA and undergraduate business students, and other academics, I have
witnessed many of the same things. The following challenges in using the five forces
framework are taken from Porter (2008), Magretta (2012) and my own observations.
Lack of depth
Many people only understand the five forces framework and its use in an inordinately
shallow way. At best, this leads to incomplete, inaccurate, and unhelpful analysis. At
worst, it can lead to misanalysis, poor decision making, and disastrous organizational
outcomes. Those of us in academia bear a good deal of the blame when it comes to a lack
of depth in teaching students about the concepts and usage of the five forces framework.
This begins with textbook coverage. I surveyed ten leading (Napshin, 2010) strategic
management textbooks and catalogued the coverage of the five forces in each (Table I).
The number of pages devoted to the five forces framework ranges from four to 21 pages.
Only two of the textbooks provide in-depth descriptions, explanations, and applications
(Thompson et al., 2012; Barney, 2011). Most textbooks summarize the basic concepts,
reprint or adapt Porter’s graphical depiction of the framework, and provide examples
from various industries. Two other textbooks (Wheelen and Hunger, 2012; David, 2011)
provide only four pages of coverage, diluting the power and potential value of the
framework considerably. Unless students read one of the two textbooks with in-depth
coverage of the five forces and have an instructor who can comprehensively and
effectively explain the framework, most will grasp only a superficial familiarity with five
Author(s) Title Ed. q
Pages of five forces
coverage
Barney Gaining and Sustaining Competitive
Advantage
4 2011 21
David Strategic Management: Concepts and
Cases
13 2011 4
Dess, Lumpkin, Eisner and
McNamara
Strategic Management: Text and
Cases
6 2012 11
Hill and Jones Strategic Management: An
Integrated Approach
10 2013 11
Hitt, Ireland and Hoskisson Strategic Management:
Competitiveness & Globalization
10 2013 8
Marcus Management Strategy: Achieving
Sustained Competitive Advantage
2 2011 8
Pearce and Robinson Strategic Management: Planning for
Domestic and Global Competition
13 2013 7
Rothaermel Strategic Management: Concepts and
Cases
1 2013 8
Thompson, Peteraf,
Gamble and Strickland
Crafting and Executing Strategy: The
Quest for Competitive Advantage
18 2012 18
Wheelen and Hunger Strategic Management and Business
Policy: Toward Global Sustainability
13 2012 4
Table I.
Five forces coverage
in leading strategic
management textbooks
Porter’s five
forces
framework
33

forces terminology. When these students graduate and become managers, small
business owners, and/or entrepreneurs, any industry analysis using the five forces
framework will be crippled by its lack of depth. The restoration of depth of analysis is
one of the purposes of the templates.
Lack of structured analysis
Porter (2008) laments the lack of quantitative measures used in typical applications of
the five forces framework and the devolution of the analysis into a series of qualitative
lists. These types of assessments of industry conditions are frequently rather arbitrary
and make for poor substitutes for the rigor originally outlined and prescribed by
Porter. However, the presentation of the framework in Competitive Strategy may have
played a significant role in the development of this particular problem in applying the
framework for two reasons. First, in the original explanation of the framework, Porter
provides dozens, if not hundreds of examples of the five forces at work in a wide
variety of industries; but in only very rare instances does he provide quantitative
details of the examples. Second, the original description of the five forces is, in essence,
a list. Granted, the list is not simple, but there are extensive lists of the sources of
threats within the five forces. Users of the framework have naturally taken their cues
from Porter, and following his lead have used lists and largely qualitative assessments
of the five forces. It is the frequent arbitrary nature of five forces analyses that may be
significantly diminished through a more structured approach to the implementation
of the framework which is what the templates are designed to provide.
Lack of strategic insight
Perhaps Porter’s (2008) biggest disappointment in the misapplication of the five forces
framework is the perception that the framework is primarily a tool to assess the
attractiveness levels of industries rather than gain strategic insight as to how a firm
can compete more effectively within its industry. The primary purpose of the
framework is the latter; however, tying the analysis to specific strategic action items is
challenging. There are many contingency factors to consider (e.g. stage of industry
cycle) so that universal guidelines regarding actions to take given certain threat levels
are not advisable. In Competitive Strategy, Porter’s links between the five forces and
specific strategic actions are provided throughout much of the latter parts of the book
and are not in a single place which would make them more accessible and likely to be
seen and/or used. While this placement is understandable and warranted, it forces the
user of the framework to be more proactive and perceptive in drawing actionable
conclusions from his/her five forces analysis. The templates are designed to aid
analysts with this aspect of using the framework, as well.
Millennial generation preferences
Another factor affecting how students process and apply the five forces framework may
be the generation to which they belong. As of the 2010s, traditional college-aged students
are classified as Millennials, or members of Generation-Y. While people in this
generation are very media-conscious and familiar with how technology contributes to an
increasingly complex environment (Considine et al., 2009), they also long for the stability
that authority and structure bring ( Jonas-Dwyer and Pospisil, 2004; Moore, 2007).
In addition, they expect high levels of service, low levels of “busy work,” and will not
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hesitate to voice their frustrations or dissatisfaction when those expectations are not met
(Black, 2010; Eisner, 2011). The templates provide the structure desired by these
Millennials and allow them to spend more time on analysis and less on formatting
leading to higher overall levels of satisfaction with the education process.
Five forces templates
The challenges identified by Porter in applying the five forces framework have certainly
been observed by others. Any instructor teaching a strategic management course or a
consultant working with clients has witnessed the same issues. But in an intensive,
professional MBA program in which students have a strong desire to take Monday
evening’s principles and bring them to bear on Tuesday morning’s business problems,
the challenges to proper and effective application of the five forces framework comes into
much sharper focus. It was in such an environment that I made my first rudimentary
attempts at developing a guide to help managers and students apply the five forces
framework to their companies. Over the course of time, I continued to refine the emerging
set of templates as I interacted with different types of students, consulting clients,
academics, and professional industry analysts. My students and I used the templates to
analyze large, small, and entrepreneurial businesses; government agencies; nonprofit
and charitable organizations, and other types of organizations.
As the templates improved, students’ strategic insight improved. Rather than
exhibiting a superficial familiarity with terminology like switching costs and exit
barriers, students and professionals using the templates seemed to have a deeper
understanding of the underpinnings of industry structure. This translated into more
nuanced recognition and exploitation of competitive industry dynamics. Granted, not
all users of the templates have become proficient in the application of the five forces
framework – far from it in many cases. However, in my experience, each of the
challenges described earlier regarding the application of the five forces framework is
lessened significantly when these templates are used. The latest versions of these five
forces templates are provided in Appendix 1.
As to the order in which the five forces are presented in the templates (competitive
rivalry, buyer power, supplier power, new entrants, and substitutes), there are two
primary reasons for the order I decided to use. First, Porter presents them in different
orders himself, implying there is no correct order. In 1980, he uses the following order:
new entrants, competitive rivalry, substitutes, buyer power, and supplier power. In
2008, he presented them in a different order: new entrants, supplier power, buyer
power, substitutes, and competitive rivalry.
Second, by trial and error, I have found this particular order most effective. My
experience with MBA and undergraduate students alike is that they are most familiar
with concepts regarding competitive rivalry. They understand direct competition from
previous business classes as well as life experiences. Therefore, I place competitive
rivalry as the first force to examine in an attempt to start with the most familiar
concepts. The second and third forces are buyer and supplier power, in that order.
Typically, students and practicing managers are familiar with distribution channels
and supply chain issues, so these two forces are not as challenging to grasp. The fourth
force is the threat of new entrants. This is not a force some students and managers
have thought about before in much depth, so it is placed fourth so that
students/managers can have some momentum upon which to build. And finally, the
Porter’s five
forces
framework
35