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What are the limitations of Porter's five forces in the digital era?

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Porter's five forces is a popular framework for analyzing the competitive environment of an industry. It helps you identify the sources of bargaining power, rivalry, threat of entry, threat of substitution, and complementary products or services that affect your profitability. However, this model has some limitations, especially in the digital era, where the pace of change, innovation, and disruption is high. In this article, we will discuss some of the criticisms of Porter's five forces and how you can adapt it to the current business landscape.

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Embrace scenario planning:

Use techniques like trend analysis or foresight to anticipate industry shifts. This helps you prepare for future changes, ensuring your strategy remains relevant and robust.### *Expand beyond industry boundaries:Look for opportunities in adjacent markets or through partnerships. This approach broadens your value creation and capture, enhancing your competitive edge in the digital era.

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1 The static nature of Porter's five forces

One of the main drawbacks of Porter's five forces is that it assumes a stable and predictable industry structure. It does not account for the dynamic and complex interactions among the forces, or the impact of external factors such as technological, social, or environmental changes. For example, the emergence of digital platforms, such as Uber or Airbnb, has disrupted the traditional boundaries and barriers of entry in the transportation and hospitality industries. These platforms have created new sources of value and competition, and have reduced the bargaining power of suppliers and customers. Therefore, Porter's five forces may not capture the full extent of the opportunities and threats that these new entrants pose to the incumbents.

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Tiago Henrique Bona

Gerente de Tecnologia | Mestre em Dire??o Estratégica | Top Voice Project Management
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1. Foco limitado na competi??o direta entre empresas em uma indústria específica. 2. Dificuldade em acompanhar as mudan?as rápidas e imprevisíveis no ambiente digital. 3. Subestima??o do impacto da inova??o tecnológica na dinamica competitiva. 4. Pouca considera??o ao poder dos consumidores e fornecedores, especialmente em indústrias digitais. 5. Falta de abordagem para lidar com a globaliza??o e interconex?o, que ampliam o escopo competitivo além das fronteiras tradicionais.

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced Scorecard Professional (BSP) & Senior Associate | Blue Ocean Strategy Certified | Six Sigma Black Belt
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The model may not accurately reflect fast-changing industries influenced by technology, regulations, or consumer preferences. It may need to catch up in capturing the fluidity of markets disrupted by digital technology and internet-based business models. Therefore, while the model provides a foundational analysis, using it alongside other tools that consider the dynamism of modern business environments is beneficial.

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Alan S. Michaels

Director of Industry Research @ Industry Knowledge Graph LLC | MBA Visit IndustryKG.com
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This is the easiest (trick) question ever (much easier than the trick question in My Cousin Vinny). There is NOTHING static in Porter's five forces. Obviously, the AI training model did not read chapter 8 in "Competitive Strategy" nor read past page 7 in "Competitive Advantage."

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José Antonio Venegas

Business Consultant
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While Porter's Five Forces remains a valuable tool for understanding industry structure and competitive strategy, its application in the digital era may require adaptation or supplementation with other models and theories that better account for the nuances of digital markets and the rapid pace of technological change. Integrating insights from newer frameworks that consider the unique characteristics of digital economies, such as platform theory and the role of data, can provide a more comprehensive view of competitive dynamics in today’s business environment.

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Priyanka Gautam

"Transformative HR Leader: Crafting Exceptional Teams and Cultures for Sustainable Success" | "Strategic HR Recruiter | Connecting Top Talent with Innovative Organizations for Mutual Growth"
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Porter's Five Forces may overlook rapid technological changes, the importance of network effects, data-driven strategies, and the prevalence of disruptive innovations in the digital era.

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2 The narrow focus on industry-level analysis

Another limitation of Porter's five forces is that it focuses on the industry-level analysis, rather than the firm-level or the market-level analysis. It does not consider the differences in the strategies, capabilities, resources, and performance of individual firms within the same industry. It also does not address the variations in the preferences, needs, and behaviors of different segments or niches of customers within the same market. For example, Netflix and Disney+ are both competing in the online streaming industry, but they have different value propositions, target audiences, and competitive advantages. Similarly, Apple and Samsung are both competing in the smartphone industry, but they have different customer loyalty, innovation, and pricing strategies. Therefore, Porter's five forces may not reflect the specific strengths and weaknesses of each firm or the diversity and complexity of each market.

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Alan S. Michaels

Director of Industry Research @ Industry Knowledge Graph LLC | MBA Visit IndustryKG.com
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Porter's five forces are used to define an industry (like Paper Towels Manufacturing). A "firm-level" analysis (aka: Corporate Strategy) starts with answering the question, "In which industries does the firm compete? Examples at https://IndustryKG.com

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced Scorecard Professional (BSP) & Senior Associate | Blue Ocean Strategy Certified | Six Sigma Black Belt
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I think this which can be both a strength and a limitation. It effectively evaluates the competitive dynamics within an industry but often overlooks factors like company-specific resources and capabilities, which can be crucial for strategic planning. For instance, two companies within the same industry might face the same external forces, but their internal resources could lead to different strategic approaches and outcomes. Moreover, this model may not fully account for the influence of external macro-environmental factors such as political, economic, sociocultural, and technological changes.

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3 The limited scope of value creation and capture

A third criticism of Porter's five forces is that it has a limited scope of value creation and capture. It focuses on the competitive forces that determine the potential profitability of an industry, but it does not address how firms can create and capture value beyond the industry boundaries. It also does not account for the role of collaboration, cooperation, and co-creation among the industry players, or the impact of social and environmental responsibility on the long-term sustainability of the industry. For example, Google and Facebook are not only competing in the online advertising industry, but they are also creating and capturing value in other domains, such as cloud computing, artificial intelligence, or social networking. They are also collaborating with other firms, such as telecom operators, content providers, or regulators, to enhance their offerings and reach. Moreover, they are facing increasing pressure from the society and the government to address the ethical and environmental issues that their operations generate. Therefore, Porter's five forces may not account for the multiple and evolving sources of value creation and capture that firms can pursue in the digital era.

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4 How to adapt Porter's five forces to the digital era

Porter's five forces is still a valuable tool for comprehending the competitive environment of an industry, yet it needs to be adapted and supplemented with other frameworks and methods to capture the complexities of the digital era. To do this, use Porter's five forces as a beginning point and consider how the forces may change over time, or how they may interact with external factors. Utilize scenario planning, trend analysis, or foresight techniques to plan for future developments in the industry. Additionally, supplement Porter's five forces with other models that focus on firm-level or market-level analysis such as SWOT analysis, value chain analysis, or customer journey mapping. Identify your core competencies, competitive advantages, and value propositions in comparison to your rivals. Segment your customers and understand their needs, preferences, and behaviors. Also, widen your scope of value creation and capture beyond industry boundaries. Consider the opportunities and threats that come from the convergence or emergence of new industries, markets, or technologies. Leverage existing or potential partnerships to increase your offerings and reach. Incorporate social and environmental responsibility into your strategy and operations to communicate your impact to stakeholders.

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Amine Khatouch

Senior Associate at Boston Consulting Group (BCG)
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To adapt Porter's five to the digital era, it's essential to take into account the much higher speed on innovation nowadays but also changing nature of inputs in coherence with digital ecosystems, network effects and the increasing power of the consumers.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Tristan Pelloux

Founder @ StrategWhy & Fintech Review | Strategy Execution & OKR, Corporate Finance
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Porter's Five Forces and similar classic frameworks like SWOT don't always work well in the real world. These methods can make things seem simpler than they are, not catching how quickly things can change online and offline. How easy it is for new companies to jump in, or how customer likes can quickly change. They don't fully consider how important online networks, data, and the blend of different digital services are. Companies that only use these old-school frameworks might miss out on new chances to innovate and grow in the digital space.

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Erick Herrera Porcallo

Director Ejecutivo en Grupo Funeza
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El modelo de Porter se centra principalme en dos actores fundamentales: los clientes y los competidores. El entrono digital en el que vivimos ha traído cambios significativos en el comportamiento de los clientes, que han pasado de ser simples espectadores, a ser parte activa y prioritaria de la conversación con las marcas. Son ahora los clientes los que tienen un papel predominante en la relación, llegando incluso a dar más relevancia a los mensajes, recomendaciones y comentarios de otros clientes similares a ellos, que a las propias empresas. Respecto a los competidores, el escenario digital en el que nos encontramos también ha permitido que haya más competidores y menos barreras de entrada, sin considerar la globalización de la economía

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What are the limitations of Porter's five forces in the digital era?

1

2

3

4

5

1 The static nature of Porter's five forces

2 The narrow focus on industry-level analysis

3 The limited scope of value creation and capture

4 How to adapt Porter's five forces to the digital era

5 Here’s what else to consider

Business Strategy

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What are the limitations of Porter's five forces in the digital era?

1

2

3

4

5

1 The static nature of Porter's five forces

2 The narrow focus on industry-level analysis

3 The limited scope of value creation and capture

4 How to adapt Porter's five forces to the digital era

5 Here’s what else to consider

Business Strategy

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