Applying 5-Force Model and Value Chain Analysis

Michael Porter's 5-Force Model and Value Chain Analysis have been much taught in business programmes; students learn them in strategic  management, in marketing strategy and strategic management accounting, for example. Nevertheless, the quality of their application is very often quite poor. What is the main deficiency in students' application of these two models?

A good starting point to understand the problem is that students do not have time to study the original work of Porter. When students only spare time to study Porter's models in summary form in standard textbooks or from some Internet websites, their knowledge of these two models are necessarily shallow. Even if students take time to study these two models in Porter's original works, they will find that the line of reasoning in Porter's work not easy to follow, especially when students' English is not good at the same time.

Learning Porter's work requires time and a sincere attitude toward professional development in management. When Porter's models are applied in assignment works, students should pay attention to the following point:

Applying 5-Force model is not just to provide examples as related to the 5 forces or to provide examples as related to the various value activities in Value Chain analysis. In the case of 5-Force model, students need to come up with an assessment of how the various forces interact to influence the intensity of competition in  an industry now and in the future. The intensity of competition will affect the profitability, thus attractiveness of the industry. In the case of Value Chain analysis, the review of various value activities need to come up with an assessment of the cost structure of the value chain and the cost-effectiveness of the value chain to support the business's strategy under review. In the discussion with value chain application, students should also make some explicit efforts to carry out linkage analysis and cost-driver analysis to support their assessement view of the company's cost structure under review.

As a result of using Porter's models in the analysis, students should be explicit about their assessment view of the company under review on its strategic positioning with justifications that are theory-driven (in this case, in terms of 5-Force Model or Value chain analysis). Subsequently, students need to clearly endorse their recommendations with their assessment views so derived. Recommendations could, for example, discuss how companies should influence the 5-forces to their advantages or how companies should further exploit value chain linkages and value activity cost drivers to further improve the cost structure of their value chains.

This leads us to a more fundamental question: how to do that? My answer is relatively simple: via sincere study of Porter's work and other writers' work. There is no short-cut for improving theory-driven analysis skill. Lastly, I would like to point out that students could also watch Porter's lectures on strategic management, including his discussion of 5-Force model in youtube.