What is the drawback of the five forces model? Provide an example that shows this drawback. The example can be from your reading or from your own experience.

Question

What will be an ideal response?

Answer 1

Student answers will vary. A sample answer follows:

Although the five forces plus complements model is useful in understanding an industry's profit potential, it provides only a point-in-time snapshot of a moving target. With this model (as with other static models), one cannot determine the changing speed of an industry or the rate of innovation. This drawback implies that managers must repeat their analysis over time to create a more accurate picture of their industry.

Industry structures are not stable over time. Rather, they are dynamic. Since a consolidated industry tends to be more profitable than a fragmented one, firms have a tendency to change the industry structure in their favor, making it more consolidated through horizontal mergers and acquisitions. Having fewer competitors generally equates to higher industry profitability. Industry incumbents, therefore, have an incentive to reduce the number of competitors in the industry.

The U.S. domestic airline industry has witnessed several large, horizontal mergers between competitors, including Delta and Northwest, United and Continental, Southwest and AirTran, as well as American and U.S. Airways. A more consolidated airline industry is likely to lead to higher ticket prices and fewer choices for customers, but also more profitable airlines.