Corporate environment as a sixth force

Michael Porter’s Five Forces (The five forces (Porter)) has remained influential for four decades, while practitioners have repeatedly proposed additions. One candidate is the corporate environment: public institutions and collective bodies whose decisions can reshape industry economics.

When to use it

• Use the extension when government, regulation or collective institutions materially determine industry profitability, as they can in sheep farming.

Origins

During the 1990s, several consulting groups began treating the corporate environment as a separate sixth force. The extension aggregates the influence of external organisations that are not already classified as competitors, entrants, substitutes, buyers or suppliers. Porter accepts that government and other institutions can be decisive, but generally analyses their effects through the original five forces rather than assigning them a universal independent category.

What it is

The model asks whether public policy and institutional action help or hinder the business, and through which economic mechanism.

Local, central and supranational authorities may alter profitability through tax, subsidy, regulation, trade policy, law or control of access. The analytical question is whether that combined effect merits separate treatment in the industry under review.

How to use it

Define the industry and list the external institutions that can change demand, cost, capacity, entry, conduct or risk. Exclude actors already represented clearly in the original five forces, then assess the remaining institutional effects by impact, direction, probability and time horizon.

Relevant bodies can include:

Central or federal government, through tariffs and sales, corporate, value-added or labour taxes; subsidy; trade restriction; regulation; employment, health, safety and environmental law; industrial restructuring; and political stability.

Local and regional government, including counties, boroughs, provinces and states.

National regulators, such as Ofcom and Ofgem in the UK.

International rules and directives, including the Basel accords on financial-institution capital adequacy.

Pressure groups and collective organisations, including industry associations, trade unions and Greenpeace.

Test whether the corporate environment warrants a sixth force.

Corporate environment and public institutions

For each actor, trace the effect into industry economics rather than merely noting its existence. The European Union’s Common Agricultural Policy, for example, alters market signals in ways that can support small farmers while increasing consumer cost. Pressure groups can likewise change demand, supply, permissions and reputation.

Then compare the insight from a separate sixth force with the original model. Porter’s position is that the corporate environment can be a major factor without becoming an additional force; its influence may operate through rivalry, entry, buyer power, supplier power or substitutes. Retain the extra category only when it makes a distinct causal mechanism clearer.

Top practical tip

Map each policy or institution to its effect on price, cost, demand, capacity, entry or risk. This turns a broad environmental list into an economic analysis.

Top pitfall

Do not create a sixth force when public institutions merely modify an existing force alongside factors such as competitor numbers or market growth. Separate treatment must add explanatory value.

Further reading

• Porter, M.E. (two thousand and eight). “The Five Competitive Forces That Shape Strategy.” Harvard Business Review.
• Grundy, T. (two thousand and six). “Rethinking and Reinventing Michael Porter’s Five Forces Model.” Strategic Change.