Home > Strategy > What is left of Porter`s five forces model?

What is left of Porter`s five forces model?

In November 20th 2012, Eteve Denning wrote an article in Forbes under the title ”What Killed Michael Porter’s Monitor Group? The One Force That Really Matters”.

 

It was a very critical approach to Porter`s main contribution to the theory of Strategic Management, and was very unfairly supported in the fact that the Monitor Group, (once created by Porter as a consulting firm that applied his theories), had been forced to file for bankruptcy protection.

 

The five forces model allows firms to protect and preserve in time a situation of above-normal profits, whether through strategic relationships with customers, providers, competitors, potential entrants and substitutes. Firms with above-normal profits were those that were able to introduce some oligopolistic strength to their relationships with those five forces, some kind of barrier to the competing inertia they exert.

 

What he discovered was a way to determine the structure of the market, so that firms could alter (or use) the way the Harvard Industrial Economics paradigm understood market forces; according to Bain and Mason, in the 1920`s, the structure of a market determined the Conduct of participants, and consequently, certain effects were obtained: price, volume of the market, efficiency, and so on. Somehow Porter discovered that market structures are an endogenous variable, that depended on the conduct of the market agents, so that insofar as they were able to alter the structure, they could also obtain the above-normal profits, and preserve them in time as desired.

 

Steve Denning remarks the thought that Porter`s recommendation was to avoid competition, so as to preserve the profits, which is slightly unfair. It does not follow from his model that a company could forget about customer`s evolving needs, new technologies, new products and services, (substitutes or not). When talking about emergent industries in which a firm could invest, his proposal was that a decision would be good if the ultimate structure of the market (not the initial one) allowed to obtain above-average profits.

 

But still Denning and others view Porter as considering the market as a given, where the customers exist and continue to be there for the best strategist to obtain the above-average profits for ever. And he unfairly takes the example of his consulting group, that, briefly said, used the five-forces model, forgot about adding value to its customers, and failed. As Denning puts it, for Porter “Strategy is all about figuring out how to secure excess profits without having to make a better product or deliver a better service”.

 

Denning nevertheless recognizes Porter tries to correct his failure in 2011 with his article about “Shared Value”, which is defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.” Even tough, Porter is not given too much credit for that.

 

Another critic by Denning suggests the time in which Porter created his model, was a time of oligopolistic firms, where it was easier to preserve profits in time. But he argues this time is past, as globalization and internet destroyed the capacity by firms to build barriers; new products and entrants constantly redefine markets. Disruptive innovations have a formidable strength to alter the profit capacity of industries, thus to turnaround the players group in each industry through time.

 

He uses the examples of Zara, Amazon, Salesforce, and some others, as firms that centered their efforts in innovation and adding value to their customers, instead of in protecting whatever profit situation they might have had at a certain moment in time. But at the same time, he states his doubt about the fact that continuous innovation can be sustained.

 

As I see the answer to that doubt, continuous innovation can be obtained in some cases for some time, but the big amount of resources obtained by those firms might help them avoid innovation by others, whether by purchasing succesful start-ups, by blocking their commercial possibilities, and so on. This has been a normal practice by so-called disruptive firms once they are not the first innovation champion in the industry: take Microsoft, Google, and  many other firms in so many smaller markets and you will still see a lot of this five-forces model battle. All those firms fight for their trademark, in order to build barriers; all of them fight with each other with crossed and multiple patents, more useful against competitors that for the firm itself; they purchase small innovative firms that lack resources to fight with their fantastic financial situation, (what has that to do with customer satisfaction?).

 

Perhaps the time passed for the model as a single tool, but his place is still well among us, and for long.

 

In her book “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business”, Rita McGrath takes a more moderate approach than Denning. She admits “sustainable competitive advantage” is not an acceptable unique concept today, and advocates for what she calls “transient competitive advantage”.  Some of the most successful companies have very fast seen their competitive advantage fail, (just think of RIM-Blackberry), so that a firm cannot rely on protecting it, but to keep itself in a continuous process of reconfiguration. And there is also a need to know this is the new environment, so as to avoid sunk costs that are incompatible with the idea of constant reconfiguration.

 

This is perhaps a more pragmatic approach: keep the above-average profits while you can, but keep always looking for innovation and reconfiguration, so as to have a “transient competitive advantage”.

Advertisements
  1. February 23, 2014 at 12:45 pm

    Let`s give an example of some companies looking for a “transient competitive advantage”; in the article below by Wayne Busch and Juan Pedro Moreno, the authors explain how barriers to some parts of the banking activity are falling, (payment methods and other).
    So, banks shouldn`t just try to keep their defenses up, but they should use their assets in a broader way; their assets are valuable in the digital world, so some banks, (and particularly Spanish BBVA, -Garanti is partly owned by it-), are trying to develop technologies that help them keep customers near them, a feature that seems to be near to disappear if things continue without banks reacting. BBVA and others try to go into retailing activities, into mobile apps, etc.

    An interesting reading, indeed.

    http://blogs.hbr.org/2014/02/banks-new-competitors-starbucks-google-and-alibaba/

    Like

  1. July 6, 2015 at 9:42 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: