Is Michael Porter still relevant in today’s fast and connected markets?
October 31, 2016
Michael Porter is seen as the guru’s guru, the world’s best management thinker, the godfather of strategy. Born in Ann Arbor, Michigan, 69 years ago, he credits his own Harvard professor Chris Christensen with inspiring him and encouraging him to speak up during class, hand-writing Porter a note that began: “Mr. Porter, you have a lot to contribute in class and I hope you will.”
At Harvard, he took classes in industrial organisation economics, which attempts to model the effect of competitive forces on industries and their profitability. This study inspired his “five forces analysis” framework. 18 global bestselling books later (including Competitive Strategy, Competitive Advantage, Competitive Advantage of Nations, and On Competition), and a 6-time winner of the McKinsey Award for the best HBR article of the year, Porter is said to be the most cited author in business and economics
In an interview for “The Lords of Strategy” Porter said: “What I’ve come to see as probably my greatest gift is the ability to take an extraordinarily complex, integrated, multidimensional problem and get arms around it conceptually in a way that helps, that informs and empowers practitioners to actually do things.”
Just as a reminder of his Five Forces … Porter’s model assumes that there are five important forces that determine competitive power in a business situation. These are Supplier Power (how easy it is for suppliers to drive up prices), Buyer Power (how easy it is for buyers to drive prices down), Competitive Rivalry (the number and capability of your competitors), Threat of Substitution (ability of your customers to find a different way of doing what you do), and Threat of New Entry (the ability of people to enter your market).
Are the Five Forces still relevant today?
Competitiveness has always been at the heart of Porter’s thinking. All of his bestselling books have focused on this theme, and his definition of strategy (“the creation of a unique and valuable position, involving a different set of activities”) is based on your competitive difference, or advantage.
I have five big problems with Porter’s famed but outdated approach. This is how I believe strategy has changed, with the new 5 priorities for strategic thinking:
- Strategy is about direction and choices … In dynamic markets, strategy becomes a roadmap to future growth, finding the best opportunities to shape markets to your advantage, in ways that create long-term sustainable value. It is about where to compete, and then how. How is not just about being different, but developing purpose, more innovative postures and trajectories, business models and customer experiences, programs and tactics. Porter’s model suggests that markets are stable, and finding a position is enough to survive almost statically over time.
- Customers matter more than competitors … We all recognise the power shift to customers, the search for deeper insights, analytical and intuitive, predictive and personal, to be relevant, to find and engage the best customers, and grow with them over time. Customer-centricity has become an enduring pursuit of every business, not just in terms of serving them well, but in recognising them as a guiding star. Porter hardly mentions customers relative to competition. I would suggest that it is more important to be relevant than different. Positioning is about relevance more than difference.
- Markets are dynamic, so are competitors … In connected and convergent markets, boundaries blur and competitors can not only challenge you physically and virtually from any part of the world, but also from other sectors. Equally for you, your strategic opportunity might be to move across these sector and geo boundaries, or fuse them together. Communication becomes media becomes entertainment becomes sport. Competitiveness matters of course, but it is more about out-thinking others – rethinking markets and business models, solutions and experiences – then just being a little different – cheaper or better.
- Organisations are ecosystems, not value chains … The traditional linear model of suppliers in and distributors out, just doesn’t work anymore. We used to assume we needed to make things ourselves, to focus on our core competencies. The thing is, these competencies are usually the things that made is good in the past, but are unlikely to do so in future. We need to let go of our product, competence, and integrated mindset. They limit our thinking, and blinker our strategy. Somebody else can do most of what we do better, so lets partner with them, and maybe even find complementary services too. Ideas are out starting point, and advantage.
- Big is not always best … The implicit assumption is that companies win through scale. More widgets, more people, more revenue, more share, more power. This is increasingly not so. Many companies sought to be big to generate cash to cover the huge capital cost of big factories and operations. They addressed homogenous markets with largely undifferentiated products and services, and each extra product added equal profit. That’s old thinking. Today’s winners succeed through better vision and ideas, then executing them more profitably. Typically with partners, typically laser focused on niches of highly relevant customers across the world – staying small, agile and smart.
In my view, today’s winning strategies are about creating the future, engaging the customer, and creating long-term value for all stakeholders in more innovative ways. Competitive advantage is not just about positioning, but about out-thinking and out-performing the competition. Strategic thinking is about making sense of the future better than others, and then shaping that future to your advantage.
Of course, my thinking is not unique – it is common sense, and what you see in the best companies today – and you can read about my approaches, tools, workshops and more here:
- Strategy … shape the future, change the game, find new growth
- Customers … being relevant, deeper insight, design thinking
- Innovation … rethinking business models, and customer experiences
So is Michael Porter still relevant today?
It might sound like no. Certainly to his obsession with competitors. But Porter has actually changed too. Here are extracts from two articles about Porter’s relevance in today’s markets. The first by Nilofer Merchant argues that five forces is no longer relevant in an era of social, collaborative, and networked businesses. The second by Laura Levis focuses on Porter’s new passion, social progress, and making it equal to prosperity.
Extract 1: Strategy in a digital and social world
Imagine that you wanted a new home theater system. But instead of spending hours in Best Buy or on Amazon comparing configurations and assembling the parts you needed, you could signal what you wanted and a company would create it for you. You might simply Pinterest the elements you liked, including information about your space or noise limitations (“One-bedroom apartment on busy street in New York,” or “suburban space that needs stuff protected from little kids”), and then have a retailer give you a personalized, optimal configuration.
Right now, social is largely seen as a way to amplify messages (“Like” us on Facebook!) or to create conversations around customer service (“We’re so sorry you’re having a problem,” the persistent tweet from @ComcastCares). These two key functions — Marketing and Service — are regularly discussed as shaped by social era dynamics.
But the social era can — and will — be more than that. It will help us decide what we make, how much we make, and how we finance that production. While social media doesn’t shift Porter’s model, the social era surely does.
Big Isn’t Enough. Winning in the social era is about being fast, fluid, and flexible. Let’s think about the way that changes our modes of production. Size once gave organizations purchasing power. Being big used to enable high barriers-to-entry, keeping out potential competitors. Big had the dollars to buy the mass-market access to consumers back when mass media was the only way to reach an audience. But when the capital requirements to enter markets have declined, the marginal cost of reaching consumers is effectively zero, and one-off production is not hard to do… being big offers a much smaller advantage than it used to. Being big ain’t enough, anymore.
Most existing big organizations — the 800-pound gorillas — subscribe to Michael Porter’s value chain framework. As I mentioned in the first part of this series, this model optimizes for efficient delivery of a known thing. Organizationally it means Z follows Y, which follows X. It carries with it one fundamental assumption: that customers are tangential to the process.
There is no question that Porter’s work has helped shape (some would say, “invent”) modern-day strategy. I’ve used his ideas for over 20 years of running companies big and small, and I consider myself a fan of his thinking. But, to put it bluntly, Porter’s value chain is antiquated in the light of the social era. It was created at a time when being big and having scale was in itself a key aspect to competitive advantage and profitability.
Generic vs. Distinct. People buy two categories of things: the distinct and the generic. The distinct items are the things that have a limited quantity, that are artisanal in nature, and that are worth paying a premium for. The generic items are, well, the things you might find on Amazon.
When companies like Best Buy or Target are simply aisles of what you can find online, then it’s easy enough to become the storefront for Amazon. Everything that is undifferentiated is going to be delivered in ever more efficient, low-cost ways. Porter’s value chain is well suited for this mass-market, cost-driven approach, where customers remain at the end of the value chain.
But for organizations wanting to thrive in the social era, being distinct is key to both profitability and winning. While there has always been a market for bespoke, differentiated items, until very recently that market served a tiny fraction of the uber-rich. But today, both macroeconomic forces, and technological advances mean that customized products aren’t just for the one percent. Instead, customized products and experiences can be for everybody, at least some of the time.
How will the smartest, nimblest companies move away from less-profitable generics and into more-profitable distinct goods and services? By using the rules of the social era.
Extract 2: Social Progress beyond Profit
What are the ingredients of a healthy, inclusive society—one that offers its citizens opportunity, happiness, and a positive quality of life? According to Lawrence University Professor Michael E. Porter, models of human development based on economic growth alone are incomplete; nations that thrive provide personal rights, nutrition and basic medical care, ecosystem sustainability, and access to advanced education, among other goods—and it is possible to measure progress toward providing these social benefits.
Porter’s 2015 Social Progress Index (SPI) developed in collaboration with Sarnoff professor Scott Stern of MIT’s Sloan School and the nonprofit Social Progress Imperative—ranks 133 countries on multiple dimensions of social and environmental performance in three main categories: Basic Human Needs (food, water, shelter, safety); Foundations of Wellbeing (basic education, information, health, and a sustainable environment); and Opportunity (freedom of choice, freedom from discrimination, and access to higher education). Porter considers the index “the most comprehensive framework developed for measuring social progress, and the first to measure social progress independently of gross domestic product (GDP).”
The index, he explains, is in some sense “a measure of inclusiveness,” developed based on discussions with stakeholders around the world about what is missed when policymakers concentrate on GDP (which tallies the value of all the goods and services produced by a country each year) to the exclusion of social performance. The framework focuses on several distinct questions: Does a country provide for its people’s most essential needs? Are the building blocks in place for individuals and communities to enhance and sustain well-being? Is there opportunity for all individuals to reach their full potential?
The United States may rank sixth among countries in terms of GDP per capita, but its results on the Social Progress Index are lackluster. It is sixteenth overall in social progress: well below Canada, the United Kingdom, Germany, and Japan in several key areas, including citizens’ quality of life and provision of basic human needs. The nation ranks thirtieth in personal safety, forty-fifth in access to basic knowledge, sixty-eighth on health and wellness, and seventy-fourth in ecosystem sustainability. “We had a lot of firsts in social progress over the years in America,” Porter points out, “but we kind of lost our rhythm and our momentum.”
About 20 or 30 years ago, for reasons Porter says he cannot completely explain, the rate of progress in America began to slow down. As a society, he points out, Americans slowly became more divided, and important priorities such as healthcare, education, and politics suffered. “We had gridlock, whether it’s unions or whether it’s ideological differences, and—although we’ve made some big steps in certain areas of human rights like gay rights—if you think about the really core things like our education system and our health system, we’re just not moving,” he says. “I think our political system isn’t helping, because we’re all about political gains and blocking the other guy, rather than compromising and getting things done.”
Meanwhile, he notes that even though other fast-growing nations such as India and China haven’t been able to attain a level of social progress commensurate with their economic progress either, certain countries such as Rwanda have “knocked the cover off the ball” in terms of social progress. “They went through a genocide, were devastated, and, to bring the society together, there was a consensus, led by the president, that their first job was to re-energize and restock the society and the capacity of their citizens,” he says. For example, the country achieved a 61 percent reduction in child mortality in a single decade, and today, primary-school enrollment stands at 95 percent. Rwanda also ranks high for gender equity, as women constitute a majority of the parliament—partly he says, because a lot of men were killed, but also because the country set out to be a place where women are not just equals, but leaders.
Porter hopes his continuing work on the index will help explain why the United States is “doing poorly” relative to other countries that are doing well. His team had “a pretty big mountain to climb” just to get the SPI recognized by national leaders and scholars, mainly because GDP has become the main way of measuring a nation’s success. The goal now is to get the United States to use their tool at the state and city level to assess local performance, and then set priorities for improvement.
In terms of progress for the average citizen, Porter warns, the United States is more threatened now, globally and economically, than it has been in generations. This phenomenon, he argues, reflects a legacy of anti-progressive politics, as well as bad economic policy. As a result, “We can’t fix our tax system, we can’t improve our infrastructure, we can’t deal with our public schools, and we can’t rein in this excessively costly legal system that we have that doesn’t necessarily achieve better results.”
Yet the Social Progress Index, Porter hopes, could prove to be a useful tool that will propel the business world in the right direction. He is currently working with leaders on the national level in several countries, including Brazil, Colombia, and Paraguay, where the SPI is a core element of their national development plan. “Now the general awareness is that this is a critical tool and a necessity—people are starting to use it in thinking about how we [achieve social progress] in our country, in our society, in our region, in our city,” he says. “We’re encouraged—but we’ve got a long way to go.”
Porter has found a new passion … Progress beyond profit
Is Porter still interesting, relevant and important today? Yes! Not because of his old thinking – the competitive strategy, the five forces – but because of the way he has reinvented himself, or better, seen a higher purpose. To see the important role of business in society, and how it wins when the world wins.
You can meet Michael Porter at the Thinkers50 Europe Business Forum in Odense on 9-10 May 2017, when he will deliver the prestigious European Business Lecture, focusing on the challenges and best opportunities for business leaders to drive growth and innovation in today’s world.
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