Apr 2 2014, 10:52am CDT | by Forbes
Porter’s theories suggest that the strategy for success is to dominate suppliers, customers, and direct, indirect, and new competitors in order to eliminate threats. His theories encourage executives to bulk up, i.e. to buy their competitors to reduce competition and better control their markets and vendors. Taken to an extreme, this would lead to one company in each industry or a few companies in each industry (if regulators will not allow monopolies, as we hope) who can dominate their customers and vendors. But there are still some issues in addition to the problem with monopolies or oligopolies. If Company A dominates its industry and sells to Company B which also dominates its market, who wins in that relationship? Maybe they collude to take advantage of the ultimate customers.
Secondly, with size and oligopolies, executives will seek to protect the status quo to increase profits by focusing on low-risk, evolutionary improvements to keep up with their similarly inclined competitors. Their organizational and business practices will be designed for dominance in their industry as the industry is currently structured. They become big like Barnes & Noble or Borders – but less dynamic. I know you can see what is coming. When the rules of the game change, and the old structure crumbles, the giants of the industry become dinosaurs. Think about giants such as Digital Equipment, Control Data, Sears, and so many more. Porter’s theories seem to be designed to build large, lumbering organizations that survive due to size and lack of competition. In a fast-moving world, it could be disastrous. Porter’s theories can also be a problem for:
But the strategy is great for executives of the merging companies who receive giant packages for doing little. Talk to the CEO of Time Warner Cable who sold his company to Comcast, creating a potential monopoly. He will receive $80 million for a few months of work. The selling shareholders get a premium for their shares and the buying company gets more market power and the privilege to gouge customers. Who benefits? Shareholders, executives, and Wall Street. Who loses? See above.
Porter’s theories are also not a great fit for new-business development. It is tough for new businesses to use their size and clout to dominate because, usually, they have no size or clout unless they have some unique advantages such as a fantastic patent (like Qualcomm). But the competitive advantages for newer ventures change when new industries emerge with the introduction of revolutionary innovations, which was popularized by Christensen as “disruptive innovations.” Under Porter’s theories, this is one of the “forces”, i.e. threats that the company should eliminate. But history has shown that the giants dismiss revolutionary technologies or threats when their potential or threat is not clear. By the time the threat to the slow-moving, old-school business is evident, it is usually too late. This is how entrepreneurial companies like Microsoft beat IBM, or how Amazon beat Borders and Barnes & Noble.
How does this apply to new-business development? Billion-dollar entrepreneurs, who are the uncivilized hordes, often grow by defeating dinosaurs when a revolutionary industry emerges. They are the “threat” and they are riding a new trend that shall not be denied. But business-school professors seem to love the static (Porter) over the dynamic (Christensen). Wonder why?
MY TAKE: It is time to retire Porter’s five forces. Executives of giant companies should know that they are living in a dynamic world and even the biggest empire crumbles when it does not adapt to new, revolutionary threats. Jeff Pfeffer, who is an academic at Stanford put it very diplomatically when he noted that Porter is “partly right and largely wrong”. My advice to business-school professors who are teaching Porter is to understand that you are living in a dynamic world, not a static one. Christensen’s direction is better for a dynamic world where trends are changing, and competitors and customers and vendors cannot always be controlled. I have found that lessons from billion-dollar entrepreneurs show a clearer path to new-business development for entrepreneurs or for corporate renewal with limited risk in a dynamic world.
Source: Forbes Business
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