Porter's Model in Today's Markets
We wrote this essay in support of an article that appeared in HBR titled "Why Porter's Model No Longer Works" by Nilofer Merchant.
In the strategic management field , the scholars agree upon dividing strategy frameworks into 3 main classes (or paradigms). A fourth paradigm (dynamic capabilities) was accepted later as an extension of the RBV.
Competitive forces (~Porter)
Resource based-view (RBV) and
Based on Porter model, most of today's hi-tech firms (from Amazon to Gilead Sciences) would not be able to penetrate the market. So what made it possible? From 1982 to 2002, only HP and Intel survived in the first 10 Silicon Valley firms. How did firms such as Google and Gilead rise when the 5 forces didnt "allow" them to rise?
As Lewin said:
"there is nothing as practical as good theory"
So, it is important to understand not only why the Porter model "no longer works today" but also the specific nature of each paradigm such as:
nature of the economic rents
the fundamental unit of analysis
how the framework sees the strategic problem and
its individual intellectual roots.
The Competitive Forces Model (CFM)
In that respect the CFM has its roots in the Bain-Mason system of beliefs where the industry plays an important role whereby economic rents are created at the industry level (monopoly rents). The Porter model (CFM) assumes that differences are related mainly to "scale"; the industry and sub-sectors can be segmented and no attention is given to the ability to asset orchestrate or analyse the changes at the fringes of firm's respective industry into the far ecosystem. The entry deterrence and positioning play a central powerful role. The competitors push against the productivity frontier in a race to zero margins - a very difficult game that is still, unfortunately, played today
In the CFM, resources and balance sheet of assets matter.
It is no surprise that the CFM fails in today's high velocity markets, hence a new approach is required.
The Dynamic Capabilities Framework
The Dynamic Capabilities- based framework (DC) recognizes that the economic rents derived by the firms are function of firm's ability to innovate, sense, adapt and re-configure competencies in order to be able to align themselves with rapid changes that take place outside their immediate industry/sub-sector.
The DC framework is an extension of the RBV and advocates agility and time-dependent responsiveness qualities.
In the DC model, asset orchestration and intangibles matter
The DC model recognizes Schumpeter's creative destruction as one avenue for innovation (see my article on systemic vs autonomous innovation); the continuous innovative process (due to the diffusion of innovation) and the ability to sense, adapt and re-configure competencies in order to remain relevant. As well, the importance of intangibles is key to the DC model: in 1985, approx 70% of the value of S&P500 Co’s sat on its balance sheet in form of tangibles (ordinary capabilities)… today over 80% of value lies in intangibles.. they are difficult to trade (because property rights have fuzzy boundaries), the values are context dependent and tied to the organization.
One central element in the DC approach is the role that leadership plays in the strategic management process, in particular
a.) the learning process and
b.) the re-configuration process
The successful leaders of today need to go back to basics and do what leaders are meant to do: deal with change and culture.
There is also a very important distinction to be made between:
change management vs change leadership
which may be the topic of another article - but essentially change leadership is an engine on the whole change process, it is about 'big visions". In contrast, if you look at what most consultants do when employed by a client on a change management program is to "manage change"..utilizing tools that facilitate pushing things along, trying to minimize disruptions, i.e., keep things under control. Big difference and fundamentally different!
Why do I raise the leadership issue? Simply because the DC framework is useless in the absence of strong leadership.... in which case the framework reverts to RBV (at best) or to CFM (at worst)...not only in theory but also in practice.
As Teece plainly put it:
in dynamic capabilities framework, leadership matters.
Overall, I believe that the subdued global growth that the world experiences today forces leaders to vector in on the operational side of things leaving them exposed to being unable to innovate and re-configure. I also believe that high-tech industries (eg. semiconductors, biotechs) will continue to innovate, adapt and re-configure at a higher rate than the old monopoly-based industries such as energy and resources.
Clear examples emerge from watching the various M&A intents : Intel buys Mobileye to make inroads into a future technology market (outside Intel's core competences) while Wood Group buys AMEC FW to anchor themselves in more-of-the-same market (crowded and in decline).
Hence, leadership is key and ambidexterity should be valued.
The original author of the HBR piece is right. Societies move, technologies progress.
If you are an executive today, the worst thing you can do is:
try to sell your Board a faster horse when someone out there is about to discover the combustion engine.