Porter’s Five Forces Are Dead
Web 2.0 has brought about interesting changes in business strategy. Initially, the generally accepted framework for business strategy, Porter’s Five Rules, applied across the board, no matter the sector or industry. Today, Porter’s rules are under fire.
WinMarket has a great post (although it is an ‘alpha’ version) about the differences between traditional business framework and the new, perceived 2.0 framework. In it, Nilofer Merchant details the following:
- Manufacturing costs have been reduced
- Investment costs have been reduced.
- Marketing is decentralized.
- Many different revenue models have emerged.
Personally, I think that Porter’s model needs to be tweaked, no different than some of Jack Welsh’s quotes and teachings do. But elements of the legacy view are still true. Every business still has customers and suppliers, just in different forms. New entrants and substitute products must be taken into consideration, even in an online marketplace. And competitive rivalry still exists, hence Google and Microsoft.
Web 2.0 opens up a lot of new revenue models and a very low cost of entry, but a startups external environment needs to be accounted for which isn’t apparent in the WinMarkets article. External factors is one of the reasons I truly don’t understand how there can be so many clones. Digg for example has 26 comptetitors the last time I checked, which tells me that someone either hasn’t done their homework, or doesn’t care. Either way, externalities need to be considered.
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So, why do you think Porter’s 5 forces are dead? :)
I don’t see any compelling logic against it. Merchant’s article doesn’t really have any substance against Porter’s 5 forces. For example, Merchant holds up Dell as the poster child of the Porter 5 Forces model, but Dell is also, for example, a poster child of the Blue Ocean Strategy approach (see Blue Ocean Strategy, pp. 202-203), an approach often taken to be a polar opposite of the Porter strategic competition approach.
But Dell didn’t say ‘we’re going to create an example of Porter Strategy’ or similarly for Blue Ocean Strategy. What Dell did was innovate an effective new business model that added value for customers and allowed them to protect a product space while undermining traditional competition (which I think, is more of what Blue Ocean was about than what Porter was about).
What Merchant does is get caught up in analysis about effective market strategy in the modern world. But her argument does nothing to address let alone invalidate the relevance of the Porter 5 Forces model in the modern world. She does not argue that customers, suppliers, etc are no longer relevant in understanding market dynamics, she just says the market structure has changed.
This is not to say whether or not Merchant’s article is of value or whether she has a good point to make. However, her headline claim that the Porter 5 Forces model is dead is not supported by the article and, as far as her article goes, seems to be just rhetoric to attract attention, as far as I can see. And if so, is it worth repeating? ;)
But let me know if you think I missed something important . . .
Regards
Lauchlan, you do have a point. The article indeed is not hitting directly on Porter’s 5 Forces.
What Jason means, however, is that the information age along with its new technologies and platforms and changing the competitive landscape in such a way that maybe those 5 forces need to be reviewed.
For instance the attractiveness of an industry under the Porter’s framework was based on factors that may not be relevant anymore. What are the barriers of entry on the Web 2.0 scenario as Jason mentioned? It is really difficult to figure that out when have 2 graduates that create a 100 billion dollar Goliath out of their dorm rooms, and all in 5 years…
Daniel,
Thanks for your reply. That’s the way I understood the article too. And it’s a valid point to make.
I just wanted to note/emphasise that it doesn’t in any way invalidate the Porter 5 forces model, it simply argues that the context in which it is to be applied has changed. Which is, to my mind, quite a different point to make than the claim in the headline of your blog and Merchant’s blog to the effect that “the Porter 5 Forces Model is dead” which to my mind implies obsolete or no longer relevant or appropriate. One could see how a reader could get an impression or idea that is not supported at all by the article . . .
Kind regards
Lauchlan Mackinnon