Michael Porter, Adaptivity, and Digital Strategy

HelloMonday, January 9, 2012

Let’s talk about Michael Porter, the Five Forces, and what they mean today.Monday, January 9, 2012

A Short Refresher, Please. Michael Porter introduced the Five Forces framework in 1979. Accolades ensued, and 1 Supplier Power their wide embrace by practically everyone with an MBA has created strategic homogeneity across most established industries. 2 Customer Power 3 Threat of New Entrants 4 Threat of Substitute Products 5 Industry Rivalry Michael PorterMonday, January 9, 2012

In 1979, the Internet didn’t exist. You could build an entire business model using the ﬁve forces on the back of strong distribution, and that’s just what Porter’s disciples did.Monday, January 9, 2012

What does distribution do?Monday, January 9, 2012

Distribution 1 Supplier Power 2 Customer Power A strong distribution network destroys supplier power. If they want access to your customer base as 3 Threat of New Entrants a proxy to sell raw materials and manufacturing to, 4 Threat of Substitute Products they have to go through you. It’s a side effect of limited competition, but in no way a trivial one. 5 Industry RivalryMonday, January 9, 2012

Distribution 2 Customer Power 1 Supplier Power Customers are stuck with you, unless they want to absorb the “last mile” costs of driving to the nearest 3 Threat of New Entrants source of substitution, at which point they might as 4 Threat of Substitute Products well fork over more cash for a better model. You can even write ominous things into end use agreements 5 Industry Rivalry and sue your customers if they don’t play ball.Monday, January 9, 2012

Distribution 3 Threat of New Entrants 1 Supplier Power 2 Customer Power This one is pretty obvious. You’d have to be totally asleep at the wheel to let a new competitor sneak up and build a better distribution network at a 4 Threat of Substitute Products comparable price. 5 Industry RivalryMonday, January 9, 2012

Distribution 4 Threat of Substitute Products 1 Supplier Power 2 Customer Power Your product doesn’t even have to be that great, 3 Threat of New Entrants because substitutes, however good they might be, have to go through the difﬁculty and expense of actually getting in front of customers. It’s not worth it to them. This is why every major US airline does not 5 Industry Rivalry invest in improving the experience of passengers ﬂying coach.Monday, January 9, 2012

Distribution 5 Industry Rivalry 1 Supplier Power 2 Customer Power Distribution-based barriers to entry also tend to produce highly competitive equilibriums for the 3 Threat of New Entrants existing players. Advantage exists momentarily but is 4 Threat of Substitute Products quickly matched, and incremental acquisitions and improvements are the hallmark of these stalemates.Monday, January 9, 2012

Now you’re sitting pretty, ain’tcha? You built the castle, and the moat. Post sentries, and chill out. You’ve carved out a subtle form of monopoly and the margins are fat. Smoke a blunt. Stay trill. Look at this baller fucking castle, bro.Monday, January 9, 2012

This isn’t another cri de coeur about Netﬂix, and how delivering video over the internet destroys Blockbuster, however. It’s much simpler than that.Monday, January 9, 2012

“ In any sort of a contest—financial, mental or physical—its an enormous advantage to have opponents who have been taught that its useless to even try. Warren BuffetMonday, January 9, 2012

The strategic homogeneity produced by Five Forces analysis has driven many companies into defensive postures. Unfortunately for them, technology makes aggression more potent than ever before. Nota bene: Disruption is just a defanged and wishy-washy term for aggression. Disruption “happens” to everyone, says the hapless defensive company soon to no longer exist. Aggressive companies proactively seek to disrupt their competitors.Monday, January 9, 2012

y have a plan. Pe ople realize Reed does not actuall NFLX: $304.79 +453.26% Netflix isn’t a role model. Netflix has powerful suppliers that erode FUUUUUUUU Netflix destroyed Blockbuster by realizing the 1 its margins at $30,000,000 a picture. eventual fate of a distribution-based business model - commodity pricing - and implemented first. Customers have a large number of But in doing so, they consigned themselves to the 2 alternatives, many of which are free. same fate. UUUUUUUUC Content costs, not distribution, are the 3 barrier to entry. The simple acquisition of better content 4 creates a threatening substitute. KKKKKKKK Those powerful suppliers are also rivals: 5 CMCSA, TWX, NWSA, CBS. Reed Hastings People think Reed is cool. NFLX: $55.09 us to Someone writes an article telling stop being mean to Reed.Monday, January 9, 2012

Who gets it? ? ? ? ? Established Firms Consultancies Agencies Startups Established firms often fail to conduct Consultancies accumulate value in the Agencies are poorly suited for designing Startups occasionally cause great offensive strategy due to a short-term form of institutional knowledge of best aggressive strategies driven by Porter disruption, but rarely with any real focus on preserving margins and share. practices across the industries they analysis. When you live and die at the aggression towards existing companies. The status quo, in other words. It’s as if specialize in. The decreasing impact of campaign level, there’s no incentive to They move in a disruptive fashion only they were all playing Prisoner’s Dilemma strategy consulting on the bottom line of rock the boat too dramatically. accidentally, if at all, frequently with a with the expectation that the game top firms speaks to this shift in focus: Incremental improvement in existing blind eye towards profitability in an never ends and everyone cooperates. helping companies adopt best practices sales is what butters the bread. How aggressively competitive environment. This works to the extent that is a fundamentally defensive act. It’s many agencies demonstrate their Indeed, startups use Porter to play comfortable equilibriums exist between adaptive insofar as it denotes change, prowess by pointing to a long list of their defense too: the focus on scale and major inflection points, but the slow but it does not constitute the clients’ vanquished competitors? barriers to entry are essential to carving hardening of corporate arteries resulting development of adaptivity as an actual out a niche. If established firms weren’t from this inactivity prevents established capability or advantage. Consultancies so reticent, many existing startups firms from surviving big shifts. do not advocate truly aggressive action would never have gotten off the ground. because they do not have to. In the land of the blind, after all...Monday, January 9, 2012

Apple gets it. Apple gets how to conduct aggressive competitive Customers don’t need to be bullied, and end strategy using Porter Analysis. They know that a 1 use restrictions don’t need to be onerous. distribution network ≠ a sustainable advantage. They also ﬁgured out that creating superior Developing a better product is not proﬁtable products pulls three Porter levers in one move. 2 for potential entrants. Apple combined the disruptive tactic of introducing commodity pricing with digital music distribution along with creating a music player so superior that Designing for excellence directly reduces the existing competitors could not imagine its success. 3 threat of superior substitutes.Monday, January 9, 2012

1 Amazon kneecapped publishers. Who’s next? Amazon gets it. Customers could shop elsewhere, but why, 2 when the rewards for loyalty are high? Amazon uses digital to aggressively disrupt The costs of entry to eCommerce are higher established industries with cost structure 3 than using Amazon as a host. disadvantages. And they’ve ﬁnally taken the next step: Price Check eliminates many of the remaining advantages to brick and mortar stores. Now it’s not Amazon uses its assets to insert itself into only possible, but also advantageous to order 4 new markets as a threatening substitute. something from Amazon while in-store. 5 Industry rivals? I couldn’t think of any.Monday, January 9, 2012

Adaptivity as a capability is the catalyst that makes aggressive use of Porter’s Five Forces advantageous. It’s the ability to see a Adaptivity different future, and the organizational chutzpah to enact that future ﬁrst. It’s distinct from notions of organizational ﬂexibility that amount to a predilection for meaningless change.Monday, January 9, 2012

The ability to look into a radically different future and plot an advantageous outcome involves a healthy disregard for the Adaptivity present. Recognition of the inevitable is the essence of aggressive adaptivity, and proactive repositioning to maximize advantage within that new reality is the aim of adaptive strategy.Monday, January 9, 2012

John Temujin Winterkorn spends much of his time thinking about the future of advantage at Undercurrent, a New York City consulting group. Reachable at: @jtemujinw john.winterkorn@undercurrent.com notesfromthewonderground.tumblr.comMonday, January 9, 2012

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Michael Porter, Adaptivity, and Digital Strategy

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Michael Porter, Adaptivity, and Digital Strategy — Presentation Transcript