Michael Porter, Adaptivity, and Digital Strategy

Hello

Monday, January 9, 2012

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


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 Porter


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.


What does distribution do?


Distribution
1 Supplier Power

2 Customer Power

A strong distribution network destroys supplier
power. If they want access to your customer base as

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 Rivalry


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

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.


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 Rivalry


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.


Distribution
5 Industry Rivalry 1 Supplier Power

2 Customer Power

Distribution-based barriers to entry also tend to
produce highly competitive equilibriums for the

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.


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.


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.


“
In any sort of a contest—financial,
mental or physical—it's an enormous
advantage to have opponents who have
been taught that it's useless to even try.
Warren Buffet


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.


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.


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...


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.


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.


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.


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.


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.com


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