The Irrelevance of Porter’s Five Forces for the B2B Software Industry
jhcblog.juliehuntconsulting.com
jhcblog.juliehuntconsulting.com
> “Porter's aggressive modeling around "competition" has misguided organizations into becoming obsessed with destroying the competition.”
My understanding from Porter’s model is that competitiveness is defined by Product Value - Cost… a very simple concept that doesn’t involve “destroying the competition”.
A cheap computer manufacturer doesn’t compete with Apple, because the definition of product value depends on the audience.
Now I wonder who got it wrong, me, the book, or the article.
A cheap computer may not be a 'competitor' to Apple, but it could be seen as a substitute - another of Porters 5 forces. So, how does Apple position themselves against cheaper computers in their market - by positioning themselves as a quality/luxury item.
I'm just going to say [citation needed] here. As a former software developer, turned founder/CEO now studying an MBA to understand how to do my job better, there is a serious lack of sources here.
Porter's is a good tool for understanding the landscape any business exists in, and understanding it helps software executives understand their biggest risks. For example, people say every piece of business software is competing with internal Excel spreadsheet, so how are you protecting against these substitutes?
There are a lot of things in this article that illustrate its weakness, including the ad hominem attack on Porter himself ("If his model is so good, why did his business fail? Checkmate Porter!"), and seems like a self-promotion article for the authors. In fact all links to "better" models are bit.ly links that point back to the authors blog, while other links are standard long URLs.
Q: “How do you do a five forces analysis if you’re an entrepreneur starting a new business in a completely new market space? Is strategy even relevant when there’s no existing industry or when conditions are still so fluid that there is no discernible industry structure and no direct competitors?”
Porter: “Strategy is relevant for any organization at any point in its trajectory. How to develop and sustain a competitive advantage is the core question that every organization has to answer if it’s to be successful and to prosper. In emerging industries there’s a lot of experimentation. What will the product ultimately look like? What will the distribution system look like? Will the product or service scope produce a stand-alone industry, or will this new idea become part of a larger or existing industry? There’s more uncertainty about the shape of things, but the five forces exercise is fundamentally the same with one big exception: instead of analyzing what already exists, you’re forecasting. And you probably know quite a lot about all of the five forces but one. You know the customers you’re targeting. Are they likely to be price sensitive? You know who your suppliers are or who they are likely to be. How powerful will they become? You know the substitutes and can identify the likely entry barriers. What you don’t have yet are actual rivals. That’s where you need to think through who those might be. Will the rivals most likely come from adjacent industries? Or from companies that already exist in other countries? Or will the likely rivals be new start-ups? How would each of these rivals be likely to compete? So even when you’re inventing new market market space, you probably already know more about the five forces than you realize. Doing such analysis is important because if you’re creating something that’s truly valuable, don’t kid yourself that no one will follow you. There is no such thing as a market where competition is irrelevant, as nice as that might sound. The idea that innovation allows you to ignore competition is a fairy tale. So you have to have a hypothesis for how the industry might take shape once there is an industry. Early on, there are many paths the evolution can take, many choices you can make that will have an important impact on how attractive the industry will become. Decisions you and others make over time will begin to lock in the basic economics, making industry structure less fluid. So it’s crucial to see different paths for how the industry might evolve, and to ask the basic questions about the five forces, so that you can make choices that will put the industry on the best possible path.“
That said, I agree with at least some of the points. Competitive Strategy would seem like a very incomplete work today that (as far as I know, it's been years) probably doesn't pay a lot of attention to coopetition--which may not even have been coined at the time--and things like ecosystems.
That said, we do still talk about competitive moats for businesses and VCs are certainly willing to pay a lot of money to help build those moats.
Porter has written a lot and five forces was originally in a very different context, but the real thrust of Competitive Strategy (the giant book) was about taking the time to do the homework. And that hasn't changed. You still need to do the homework. Porter was never, in any of my reading of his work, about destroying the competition... at was all about creating and capturing value.
And these books aren't easy "how to's" they're mental models for approaching things. Like von Clausewitz or Sun Tzu your mileage will vary with the creativity you apply in the comprehension and then application. There is a lot more creativity in competition and strategy than most people realize.
I'm in B2B and Porter is central to our product design and marketing strategy.
I'll just put it out there: the author has NEVER started a company!