If one man can change the world, then Michael E. Porter didn’t just change the world of business strategy, he defined, created and gave it out to all of us. There’s one article of his that deserves a monthly reading – ‘What is Strategy?’ In that article, Porter schooled the whole world about strategy.
Porter then went ahead to give the world a tool of Porter’s five forces. It came in handy for any business to understand their industry. Porter said that at any one time, an industry is always being acted upon by five forces (these days we speak of 6 forces).
That first, there was a threat of new entrants. One wanted to be in an industry where there was a low threat of new entrants. These also tended to be industries with high barriers of entry. Think of security weapons manufacturing, think of the energy generation.
The second force was the supplier power. If you were in an industry where the suppliers had a lot of power, it was not a favourable industry. Next to this was the bargaining power of buyers. In industries where buyers can easily switch, it gave them more bargaining power. Again, Pharmaceutical industry is one where there isn’t much bargaining power of buyers. Other forces included the threat of substitutes and the competitive rivalry of firms within an industry.
If I brought Porter’s tool back to our world. You soon realize that the tool comes with its own blind spots. First, Porter assumed that an industry would be such a well-defined thing. It didn’t consider the aspect of the Ugandan/ African environments where most industries are not well-defined. They are still in the mapping phase and are yet to even get to actual growth. You can’t speak of an industry in scenarios where you have one or two firms defining 80% of that industry.
Porter’s tool was also overtaken by time in the sense that today there’s an intersection of industries. It’s hard to tell the industry where a business belongs. Firms are playing in more than 3 industries at the same time. For example is MTN in the telecom industry anymore? Isn’t every business these days in the media industry? Porter didn’t consider that industries would imagine within industries, that the lines across industries would get so blurred.
Again, Porter considered that the best thing would be to lock up the buyer, increase their switching costs, consolidate them with network effects. But also Porter assumed that all buyers were the same, he thought that an industry would be defined by homogeneous buyers. Instead, today you’re dealing with different types of buyers, it’s impossible to come up with an aggregate profile of their bargaining power. Again, Porter thought that the buyer was a force to deal with. In the current era, the buyer should be seen as a long-term partner.
The point is not to shoot down the tool (for it has held us for many years), but to make the user aware of the blind spots.
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