Innovation and Porter's Five Forces
First up: Porter's Five Forces. Michael Porter wrote the book on corporate strategy. Well, he actually wrote a number of books about corporate strategy, competitive advantage and a number of other topics. The books that were mantras when I was in school were Competitive Strategy and Competitive Advantage. In these books and others Porter introduced models, tools and methods to analyze the firm and its competitive position and its competitive advantage. Two of these tools, the "Five Forces" model and the Value Chain model, are ones that have become ingrained in the way we think about businesses strategically. What I wanted to know is: does the model hold up in light of an increased emphasis on innovation?
The Five Forces model is basically a way of looking at an industry, and a firm within an industry, and all the factors that will come to play against that firm and its industry. The Five Forces are:
- Supplier Power
- New Market entrants
- Buyer Power
- Competitive Rivalry
These are the "totality" of forces acting on an industry, and by extension, firms within an industry. In the model, Porter didn't necessarily account for "innovation", but the ghost of innovation haunts the model. For example, New Market Entrants. This force accounts for firms that weren't traditionally in an market that decide to enter the market. These could be large firms seeking to enter or disrupt an existing market, or entrepreneurs who will enter a market and chip away at a small subset of the customer base. Those of you who have read Christensen will recognize the smaller entrepreneur or firm as a potential disrupter from Christensen's book the Innovator's Dilemma. While Porter didn't explicitly call out disrupters, he did account for new market entrants.
Similarly he accounted for advances in technology and in trends. He foresaw the impact of legislative effects on business as a discontinuity that opened the door for innovation. He saw the power of innovation in supplier and buyer channels as well.
There are a few gaps from an innovator's perspective that bear examination, however. Two that spring to mind upon initial examination are business model innovation and customer experience. In Porter's mind, the business needed to define its business strategy and model and build competitive barriers to the five forces. I think in hindsight that has proven only to create Maginot lines that other, more nimble firms have found easy to skirt and attack. A firm should place a significant amount of emphasis on the development of its business model, but should also place some emphasis on the evolution or dramatic shifting of its business model as competitive pressures ramp up and the pace of change increases. I don't think the model responds well to the increase in the pace of change and global competition, and in that sense must introduce nimbleness and agility into the model.
Secondly, the model was developed in a time of increasing systemization and process definition. Buyers and sellers were considered as entities to optimize. Now that we've reached a point of increasing saturation and commoditization in so many areas, firms must differentiate by improving customer experience - designing and innovating the customer interaction and experience rather than simply optimizing it. In an age of product and service abundance, customers want individual service and attention, and have high expectations for the goods and services they buy and the partners they interact with. Porter's model treats the buyers and suppliers and neutral third parties, which they no longer are. They are now extended relationships.
On the whole, Porter's Five Forces holds up well in light of an increased strategic focus on innovation, although it never explicitly calls out innovation as a "force". Innovation can easily be discovered in several, if not all, of Porter's Five Forces, and its impact is easily seen. Porter might argue that innovation is simply embedded in each of the Five Forces, as to a certain extent is a concept like Six Sigma, where Six Sigma represents small, incremental change and Innovation represents large, disruptive change within each of the Five Forces. This is one historical, well-respected strategic model that seems extensible and capable of incorporating innovation as an emerging business strategy.