Aside

Why Porter’s Model No Longer Works

This post went live mid-week last week, on HBR. It is the 3rd installment on a series of why fast / fluid / flexible is crucial for the social era. The headline has caused some interesting discussion / perspectives. (It also got some VERY strong personal attacks going.) I’m curious to see what you think, but keep the “you’re a stupid loser” comments to a minimum. ;-)

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Imagine that you wanted a new home theater system. But instead of spending hours in Best Buy or on Amazon comparing configurations and assembling the parts you needed, you could signal what you wanted and a company would create it for you. You might simply Pinterest the elements you liked, including information about your space or noise limitations (“One-bedroom apartment on busy street in New York,” or “suburban space that needs stuff protected from little kids”), and then have a retailer give you a personalized, optimal configuration.


Right now, social is largely seen as a way to amplify messages (“Like” us on Facebook!) or to create conversations around customer service (“We’re so sorry you’re having a problem,” the persistent tweet from @ComcastCares). These two key functions — Marketing and Service — are regularly discussed as shaped by social era dynamics.

But the social era can — and will — be more than that. It will help us decide what we make, how much we make, and how we finance that production. While social media doesn’t shift Porter’s model, the social era surely does.

Big Isn’t Enough

This is the 3rd part of a series on what it takes to win in the social era: being fast, fluid, and flexible.

Let’s think about the way that changes our modes of production. Size once gave organizations purchasing power. Being big used to enable high barriers-to-entry, keeping out potential competitors. Big had the dollars to buy the mass-market access to consumers back when mass media was the only way to reach an audience. But when the capital requirements to enter markets have declined, the marginal cost of reaching consumers is effectively zero, and one-off production is not hard to do… being big offers a much smaller advantage than it used to. Being big ain’t enough, anymore.

Most existing big organizations — the 800-pound gorillas — subscribe to Michael Porter’s value chain framework. As I mentioned in the first part of this series, this model optimizes for efficient delivery of a known thing. Organizationally it means Z follows Y, which follows X. It carries with it one fundamental assumption: that customers are tangential to the process.

There is no question that Porter’s work has helped shape (some would say, “invent”) modern-day strategy. I’ve used his ideas for over 20 years of running companies big and small, and I consider myself a fan of his thinking. But, to put it bluntly, Porter’s value chain is antiquated in the light of the social era. It was created at a time when being big and having scale was in itself a key aspect to competitive advantage and profitability.

Generic vs. Distinct

People buy two categories of things: The distinct, and the generic. The distinct items are the things that have a limited quantity, that are artisanal in nature, and that are worth paying a premium for. The generic items are, well, the things you might find on Amazon.
When companies like Best Buy or Target are simply aisles of what you can find online, then it’s easy enough to become a storefront for Amazon. Everything that is undifferentiated is going to be delivered in ever more efficient, low-cost ways. Porter’s value chain is well suited for this mass-market, cost-driven approach, where customers remain at the end of the value chain.

But for organizations wanting to thrive in the social era, being distinct is key to both profitability and winning. While there has always been a market for bespoke, differentiated items, until very recently that market served a tiny fraction of the uber-rich. But today, both macroeconomic forces, and technological advances mean that customized products aren’t just for the one percent. Instead, customized products and experiences can be for everybody, at least some of the time.

How will the smartest, nimblest companies move away from less-profitable generics and into more-profitable distinct goods and services? By using the rules of the social era.

Social Becomes Central to What We Build

During Fashion Week in September 2011, Burberry did a direct campaign with an everyday consumer (not just the editors and fashionistas) to showcase their new line in what they called a #tweetwalk, letting users tweet about what they liked (or didn’t). It created an immediate signal between the company and its broad users.

It was an interesting first step.

Every brand already has the ability to get direct feedback from consumers on what they like; the friction cost of doing this is effectively zero through a social media conversation. But Burberry stopped short of doing what makes the most sense to their bottom line. Imagine if they’d actually created a video of a runway walk that enabled click to order. They could produce only what was ordered, and thus reverse their supply chain to produce only what is already sold. They could even allow customers to request products in particular colors at premium prices. Social gives companies more control to operationally adjust their offers and create zealots by better collecting and amplifying even weak signals.

This puts the customer at the center of the company much more than any lip service about being “customer centric.” Today, we see brands asking consumers to “like” them on Facebook as a way of getting permission to push them information. The brand is still the central part of that communication. Imagine what that dynamic becomes when using the power of pull. Ask yourself, what would it look like to put customers at the center?

Many of you already know of Kickstarter as the largest funding platform for creative projects in the world. Several other platforms exist to allow community to fund expansion. When no one funds you, you know there’s no market for your idea. This changes more than the economic source. When a community invests in an idea, it also co-owns its success. In other words, it’s not just socially funded; it’s socially meaningful.

Now, let’s go back to that imagined home entertainment system. What if you — and everyone else shopping for a similar system — could signal your desired systems and have Best Buy choose one of hundreds each week to showcase (or perhaps choose the most popular per region). You would then have a reason to check out that configuration in a retail store — to see it and feel it — and then order it so they could come set it up at your place. See how that changes the retail experience from generic long aisles of commodity items to customized and community experiences? That is what social allows.

A Cycle of Profitability

When companies figure out how to shape their design, production, and manufacturing cycle from rigid planning and production systems to unique customer-driven experiences, they’ll design a way to respond in smaller bursts of more profitable cycles.

By allowing customers to directly fund an expansion, companies will know exactly what to build, and what is extraneous. By allowing signals to direct production, there’s an opportunity to learn immediately what the market responds to. Organizations can be in a constant conversation to learn what is working and what is not, and adapt on the fly. These nimble organizations consistently try new things, adapt to what works and thus improve the bottom line. What is interesting about this approach is that no company has to get it “right” the first time, as much as know how to learn and discover what works for growth.

The 800-pound gorilla dominated at a time when companies needed and used more capital, when the value chain could be profit maximized through vertical integration. To run this kind of organization, leaders had to be focus on being big enough to enable scale — because that’s where the profits once were. Once an organization got big, it took a lot to displace it. But the social era demands something more of our organizations. Something that is qualitatively different. The social era rewards the gazelles — the ones that are fast, fluid, and flexible.

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This post is part of a series on how the social era will reward fast, fluid, flexible organizations. Now that we’ve covered the rules of the social era, the way it affects how we organize, and how companies produce and distribute, we’ll move onto what it means for how we sell and market. (The original post is here: http://blogs.hbr.org/cs/2012/02/why_porters_model_no_longer_wo.html). I’d appreciate you making comments at the original source, over at HBR since that honors the work I do with my editor.

 

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6 Responses:

  1. Vivek Khanna. March 6, 2012 at 4:32 am  |  

    Hi Nilofer,

    Here’s what I think about this “Loser” comments:

    “Each work has to pass through these stages—ridicule, opposition, and then acceptance. — Swami Vivekanand”

    You’re getting there – keep at it!!! :)

    Great insights as always

    Reply
  2. Vivek Khanna. March 6, 2012 at 4:34 am  |  

    Oops… typo! (Wish there was an edit option)

    “this” should read “the” in the first line of my above post

    Reply
  3. maz iqbal. March 7, 2012 at 8:59 am  |  

    Hello Nilofer
    Your assertion that Porters model does not work is predicated on two assumptions:

    a) One that all there is to Porter’s model is the Value Chain; and
    b) Your interpretation of Porter’s value chain thinking (y, follows x) is an accurate and the only interpretation.

    If you study Porter, which you have, you will notice that Porter says that the companies who create distinctive value for customers and claim the right place in the value chain that creates/delivers that value to the customer, get the lions share of the rewards. The are competitvely successful as compared to the other players in the industry.

    Porter says that the key to strategy is to pick a distinctive path. So the path that you are suggesting – one that is based on quick response to articulated customer needs could be a distinctive path. Let’s move on and consider the value chain.

    The value chain is simply the configuration of activities that enables the firm to create and deliver that distinctive value proposition and to do so effectively and efficiently. With the value chain Porter brings the strategic discussion back down to earth. You have to choose the means through which you create/deliver. Take a consulting firm, it’s value chain, say, has to include say three activities: creating/publishing thought leadership; winning new engagements; delivering new engagments. That is simply what is so. How you do that is entirely up to you. You can buy that thought leadership and brand it as yours. You can assign that task to everyone in the firm, collect the insight and have a central team put it all together, clarify it, write it and publish it. Or you can have some superstar thinkers in a R&D team creating that thought leadership. Going further, Porter might say, you can question if you need thought leadership at all – in that case you can change the game by stripping that out of the value function and competing as simply a great implementor.

    To conclude: given your interpretation of Porter your assertion is logically correct. The question I have for you is this: have you selected a definition, purposefully, that allows you to write that provocative headline and get readers?

    Finally: most people in business do not get Porter though they think they get Porter. Porter goes against accepted wisdom, entrenched practices and most importantly the way that human beings and companies are wired. So getting Porter is really difficult. Acting on his advice is almost impossibel.

    Maz

    Reply
    • Nilofer Merchant. March 7, 2012 at 4:07 pm  |  

      One lesson I learned about all this is what you already stated is that seriously people don’t get Porter.

      Even absolute Porter zealots couldn’t track that Porter has two discrete models. (One guy on the Porter thing who went out of his way to both publicly dismiss me on a personal level and to critic the ideas is a Harvard grad who works on this stuff daily and his notes suggest he doesn’t understand the distinction…). My husband actually said that to me, but I was like… nah, people will know. But lesson learned

      Another thing I learned is that I could have been more precise. This is almost always true because of the fact that situations are complex. By being broad-brushed, we can maybe over-simplify when it’s not necessary. While I always aim to be precise, this was one where a sentence or two could have made a difference in how people understood the issues. But even I run out of gas and cycles on things. This series has consumed a huge chunk of time — hundreds of hours of writing — but that’s no excuse.

      Finally… I do get the sense that people were able to look beyond the static I created with the headline to notice some of the distinctions happening in the market and what that means for how we produce. For that I am grateful …

      Thanks for your thoughtful comments, Maz.

      Reply
      • voroperez. March 7, 2012 at 9:08 pm  |  

        10/10 You are very brave!!!

        Reply
  4. Gaurav Kapil. March 22, 2012 at 8:44 am  |  

    Hi,

    I don’t want to be critic but I’m still not able to understand that how does customer at center or a social era makes Porter’s model non-workable.

    If I put customer at center then all I’m doing is changing fields of competitive advantage. That is I’m giving more power/substitute to customer myself and decreasing threat from substitutes/rivals. Fundamentally there is no addition or deletion of any of the forces.

    If my firm learns to act on social/customer cues then it is only a competitive advantage leading to firm’s dominance. There was an interesting case study on how, due to Indian Government policies, wheat industry in some states of India were turned into loss making units, whereas other states thrived. Although my Professor tried to argue that Government as 6th force exists, but I’m still unconvinced. All this 6th force (or a social era does) did was gave more bargaining power to customers. What I read from Porter about government/ society/ Complementors is that they aren’t 6th force but its a condition that affect 5 forces.

    Please correct if I’m wrong.

    Reply

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