Porter Model is Dead

I’m at the O’Reilly conference of Emerging Technology and it’s giving me just the right setting (and time away from the day job of leading Rubicon) to capture an idea I’ve been brewing for some time.

Because the work I do is about helping companies to win markets, I pay a lot of attention to changes big and small in the terrain of the market because we all know that consumer expectations or new competitive entry or even a new disruptive technology offer can radically shift market power. For some time, I’ve been watching what is dubbed “web 2.0 business models, knowing some things inherently would cause disruption”. And the more I looked at it, the more I have come away with a wide aperture view of what is going on.

So before you read on, you’ve gotta know this is by far my longest post. I’m sorry for that. I’m at a conference, with bright people, wi-fi, and time.
And before you jump to any conclusions, I’m not saying this is “it”. I’ll call it “alpha” with the hopes that both online and offline my colleagues who read this will help me advance/ edit / distill / delete that which needs to be done.

Why be timid. Let’s start out with my premise.

PORTER’s MODEL IS DEAD!

There was a time when control, and scale drove market power.
But those times are not now.
Today, we have a different set of things that drives market momentum, and create market power.

The last “market expert” who captured what defined market power was a guy named Michael Porter. He created a framework since dubbed the “five forces” framework. His model was the very definition of mass production or mass markets. If you think about a “poster child” of the Porter model, it was Michael Dell of Dell Computers. Dell did close integration with suppliers reducing individual unit costs, and created a centralized, controlled ability to set direction to make a specific thing, and with the help of multiple suppliers drove cost out of the equation. The more Dell grew in scale, the larger the price for any other company wanting to serve that market. And so the large got larger and had more control.

Let’s take a tour back in history. Think Dell, Apple or Intel during the heyday of the 1980s and early 1990s. Value was created in a relatively linear fashion. First, a product was designed, then parts purchased, then manufactured, then marketed, sold and delivered. The one who could own the full show – design to delivery – could generate the most customer value. The goal in optimization back then was to look at how to get good customer insights early in the process, because you needed a long ramp to get to market. At one time there were even Dell stores. Remember that? They had a particular sequence of steps and relationships that they owned, and that, taken in aggregate, created superior value.

The more powerful they got, the harder it was to compete against them. Much like a castle model, the walls kept getting higher and higher.

To the degree these companies “outsourced,” they were still in control, telling others exactly what to produce and holding on to as much of the intellectual property as possible. The relationship was very much that of a prime contractor and a subcontractor. A single organization drove operations through from start to finish. Maybe that made sense. Maybe it was about the integration of all operational parts to create market power. There was only enough room at the top for a few companies, and these companies could, and did, create barriers of entry as protection against new entrants. The game was all about locking up enough supplier relationships to be able to lower manufacturing costs to the point where they could drive additional demand and feed the cycle again. The market was won by the companies that created so much scale at the beginning that alternatives and new entrants were frozen out of the market.

WEB 1.0 PUT A DENT IN THE MODEL:
I think that model is defunct. Because the Internet fundamentally changes mass markets with dominant players to a series of smaller, micro, differentiated markets. Instead of deep vertical integration with suppliers and 18-month product life cycles, the new era is a quick, response, targeted sub-markets where many can “come to market” and many can partake. One particular thing in the Porter model was always that the users had as little power as possible to alternatives or to price shopping. And, that’s probably the single force to me that changed with the first Internet revolution. Internet 1.0 brought the ease of distribution of products so many can sell to many. Think Ebay or Amazon. It created the ability for users to know more, and thus reduced the control any company had on what it could offer. It also opened up markets in new ways.

BUT WEB 2.0 TOOK IT ALL THE WAY
The 2nd Internet revolution (what O’Reilly named web 2.0) brought 4 more efficiencies in into the market value chain.

1. MANUFACTURING COSTS REDUCED .
Open source and a worldwide talent pool brought in software efficiencies. You no longer needed a team of software developers + QA team to produce. Monolithic applications required a certain amount of engineering resources to code, QA resources to test, etc. Now, with lots of little developers each tackling a piece of an overall solution, development—and especially innovation—can occur much more rapidly. No one has to live near you, work near you, heck even know you in order to join together to create something.

And, in the hardware domain, even injection molding is now readily available to the “common man” and concepts can be built quickly and contract manufacturers can deploy things with Chinese-based production. This lowers the cost of entry and created many alternatives.

2. INVESTMENT COSTS REDUCED
Production. With the AJAX architecture and then the ability to “mash-up” technologies online through sites like programmable web.com, the web has changed the fundamental production model from “make it all” to “make some piece” of the highest value. This has meant that very small teams of 5 people can enter a new market and make money from their specific vertical application or knowledge.
This allows not only more creativity to enter the production system, but also a different way to create a “product”.
Layer on top of that the SaaS model, and any company can enter a market without needing to invest upfront dollars to buy applications, storage, etc. This lowered the cost of entry to any market and created many alternatives / substitutes.

3. MARKETING IS DECENTRALIZED
It is now possible to have user-to-user enthusiasts and guides create a market demand. It is no longer necessary to have multi-million dollar marketing budgets.

It used to be a person (influencers, early adopters, mavens) who was influential might talk to a few friends, some communities groups such as his or her church, and if they traveled a bit, social circles in some other areas.

Today, with the use of blogging and wikis, the ability to go from one person’s opinion to knowing the opinions held by thousands of people isn’t limited by personal reach. It’s limited by the power of the idea and the personal credibility of the person. On the web, authority is dependent on the quality, consistency and integrity of the content. The mainstream media is being “shown up” more and more often because its power is based on Porter’s Five Forces while bloggers and other parts of the new media are required to establish credibility based on content, not market power.

4. MANY new REVENUE MODELS ENABLED
Probably the most difficult model to discuss.

Direct exchange to Ecosystem Economics. Value creation used to be driven by the core “thing” we produced. Dell made a computer, Intel made a chip. Then along came ebay and they enabled an exchange. The sellers (not the buyers) paid the price of the exchange because it was more cost efficient that duplicating what Ebay had built. Along the way, Ebay has studied that the more users come to the site as consumers, the more the sellers are willing to pay to get access.

+Anchillary value. Used to be that we paid for photo touch-up software. But now, at sites like Shutterfly, we use that as a service along with hosted pictures all for free. Shutterfly makes money in an indirect way that in the case where we want printed pictures, we’ll use their services. But Shutterfly gives away at least 2 products that have tremendous value.

+User-generated value. Tagging technology and the ease of labeling anything is prevalent. With this, users can add value or create meaning themselves. The more users of Digg or De.li.cious tag things, the more value is created over time. Flickr, Facebook and other “social sites” are the beginning of users creating a value for themselves and then sharing it so that, in aggregate for communities of users, the value grows. It grows because natural interests cause ties that bind. And everybody does a little bit. If all of us enable that little bit, the platform creates more stickiness while it also gets stronger.

+Advertising-based Revenues. Allows the monetization of “eyeballs” via the democratization of advertising online.

(We’re not done yet in this arena, I’d bet … )
OKAY, so WAaaaayY BIG CHANGES.

I BELIEVE OLD MODEL IS DONE. NOW, What’s the NEW MODEL?
I’ve been thinking there is a new model on the horizon and it involves being the very opposite of what Porter defined in the 80’s. Instead of Centralized Control, the new source of power comes from something I’ve named in my head: “Permeable Corporation”.

Essentially, the pillars of markets, those things that hold up the supply chain of distribution manufacturing and marketing are all fundamentally different in this era. Those aren’t even the right categories or names per se. Because the term manufacturing is really not the question. I’m going to propose the new categories are ‘Creation”, “Customization”, and “Communication”.

My thesis is this. Market Power is derived from being more “permeable”. In a Permeable Corporation, success depends on how well you play with others in delivering customer value. In this model, power comes from ….

SOURCE OF POWER #1: CREATION.
We no longer play in individual sand boxes. We share ideas and focus on building on each others’ ideas so that creation is not about building the coolest widget, but building different pieces together to solve a particular need.

Measures of Permeability: How well you enable integration with other technology solutions as well as how open you can be to build collaboratively is the question. Measures would be the level and support around developer engagement. Do you have open APIs, do you enable platforms such as Adobe’s Apollo, Ebay’s Ecommerce solution, and do you release content into open source or provide component enablement (programmable web.com) so that others can co-create with you?

Implied in this model is that you can develop faster, and innovate faster. But it would also mean that you are creating something based on a particular user set’s needs. And you could layer other work on top of (or sit on top of) the platforms to make the solution complete.

SOURCE OF POWER #2: CUSTOMIZATION.
Each of us is a singular person — unique and appealing to market to. But what is done today is market towards big targets without really paying attention to the individual. What is enabled in this web 2.0 era is that users can be a markets of one. The more firms focus on the big targets, the more we focus on the mainstream. But everyone’s taste departs from the mainstream somewhere, and the more we find new options, new alternatives, the more we find things we like. Or rather, we LOVE. Our choices are expanded and by having more choices, when we make a selection, we have the ability to connect to that choice deeply. What is considered ‘fringe” to one, is of extreme value to others. Getting outside normal marketing vehicles and language means the communication can be better. It is one effect of the market force Chris Anderson described so well in his book on the “Long Tail” notion.

So that’s what is an opportunity. To solving unique customer needs. Maybe this is too utopian to gain wide-spread acceptance but I believe that customer value will become really about what someone needs based on their use, their content and their self-identification (this implies a micro segmentation based on user input). The flavors are not set by any one vendor but really a marketplace where customization can take place. It is what threadless.com is all about. Many ideas get developed and each represents interests, desires, needs and in the end some portion of those get made into product. You want to bet that business is successful? Of course it is. It has the customization and flavors built into it’s very DNA.

This is the key source of power – getting to the point where we listen when the customer tells us who they are, what features they want, what products they need, and how we can best be of service. Doesn’t meant they get it all. It means you can serve more of them with different flavors.
Think about that. Think about the amount of insights that could form. And instead of me pushing out a lot of “mass” market advertising, PR, and trial software, I might instead sponsor passionate advocate-driven websites, or encourage user debate on topics relevant to them on my site, or “pull” the kinds of content and ideas they seeks from me via tags of data rather than a highly structured web site.

SOURCE OF POWER #3: COMMUNICATIONS.
In times of great change like we are facing today, people will turn to one another. And in doing, they don’t turn to a mass. They turn to a guide, a trusted friend. Who will lead these people? Will it be the traditional sources of people, ala journalists or a company like your own? Likely not.
We used to ask friends and family about where to stay on vacation, what BBQ to buy, what car model to consider. Now, we not only reference information based on who we know, but also on who is a noted authority on travel or backyard cooking equipment or cars. At times that information is linked to purchase decisions but many times it’s on Epinions, Amazon.com, or Technorati searches.

I believe we will have a new class of leaders, people who are natural leaders who do research and investigation so they tell the good from the bad, defining by their words and actions the benefits of using something. And whatever they are called: citizen marketers, consumer advocates, key influentials, user enthusiasts or something of the like. The name is not the point. (but I’m sure someone will come up with the perfect term)
There will be many of these consumer advocates as leaders. For any category or product. It could be yogurt, it could be cars, it could be blogging services. And whether they choose WordPress or VOX as the winning offer will define which product is more successful. And in doing so, these individuals, these people will shape the market view of what your company or product stands for. If you don’t already know your key user influencers, isn’t it time to do so? If you’re not in dialogue with them already, what do you think is at risk?

This information is wholly different from company collateral in that it is not controlled by the company—it is not even stored in one place. It is distributed content created by users and others. In a very real sense, each of these, and dozens of others like them, is information communities that have lives of their own.

Engaging in at least a two-way dialogue with Enthusiasts and Guides creates a path to learn, to discern, to champion.
——-
FINALLY:
Market Momentum then comes when you create the linkage of

Creation.
Customization.
Communication.

[I’m going to work on a visual next. Circles, arrows, etc must be involved. ;-)]

It’s time
We are currently in the midst of a “Triple Witching Hour” of change: societal changes, technology changes, and wide availability of broadband access enabling a worldwide community of consumers and developers. Don’t think it is just technology that is driving this new direction. Culture is rapidly changing as well. We are experiencing a new way of creating, collaborating, and communicating that does not adhere to the world of the Five Forces.

If the Five Forces of Porter’s model could be described as a castle surrounded by high walls and a moat, the emerging model looks more like the aerial view of Los Angeles: a city center that is not really the center, surrounded by smaller centers and seemingly limitless suburbs in all directions. There are bigger and smaller concentrations of activity, but little unifying power or authority.

PERMEABLE CORPORATIONS: THE NEW MODEL?!
The Five Forces are not dead as an idea because there are still some markets where it works well, such as heavy manufacturing. However, the Five Forces are about information being limited, power being withheld from suppliers and partners, and keeping users from learning about alternatives.
Web 2.0 is a fundamentally different Meta framework. Knowledge is prevalent, easily accessible and no particular idea stands all on its own. Today it is all about co-creation, and it makes things much more interesting. Where you withhold information in the Five Forces, in Web 2.0 you gain advantage by sharing. You want to become Permeable. It’s a source of strategic advantage.