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.