Porter's Five Forces Obsolete
Porter's Five Forces Driving Industry Competition (Porter, 4) have been around awhile:
- Potential Entrants - Threat of new entrants
- Buyers - Bargaining power of buyers
- Substitutes - Threat of substitute products or services
- Suppliers - Bargaining power of suppliers
- Industry Competitors - Rivalry among existing firms.
Why do they matter today? I mean, they were derived in the Stone Ages of Strategy, way back in the seventies, weren't they?
We used them today to help decide how to plan to spend some stimulus money that will soon flow into Orange County. We originally had the great idea that the best way to stimulate the "green" industry in OC was to pass a law that said that planning departments could only approve plans that followed a model green abatement plan. Look closely and you'll notice that the abatement plan to decrease negative green impacts on the community focused only on buyers. It ignored potential entrants, substitutes, supplier and competitors. Something got left out of the plan, didn't it? What to do? Include them in the plan. How to do it? There's a question. The first answer is to decide if a plan is required at all. The Libertarians out there will be saying that government doesn't need to interfere in the markets. They'll be alright by themselves. Now, we know that's not so. If we let the markets control things, there are some odds that LA would still be choking on smog - or worse. So, there is a role for regulation. Is there a role for regulation effecting the green industry. Maybe. Working with the planning departments isn't such a bad idea. But there is a whole list of things that might not be such a good idea: don't interfere with the markets with subsidies or protection.
In OC, it is hard to interfere with macroeconomics, so we can't even bother there, but on the national level interference on the macro level isn't going to help. Getting the green manufacturers to work together to share solutions sounds pretty cool, doesn't it? Wrong. Porter say it best, "Encourage new competitors; discourage cooperation (Porter, Competitive Advantage, 681)." Fierce competition is best for everyone. Yep, some companies will fail. The ones that survive will be stronger. Actually, my gut tells me that in fierce competition, there will be fewer failures, actually, because the competition will foster higher wages (how can that be good?), lower prices (again, how can that be good?), and better quality (doesn't quality cost, everyone says?). How does a government help if it wants to improve a competitive environment? Three steps, all long term: encourage better education so there will be more qualified, high level, employees; if you have enough money, invest in infrastructure, especially smart infrastructure, maybe even if you don't need it yet; consider ways to increase capital formation for smaller companies who are starving for cash in this environment. If you do it right small companies will get to profitability (and revenues, obviously) without huge venture capital infusions. If they can pull that off (and basically, in today's environment, they have to) they will be healthier, more long lasting, and more likely to create lots of very useful jobs. Sure there is an attitude. Some rules are OK, yes, but focusing on making the environment conducive to rapid growth in an environment that everyone, including the public, wins.
Porter, Michael E. Competitive Strategy. Techniques for Analyzing Industries and Competitors. The Free Press. 1980.
Porter, Michael E. The Competitive Advantage of Nations. The Free Press. 1990.