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Beyond Porter – A Critique of the Critique of Porter

The writings of the American management- tools: digitalization, globalization, and


guru and Harvard-Professor Michael E-Porter deregulation.
are considered to be among the most
influential of their subject – and among the Digitalization: As power of information
most critiqued ones. Porter had a lasting technology grows, all players in a market will
influence on strategic management with his have access to far more information. Thus,
books about competitive advantages on totally new business models will emerge in
industry level and on global level, which were which even players from outside the industry
written in the eighties. Porter’s models like the are able to vastly change the basis of
Five Competitive Forces, the Value Chain or competition in a market. Downes gives the
Porters Diamond have become standard example of the rise of electronic shopping
equipment of the manager’s toolbox. malls, operated for instance by telecom
operators or credit card organizations. Those
Porter’s ideas became more and more subject who use the Five Forces Model and who base
of critique under the impression of the their thinking on today’s industry structure
developing Internet economy during the last would never see these changes coming in
decade. Critics point out that economic time.
conditions have changed fundamentally since
that time. The rise of the Internet and of Globalization: Improvements in distribution
various e-business applications has strongly logistics and communications have allowed
influenced nearly all industries. nearly all businesses to buy, sell and
cooperate on a global level. Customers,
In fact, Porters theories base on the economic meanwhile, have the chance to shop around
situation in the eighties. This period was and compare prices globally. In the result,
characterized by strong competition, cyclical even locally orientated mid-sized companies
developments and relatively stable market find themselves in a global market, even if they
structures. Porter’s models focus on the do not export or import themselves.
analysis of the actual situation (customers, One can add here, that global and networked
suppliers, competitors etc) and on predictable markets impose new requirements on
developments (new entrants, substitutes etc). organizations' strategies. It is not enough any
Competitive advantages develop from more to position oneself as a price-leader or
strengthening the own position within this Five- quality-leader (like Porter suggests in his
Forces-Framework. Hence, these models Generic Strategies model). Rather competitive
cannot explain or analyze today’s dynamic advantages emerge now from the ability to
changes that have the power to transform develop lasting relationships to more mobile
whole industries. costumers and to manage far-reaching
networks of partners for mutual advantage.

Downes’ Three new Forces Deregulation: The past decade has seen a
Larry Downes, co-author of “Unleashing the dramatic shrinking of government influence in
Killer App: Digital Strategies for Market many industries like airline, communications,
Dominance” states in his article “Beyond utilities and banking in the U.S. and in Europe.
Porter” that these assumptions are no longer Fuelled by the new opportunities of information
viable. He identifies three new forces that technology, organizations in these industries
require a new strategic framework and a set of were able and forced to completely restructure
very different analytic and business design their businesses and to look out for
alternatives.
© Dagmar Recklies, June 2001
Recklies Management Project GmbH § www.themanager.org
Tel. ++49/391/5975930 § Fax ++49/721/151235542 § mail: drecklies@themanager.org
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However, if one wishes to conclude that


Downes summarizes that the role of Porters models are not useful any longer for
information technology is the foremost strategy development, he should bear in mind
difference between strategy what he calls the that a good strategy should never base on just
‚Porter world’ and in the new world of the new a few selected models. Even in the eighties, it
forces. The old economy used IT as a tool for was not advisable to build a strategy on
implementing change. Today technology had nothing but Porters models. Every strategy
become the most important driver for change. should base on a careful analysis of all internal
and external factors and on their potential
future development. This is no new insight.

Critique – Is Porter Still Viable? Moreover, the latest shift from dot-com-hype to
Downes’ arguments are convincing. In fact, dot-com-crashes has given evidence that the
digitalization, globalization and deregulation basic laws of economics are viable for the new
have become powerful forces during the last economy or information economy too. Exactly
years, but Porter's models rarely take them this – economic insights – are the basis for the
into consideration. Today’s markets are highly sustainability for Porters ideas.
influenced by technological progress,
especially in information technology. Michael E. Porter is an economist. His Five
Therefore, it is not advisable – if not to say Forces model is based on microeconomics. It
impossible – to develop a strategy solely on just describes them in a more understandable
the basis of Porters models. way. Porter talks about the attractiveness of an
Shapiro and Varian explain in their book industry that is influenced by the shape of five
„Information Rules“ that the economical laws forces. In economics, the constellation of
that apply to products and services cannot be factors determines issues like profit
simply transferred to the new category maximization or supernormal profits.
information good. Production, marketing etc
are different for products and services and,
hence, are different for information too.

Porters Five Forces Areas of Microeconomics


Bargaining Power of Suppliers Supply and demand theory, cost and production theory, price
elasticity
Bargaining Power of Customers Supply and demand theory, customer behavior, price elasticity
Rivalry between Existing Players Market structures, number of players, market size and growth
rates
Threat of Substitutes Substitution effects
Threat of New Entrants Market entry barriers
à Industry attractiveness à Profitability, supernormal profits

© Dagmar Recklies, June 2001


Recklies Management Project GmbH § www.themanager.org
Tel. ++49/391/5975930 § Fax ++49/721/151235542 § mail: drecklies@themanager.org
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Nobody will question the viability of these laws. limited to achieving a better competitive
position against other players. Now it is more
A story for illustration: important to form co-operations for mutual
In a lecture that the author attended, the tutor benefits. This can be ad hoc networks of
presented his very personal judgment of
partners, common standards, strategic
Porters models:
“Porters Five Forces model is simple. It is alliances and much more in-between.
nothing but microeconomics. This man had
locked himself in a library for a few years, had In the result, Porters ideas have become just
analyzed some companies and than he
one tool from the manager’s toolbox. This tool
managed to summarize nearly the whole
science of microeconomics in one single is no longer the only or the most important tool.
simple model. – That is the reason why all But it is not obsolete either. Rather it should be
other economists hate him: they are envious used in company with new and traditional
because they did not see something so
management techniques in order to gain the
obvious themselves.”
… this might be another explanation why there most comprehensive picture.
is so much critique of Porter.
Downes critique of Porter implies that Porters
models focus too much on the economic
Therefore – despite all changes in industry conditions of their era of origin. Therefore, their
dynamics and business models – Porters ideas viability is limited under changed conditions.
are not totally obsolete. Their underlying idea We need to add here that Downes new forces
is that every business operates in a framework are derived from the economic conditions of
of suppliers, buyers, competitors, new entrants their particular era too. Within some years or
and substitutes. This idea is valid in every decades, they will have lost some of their
competition-based economy. Even today, importance because other developments have
every organization in the old economy and in taken over the driving role.
the new economy has to produce its goods The most sustainable of Downes new forces
and services and to sell them by offering an will probably be digitalization. The good
attractive bundle of value for money and ‘information’ will become more and more
supporting services. Every online portal has to important for any economy. There will be more
produce or to buy content, to present it, and to technological progress in information
find buyers for its offerings – be it visitors or technology that has the power to transform
advertisers. Hence, organizations still operate industries again and again.
in the framework of the five forces described
by Porter. Moores Law:
Every 18 months, processing power doubles
What is new is that Downes forces made this while cost of processors holds constant.
framework more instable, dynamic and
Metcalfes Law:
complex. Even careful market observation The utility of a network rises equivalently as
cannot foresee all potential new entrants or the square of the number of its users rises.
substitutes that might enter the market virtually
overnight, driven by technological progress. Globalization and deregulation, however, are
Organizations have to adjust their structures, typical drivers of our time. Within some years
processes, business models and strategies to (and I intentionally avoid a precise prediction)
this new dynamics. Nevertheless, it is not less governments will have deregulated everything
important to think about the own bargaining that objectively makes sense. Later there is
power towards suppliers or customers. The (almost) nothing left to deregulate. Hence, the
difference is that managers today have more transformation processes related to
means to influence competitive forces. deregulation would be completed at some day
Traditional thinking in Porters world was largely in the future. Globalization is very similar. We
© Dagmar Recklies, June 2001
Recklies Management Project GmbH § www.themanager.org
Tel. ++49/391/5975930 § Fax ++49/721/151235542 § mail: drecklies@themanager.org
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can expect that all companies will adjust their more. New economic laws came up and other
operations to a global economy eventually. drivers stared to transform markets.
Those who do not will fail to succeed in the Nevertheless, that does not mean that Porters
marketplace. If this is the case, global thinking theories became invalid. All we have to do is to
becomes as much a standard management apply them with the knowledge of their
activity as cost control or selling are today. limitations in mind and to use them as a part of
Than there will most probably no more major a larger framework of management tools,
transformations from deregulation and techniques and theories. This approach,
globalization. however, is advisable for the application of
every business model – brand-new or old, from
Porter or from somebody else, and in every
In summary, Michael Porters models do not economy.
have the influence they used to have any

Literature:
Larry Downes: Beyond Porter. In Context Magazine. Available at
http://www.contextmag.com/setFrameRedirect.asp?src=/archives/199712/technosynthesis.asp
Without title: http://www.rit.edu/~gdc9977/docs/CLARKE873-1.html
Dagmar Recklies: Management Models – What they can Do and what they cannot Do. Available at
http://www.themanagement.de/Ressources/Managementmodelle.htm
Dagmar Recklies: Porters Five Forces. Available at
http://www.themanagement.de/Ressources/P5F.htm
Shapiro, C. & Varian, H.: Information Rules.
Porter, M.: Competitive Strategy

© Dagmar Recklies, June 2001


Recklies Management Project GmbH § www.themanager.org
Tel. ++49/391/5975930 § Fax ++49/721/151235542 § mail: drecklies@themanager.org