As an academic in the early 1980s my colleagues and I spent much of our time mostly paid for by government and quangos - pondering the wonders of innovation theory in order to produce the silver policy bullet that would revive the UK economy.
Many of my former esteemed colleagues are still earnestly involved in the same endeavour. I’m constantly amazed by the readiness with which their outpourings, and other business school-generated articles of faith, are swallowed by the corporate and bureaucratic worlds and how often the intellectual products of chin scratching cobblers are allowed to run barefoot.
Freed from the surly bonds of academia my subsequent career, building technology PR firms afforded me an insider’s view to the same issue. Experiencing what it’s like to run an entrepreneurial outfit, and being intimately involved with many of the organisations that have shaped the world in which we live today.
As an academic-turned-entrepreneur I smiled wryly when I saw that the Monitor Group, a consulting firm co-founded by university thinker and business school favourite, Michael Porter, was forced to file for bankruptcy protection. For those not familiar with Porter’s work (tsk, tsk, pay attention at the back), he originated the ’five-force’ competitive analysis model that any MBA student of the last 30 years or so can recite in their sleep.
Founded in 1983, exactly the same time as I was cosseted in the dreaming spires, the Monitor Group ultimately generated hundreds of millions of dollars in fees from corporate and non-profit clients. It also became a revenue engine for other large strategy firms such as McKinsey, Bain and BCG as organisations sought to create ’sustainable competitive advantage’ from Porter’s theoretical frameworks.
Despite its initial success, Monitor’s bankruptcy wasn’t unexpected; its long slow slide into oblivion coincided with the global recession. You might be wondering why the consulting firm didn’t use the ’five force’ principles to manage their business better. My bet is that even if they had, the world of business has changed so much since ‘five forces’ that they have been rendered irrelevant.
The problem for Monitor was that in the globalised digital world - except perhaps where artificially created by or supported by government regulation – the sustainable competitive advantage as envisaged by Porter in the five-force analysis model simply isn’t achievable.
But that didn’t stop executives in the corporate world of the recent past dreaming of delivering excess profits by creating structural barriers to competition. Porter’s theories became a convenient mantra for corporate management sitting Canute-like on their Hermann Miller thrones, trying to shore up their business whilst the inevitable tide of change lapped around them.
After all, why go through the entrepreneurial hassle of actually designing and making better products and services when the firm could simply erect a sea-wall positioning its business in a way that ensured endless above-average profits. That’d make paying for the MBA worthwhile and would certainly work for Wall Street and the City. After all, since when have either of those been interested in supporting either entrepreneurship or enabling long-term gains?
How did this situation come to be? In the early 1970s, as the industrial age was coming to the end of its life, and the digital age was still in short pants, Porter began to do his seminal work. He observed that excess profits were real and persistent in some companies and industries, because of effective barriers to competition. His genius was turning this observation into an industry.
Porter’s personal breakthrough came in the Spring of 1979 when he published his findings in the Harvard Business Review in an article entitled ’How Competitive Forces Shape Strategy’ and followed it up the succeeding years with the inevitable books on competition theory. Just like Stephen Hawking’s `A Brief History of Time’ Porter’s books are ones that everyone who wants to be taken seriously claims to have read and understood. In reality copies are unread, but look impressive on the office bookshelf.
It turned out that, like much academic work that interprets and rationalises the past in an attempt to predict the future, Porter’s conceptual framework could help explain excess profits in retrospect. But it became clear to those who tried to use his ideas to model things to come that they were almost useless. Interesting that Porter wisely avoids forecasting. Enough said.
In contrast to embracing Schumpeter’s `gales of creative destruction’ and ignoring fellow `management guru’ Peter Drucker’s previous insight that the only valid purpose of a business is to create a customer, Porter focused strategy on how to protect businesses from rivals. Strategy consultancies, business and business schools subsequently aligned to find safe havens from the forces of competition. How ironic, then, that Porter’s academic studies should have been conducted in the supposed bastion of raw capitalism and unbridled competition, the United States.
The problem was Porter’s basic premise. As Drucker indicated, and most entrepreneurs know intuitively, the positive purpose of business is to add value for customers, their community and ultimately, society at large. This is what should drive strategy. Porter’s negative view of business was driven by how to play the corporate game, avoiding competition and seeking out above-average profits protected by structural barriers. Not taking the risks of making a better product or delivering a better service entail. What it completely ignores is the inevitability that someone from the outside would decide to change the rules of the game. Those game changers started to appear in force as the digital revolution took hold – Amazon, Apple, Google, eBay and a host of now household names leading a pack of digital disrupters hungry for change.
This situation is massively different from the mature oligopolies of ‘50s corporate America on which Porter based his theories, and decades before ideas such as the Black Swan or Long Tail grabbed the innovator’s imagination.
Thus, Monitor effectively fiddled while Rome burned, encouraging business leaders to fail both to their shareholders and to their citizens. Collecting fat fees as digital and internet buccaneers recast business models, value chains and created whole new ecosystems. Unsurprisingly, in this environment, Monitor failed to add value to customers. Eventually customers realised this and stopped paying Monitor for its services. The market made its decision and Monitor went bankrupt.
The reality is that to succeed in today’s hyper-competitive business environment you need to join – as the Americans would say - the offence rather than the defence. Any competitive advantage that can be achieved in an increasingly transparent world comes from out-innovating to attract people, resources and customers; aligning the whole organisation so that it does just that that, over and over again, to focus on delivering steadily more value to customers through continuous innovation. This has to be earned every day by the nitty-gritty of perspiration and inspiration, probably in the ratios that Thomas Edison advised.
Clearly we are not yet in a world of pure, unfettered market forces driving us to the sunny uplands of authenticity and ever-rising customer satisfaction. But the customer is not stupid, never was and never will be. They will find you out very quickly these days, and have the power to close you down or at least put a large dent in your numbers as investors in outed tax avoiders, patent abusers and those indulging old fashioned industrial espionage have discovered.
But is continuous innovation itself sustainable? Can firms go on disrupting themselves as much as they disrupt others in the fight for the customer? Time will tell. What we do see is that organisations that innovate are doing a lot better than firms pursuing shareholder value by market manipulation or focusing merely on defeating rivals. A pyrrhic victory as the ground they are fighting for disappears from underneath them all as the tectonic forces of paradigm shift take their toll. Ask the former management of the now defunct UK electrical chain Comet, who appeared so focused on competing with similar companies selling the same stuff from the same sort of anonymous retail parks that they failed to spot that the world of gadget shopping had moved online.
Just as the idea of sustainable competitive advantage that arose by studying historical numbers and the past structures of the industry became increasingly implausible and irrelevant in rapidly changing economy, so too are the armies of freshly-minted MBA bookworms that used to march into highly remunerative positions in the strategy industry. Like the boy pointing at the emperor with no clothes the idea of engaging those without deep experience in understanding what customers might want, what is involved in actually making things, delivering services in particular industries, never mind how to innovate and create new value in the world outside of the campus now seems faintly ludicrous.
In a world where the only certainty is the certainty of change - and of expecting the unexpected - corporates and other consultants alike should take note if they want to avoid insolvency too. For a future that works they need to think Net-a-Porter, not Michael Porter.
Freed from the surly bonds of academia my subsequent career, building technology PR firms afforded me an insider’s view to the same issue. Experiencing what it’s like to run an entrepreneurial outfit, and being intimately involved with many of the organisations that have shaped the world in which we live today.
As an academic-turned-entrepreneur I smiled wryly when I saw that the Monitor Group, a consulting firm co-founded by university thinker and business school favourite, Michael Porter, was forced to file for bankruptcy protection. For those not familiar with Porter’s work (tsk, tsk, pay attention at the back), he originated the ’five-force’ competitive analysis model that any MBA student of the last 30 years or so can recite in their sleep.
Founded in 1983, exactly the same time as I was cosseted in the dreaming spires, the Monitor Group ultimately generated hundreds of millions of dollars in fees from corporate and non-profit clients. It also became a revenue engine for other large strategy firms such as McKinsey, Bain and BCG as organisations sought to create ’sustainable competitive advantage’ from Porter’s theoretical frameworks.
Despite its initial success, Monitor’s bankruptcy wasn’t unexpected; its long slow slide into oblivion coincided with the global recession. You might be wondering why the consulting firm didn’t use the ’five force’ principles to manage their business better. My bet is that even if they had, the world of business has changed so much since ‘five forces’ that they have been rendered irrelevant.
The problem for Monitor was that in the globalised digital world - except perhaps where artificially created by or supported by government regulation – the sustainable competitive advantage as envisaged by Porter in the five-force analysis model simply isn’t achievable.
But that didn’t stop executives in the corporate world of the recent past dreaming of delivering excess profits by creating structural barriers to competition. Porter’s theories became a convenient mantra for corporate management sitting Canute-like on their Hermann Miller thrones, trying to shore up their business whilst the inevitable tide of change lapped around them.
After all, why go through the entrepreneurial hassle of actually designing and making better products and services when the firm could simply erect a sea-wall positioning its business in a way that ensured endless above-average profits. That’d make paying for the MBA worthwhile and would certainly work for Wall Street and the City. After all, since when have either of those been interested in supporting either entrepreneurship or enabling long-term gains?
How did this situation come to be? In the early 1970s, as the industrial age was coming to the end of its life, and the digital age was still in short pants, Porter began to do his seminal work. He observed that excess profits were real and persistent in some companies and industries, because of effective barriers to competition. His genius was turning this observation into an industry.
Porter’s personal breakthrough came in the Spring of 1979 when he published his findings in the Harvard Business Review in an article entitled ’How Competitive Forces Shape Strategy’ and followed it up the succeeding years with the inevitable books on competition theory. Just like Stephen Hawking’s `A Brief History of Time’ Porter’s books are ones that everyone who wants to be taken seriously claims to have read and understood. In reality copies are unread, but look impressive on the office bookshelf.
It turned out that, like much academic work that interprets and rationalises the past in an attempt to predict the future, Porter’s conceptual framework could help explain excess profits in retrospect. But it became clear to those who tried to use his ideas to model things to come that they were almost useless. Interesting that Porter wisely avoids forecasting. Enough said.
In contrast to embracing Schumpeter’s `gales of creative destruction’ and ignoring fellow `management guru’ Peter Drucker’s previous insight that the only valid purpose of a business is to create a customer, Porter focused strategy on how to protect businesses from rivals. Strategy consultancies, business and business schools subsequently aligned to find safe havens from the forces of competition. How ironic, then, that Porter’s academic studies should have been conducted in the supposed bastion of raw capitalism and unbridled competition, the United States.
The problem was Porter’s basic premise. As Drucker indicated, and most entrepreneurs know intuitively, the positive purpose of business is to add value for customers, their community and ultimately, society at large. This is what should drive strategy. Porter’s negative view of business was driven by how to play the corporate game, avoiding competition and seeking out above-average profits protected by structural barriers. Not taking the risks of making a better product or delivering a better service entail. What it completely ignores is the inevitability that someone from the outside would decide to change the rules of the game. Those game changers started to appear in force as the digital revolution took hold – Amazon, Apple, Google, eBay and a host of now household names leading a pack of digital disrupters hungry for change.
This situation is massively different from the mature oligopolies of ‘50s corporate America on which Porter based his theories, and decades before ideas such as the Black Swan or Long Tail grabbed the innovator’s imagination.
Thus, Monitor effectively fiddled while Rome burned, encouraging business leaders to fail both to their shareholders and to their citizens. Collecting fat fees as digital and internet buccaneers recast business models, value chains and created whole new ecosystems. Unsurprisingly, in this environment, Monitor failed to add value to customers. Eventually customers realised this and stopped paying Monitor for its services. The market made its decision and Monitor went bankrupt.
The reality is that to succeed in today’s hyper-competitive business environment you need to join – as the Americans would say - the offence rather than the defence. Any competitive advantage that can be achieved in an increasingly transparent world comes from out-innovating to attract people, resources and customers; aligning the whole organisation so that it does just that that, over and over again, to focus on delivering steadily more value to customers through continuous innovation. This has to be earned every day by the nitty-gritty of perspiration and inspiration, probably in the ratios that Thomas Edison advised.
Clearly we are not yet in a world of pure, unfettered market forces driving us to the sunny uplands of authenticity and ever-rising customer satisfaction. But the customer is not stupid, never was and never will be. They will find you out very quickly these days, and have the power to close you down or at least put a large dent in your numbers as investors in outed tax avoiders, patent abusers and those indulging old fashioned industrial espionage have discovered.
But is continuous innovation itself sustainable? Can firms go on disrupting themselves as much as they disrupt others in the fight for the customer? Time will tell. What we do see is that organisations that innovate are doing a lot better than firms pursuing shareholder value by market manipulation or focusing merely on defeating rivals. A pyrrhic victory as the ground they are fighting for disappears from underneath them all as the tectonic forces of paradigm shift take their toll. Ask the former management of the now defunct UK electrical chain Comet, who appeared so focused on competing with similar companies selling the same stuff from the same sort of anonymous retail parks that they failed to spot that the world of gadget shopping had moved online.
Just as the idea of sustainable competitive advantage that arose by studying historical numbers and the past structures of the industry became increasingly implausible and irrelevant in rapidly changing economy, so too are the armies of freshly-minted MBA bookworms that used to march into highly remunerative positions in the strategy industry. Like the boy pointing at the emperor with no clothes the idea of engaging those without deep experience in understanding what customers might want, what is involved in actually making things, delivering services in particular industries, never mind how to innovate and create new value in the world outside of the campus now seems faintly ludicrous.
In a world where the only certainty is the certainty of change - and of expecting the unexpected - corporates and other consultants alike should take note if they want to avoid insolvency too. For a future that works they need to think Net-a-Porter, not Michael Porter.
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