It's all about change being continuous
Originally appearing in IMD's Tomorrow's Challenges - July 2014
What if I told you that the foundation of much of how we've opened strategic conversations in business schools over the last forty years is now perceived as being unreliable? Not "wrong," not "misleading," not "unnecessary," but something that you need to be much more careful about in using than in the past. I'm speaking about Michael Porter's long-loved "five-forces" approach to industry analysis. The new advice is let the user beware.
Porter's approach to sizing up an industry has provided managers with a map of the competitive terrain before making important strategic choices to raise the probability they will succeed. Since strategy is used to set direction for future choices, the Porter model has been at the heart of how firms behave in a marketplace, and how strategy-makers see their role. Andy Grove, a founder and long-time CEO of Intel, wrote a tribute to the power of the Porter model in helping Intel make better choices to build long-term success, in his book Only the Paranoid Survive. Since 1979, five-forces have been the strategy-maker's best friend. I, myself, have earned a good living using the model as the starting point in helping executives formulate strategy.
Why question the Porter model now? There are two compelling reasons: the ubiquity and acceleration of change. We live in a world of incessant change driven by the convergence of formerly distant technologies and markets. The five forces recognize such change in the form of "substitutes", but treat them episodically. I can recall hearing such "substitutes" characterized as "if you're lucky, this won't happen during your career". This can be more than misleading, it can be dangerous.
The second complication is that the five-forces model is for industries not firms. Yet what industry does traditional banking belong to as compared to bitcoin and PayPal? If you can no longer articulate what industry you are in, how can you do a five-forces representation of that industry? How can you make better choices in the face of such uncertainty?
Recently, led by Steve Denning in Forbes, and Rita McGrath in her book The End of Competitive Advantage, there has been a search for an alternative approach to thinking about the competitive landscape that is more appropriate for a time of change, and this has led to the academic equivalent of a "slugfest" in a debate among Harvard Business School faculty over whether or not Professor Clayton Christensen's theory of disruptive innovation is such an alternative or whether it is more aptly regarded as: terrorism, outdated, or even a myth. My colleague Howard Yu, who studied with Christensen, recently wrote about this unprecedented squabble between some of the business strategy field's superstars. Howard correctly noted the danger of allowing academic politics to distract managers from using "theories" that might help them. This would be, he suggests, a "lose-lose" for everyone.
I am an unabashed fellow-traveler with the "disruption model". While I don't agree with everything that Christensen has associated with this idea, I do think that it's a more reliable approach to establishing strategic choice than the next best alternative and better than five-forces.
What Christensen, and others before him, have seen is that industry change is continuous, not episodic. This is critical to innovative strategy thinking. Embracing change before it is required has been a message my IMD colleague Peter Killing has advocated: initiate change when resources are abundant and people feel good, rather than when resources are scarce and people are afraid. Industry evolution can be better portrayed as a recurring series of punctuated equilibriums, where ideas take hold, a new industry is born, incumbent champions evolve and prosper, and then they – almost all at the same time – are "disrupted" by outsiders who have no legacy to protect and who are more agile in addressing nascent customer desires.
During the last decade, the pace of innovation has accelerated and threatened to blow up every industry. Music, media and book publishing are perfect examples of this. Many people think disruption happens to individual companies, but disruption occurs at the industry level. We speak of how disruption destroyed Kodak but we don't ever discuss Agfa and Fuji. They were all in it together.
Recently, it would seem as if the broad acceptance of Christensen's work has led to "disruption fatigue", and Harvard historian Jill Lepore, writing in The New Yorker, questioned the underlying integrity of the model. She has gone so far as to suggest that "Disruptive innovation is a competitive strategy for an age seized by terror". I think that this is overdone. Yes, we see the term "disruption" applied too frequently and casually and this detracts from its usefulness, but the logic underlying the model works and should be a useful addition to our managerial repertoires.
Disruption has become a normal part of managerial lives and in order for firms to escape the disruption occurring in their industries, they must better understand the dynamics of the change they inevitably face. I believe that you should never be surprised by surprise.
We cannot predict the future, but in order to stay ahead of industry disruption, firms have to think creatively and jump ahead to the next generation. But they are often not looking in the right place. How could a camera company imagine that a telephone would replace them?
This should not mean a wholesale rejection of the traditional five-forces approach, but rather a more balanced approach to strategy that incorporates dynamic change-centered thinking, such as Christensen's work, along with the more static mapping that Porter's five-forces provides.