So, what are the most popular tools used by companies in conducting a strategic review or creating a new strategy? After the ubiquitous (and often ineffectual) SWOT analysis, Porter’s name seems destined to appear. Porter’s Five Forces, Porter’s Value Chain, Porter’s Generic Strategies…
But why? Let me suggest that we use Porter because we’ve always used Porter (well, since around 1980, anyway). Not because his models provide the best possible basis for understanding our industries and how we can compete to best effect. Don’t get me wrong, there’s value in all of these models, and if a tool really works for you, then use it. But, I would argue, there are better ways to create effective strategies.
Let’s start with understanding our industry. We conduct a Five Forces analysis, integrate research and analysis on industry concentration, competitive dynamics and soon, we have a decent handle on what’s really going on. But what do we do with it? The answer in most cases, I suspect, is very little. It’s a nice to have, but do we really put it to good use? Rarely.
Firstly, there seem to be so many other industry-level forces relevant to understanding what’s going on:
• Complements (the natural partner of Substitutes in economic analysis)
• Government (as an industry-level force in banking, financial services and any other highly regulated industry)
• Liquidity – Still a major enabler or constraint, even in the post Credit Crunch era.
There are more, but let’s get to a more important point…
Perhaps the most significant limitation of Porter’s Five Forces is that it doesn’t quite address what is surely one of the most fundamental questions we can ask in strategy:
What does it take to be successful in this industry?
Grant’s model of Industry Key Success Factors focuses on precisely that question, and builds on two fundamental tenets of strategic analysis:
What the Customer Wants (Which can be largely informed by a PEST/PESTLE/STEEPLE analysis)
How to Survive the Competition (Which can be largely informed by Porter’s Five Forces with whatever additions we find useful)
Once we have a clear understanding of Industry Key Success Factors, we can start exploring what mix of Resources and Capabilities we need to compete successfully. Here we may find a natural tendency to gravitate towards the Value Chain Analysis.
This model can, of course, be very useful in helping us understand the mix of support and primary activities that can contribute to margin – in other words, how the company creates and destroys value. However, does this linear, static model really capture the reality of how firms compete successfully?
In practice, it can lead to an overly simplistic representation, and we need to understand the resources and capabilities that a firm possesses in order to see how they compete. These might include some of the more everyday tangible elements of the business, but also the intangible and human resources. Porter’s model (at least, in its generic form) doesn’t appear to handle these explicitly. It’s hard to imagine a strategic appraisal of Starbucks, for example, without an understanding of the brand and other intangibles.
There’s a lot to be said for using tried and tested models and at least something to be said for keeping it simple (well, maybe)… but, at the end of the day, we need to get results – a business model that works! Is Porter the key to achieving this? I suspect not. So what is?
To start with, we must understand and accept that a firm’s ability to sustain competitive advantage in a given industry is inevitably based on a complex mix of resources and capabilities, articulated by the right strategies to address what the customer really wants and needs.
There are a number of tools for achieving this and I commend the following approaches for their rigorous approaches, and the ability to assimilate and manage complex realities:
•Kaplan and Norton’s Strategic Mapping Process
•Eden and Ackermann’s Visual Strategy
If your firm is not quite ready for this approach, then Grant’s model for Linking Resources and Capabilities to Industry KSFs might be a good starting point – a logical structure is a great place to start: