Uselessness of Porter’s 5 Forces & ‘Blue Ocean’ theology

Guru gibberish applied to Dell/EMC.

Porter’s Model

Porter’s analysis from a generation ago, stipulates that ‘industry structure’ will determine a firm’s strategy.  For Porter, there are ‘5 forces’ within an industry: threat of entrants, power of suppliers, power of buyers, threat of substitute products or services, and rivalry among existing competitors [Porter, 2008].  If applied to Dell we can summarize:

Threat of entrants:  Differs by market segment.  The PC industry is a mature oligopoly with a lot of entry barriers including supply, logistics, plant and equipment.  The Cloud market is different however, with lower entry barriers and new entrants and technologies arriving almost daily [Dell, 2016].  Threat of entrants is also known as competition.

Power of suppliers:  Dell’s PC business is an assembly operation.  Given the competition amongst suppliers, and given Dell’s enormous size, it is Dell and not the suppliers who have power.  Dell must keep good relations with AMD [chip manufacturer] and Microsoft [Windows OS] [Lev-Ram, 2017].

Power of buyers:  These can be affected by economic issues.  Dell’s business is so diversified across consumer and business markets, that no single economy, or firm, or group of buyers, has power over Dell [Marketline, 2016].

Threat of substitutes:  This might apply to the hardware and Cloud markets.  Dell does not compete on price however, but customization, service and reliability.  This is related to competition [Dell, 2017].

Rivalry among competitors:  Dell competes against a long list of large firms in both hardware and the Cloud market.  Its strategy has always been to offer value, not compete on price [it already loses $1 billion p.a.]; and develop market leaders [Darrow, 2016].

Limitations of 5 Forces:

There are plenty of limitations and issues with the Porter model [Merchant, 2012].  His ‘5 forces’ are arbitrarily chosen, and more appropriate for a static industry.  They are not relevant to the IT industry [Dalken, 2014].  Internet technology has fundamentally changed industry and competition.  In technology, firms can radically change industries.  Partnerships, co-opetition, consumer expectations, corporate budgets, and service utility are more relevant [Dalken, 2014]. His own firm Monitor went bankrupt in 2011.  Firms do not want to pay for ‘industry analysis’.  They need results and Porter’s 5 forces are better suited to the 19th century, than to a dynamic market environment of the 21rst.

Blue Ocean critique

It is hard to penetrate the models around Blue Ocean as devised by Kim & Mauborgne, in 2004/2005.  Basically these 2 academics who never built a product, a firm, or a service, ‘researched’ successful firms and mapped back to their model [a descriptive process], declaring that firms must sail off and discover new lands, devoid of competition, through the development of new products and services.  Questions are obvious:

  • How do I discover new oceans?
  • Why would I ignore the competition?
  • What if they are out innovating, looking for new oceans? Can’t I learn from them?
  • How much R&D time and budget do I need to discover my ‘Blue Ocean’?

Blue Ocean has no answers to these questions [see also Herman, 2008].

Further, business and markets are not a zero-sum game [see Porter, 2008 another academic who makes the same fatal assumption].  Blue Ocean suffers from the belief that competition is always negative, always bad, and always depresses profits.  The theory is therefore tautological (Burke, 2010).  It is also empirically invalid:

‘What we find is that in the long run is that profitability does indeed decline with competition, but it is actually quite a pedestrian force.. takes about fifteen years for an industry to push an innovation’s profits back down to a very basic level. What that means is that the profit gains from innovation, in an existing market, are quite a lot more than previously supposed.

The implication of that is that companies should pay close attention to their existing markets when looking for opportunities for innovation.’ [Burke, 2010]

This could mean that a more cogent approach is incremental innovation including R&D.

Limitations of a Pure Resource Value Based Approach

Limits of a pure RBV which impact Dell:

  • RBV theory has not been proven. Because of the heterogeneity of firms, creating a homogeneous control group has not been done, and is practically difficult to set up (Kellersman et al, 2016).
  • RBV focuses only on the internal capabilities of a firm, and ignores externalities. Many firms might have resources and skills but still fail in the marketplace.  RBV ignores the market and dynamic competition (Bridoux, 2004).
  • RBV cannot be used predictively, limiting its value (Priem & Butler, 2001a).
  • RBV is tautological and backward looking. It assumes a past-path dependency in which a successful firm acquired its resources and that its past shapes the future.  In a dynamic market this can’t be true (Priem & Butler, 2001b) and certainly does not apply to Dell.
  • Many firms such as Dell, live in markets of fungible and movable resources, in an industry in which competition is intense and IP easily copied. Yet they thrive, compete and expand.  They are not homogenous, but they are not heterogenous either (Kraaijenbrink, 2012).

Bridoux also criticizes RBV and its lack of applicability to multi-product markets.

‘I do not agree with Peteraf and Barney (2003: 314) that this type of framework “can be extended in a straightforward fashion to the multiproduct realm”. On the contrary, I argue below that multimarket reality significantly impacts competition.’ (Bridoux, 2004:12).

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