Michael Porter’s Ideas Need a Facelift

MBA students are quite familiar with Harvard Business School’s Michael E. Porter and his work on business strategy.  His most famous idea, the Five Forces industry analysis, has shaped the way everyone from students to executives view business strategy.  Other important work from Porter include the value chain and other assorted strategies.  His ideas are frequently used to evaluate firms’ strategic positioning and are studied in numerous business courses.  The ideas are well-known, and have withstood criticisms from other scholars since their introduction.  But I recently read an article that argued for an update to Porter’s ideas based on the advent of social media tools, and it argues that Porter’s ideas need to be updated to fit within the new social era businesses are learning to operate within.

Nilofer Merchant’s “Why Porter’s Model No Longer Works” was posted on the Harvard Business Review website on February 29, 2012.  The main idea of the article is this: The social era shifts Porter’s [value chain] model, and helping firms determine what they will produce, how much to produce, and how to finance that production (or service).  How does the social era allow this?  How do tools like Twitter and Facebook affect how and what firms will produce and sell?  Easy; these tools allow them to converse directly with their customers.

Ms. Merchant provides several examples of how the social era can completely alter the ways firms do business with consumers.  And at first glance, I wasn’t sure how the ideas she proposes differ from current just-in-time manufacturing processes.  But this quote from the article summarizes for me the business advantages that Ms. Merchant argues social tools provide for business: “Social gives companies more control to operationally adjust their offers and create zealots by better collecting and amplifying even weak signals.”

Now what does that mean?  I believe it may be easier to demonstrate the above statement with some examples.  First, traditional just-in-time manufacturing allows firms to build a product once an order for it has been placed (like when someone builds a custom laptop online).  In this example, the firm decides what features are made available to customers, and the customers then select from those predetermined options.  Ms. Merchant’s article however, proposes that customers have a say in determining exactly what components are offered, and firms then work to offer that exact product to the customers requesting it.

In this way, extremely nimble firms can comb social data and target specific (and highly profitable) customer segments.  These customer segments (and the products they desire) have in the past been out-of-reach of firms.  The products often served a small niche market, and companies would struggle to verify whether product demand would meet the manufactured supply. Now, social tools and networks allow businesses to meet the direct needs and desires of customers and have verification that demand exists before production even begins.

Granted, this idea is simply being discussed in the article, and has not yet been rolled-out on a massive scale.  But I can imagine companies utilizing the seemingly unlimited amounts of social data to create business models and strategies that encourage direct customer interaction and communication with firms providing a product or service.  This idea could dramatically change the way companies do business with consumers, and require some changes to the idea proposed by Michael Porter nearly 35 years ago.

What do you think?  Will the social era dramatically change the way business is done?  Are Ms. Merchant’s ideas on the right track?  Share your opinions in the comment section below.

Here is an article I read recently that I found quite interesting:

“Generational Perspectives Can Strengthen Your Strategy” – I personally have wondered what new perspectives or ideas I can bring to the world of business.  This article explores what new perspectives Generation Y employees (like myself) will bring to the companies they work for, and what important questions they will ask that could potentially alter the way current firms do business.

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