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What killed the Monitor Group, the consulting firm co-founded by the legendary business guru, Michael Porter? In November 2012, Monitor was unable to pay its bills and was forced to file for bankruptcy protection. Why didn’t the highly paid consultants of Monitor use Porter’s famous five-force analysis to save themselves?
Was Monitor’s demise something that happened unexpectedly like a bolt from the blue? Well, not exactly. The death spiral has been going on for some time. In 2008, Monitor’s consulting work slowed dramatically during the financial crisis. In 2009, the firm’s partners had to advance $4.5 million to the company and pass on $20 million in bonuses. Then Monitor borrowed a further $51 million from private equity firm, Caltius Capital Management. Beginning in September 2012, the company was unable to pay monthly rent on its Cambridge, Mass., headquarters. In November 2012, Monitor also missed an interest payment to Caltius, putting the notes in default and driving the firm into bankruptcy.
Was it negligence, like the cobbler who forgot to repair his own children’s shoes? Had Monitor tried to implement Porter’s strategy and executed it poorly? Or had Monitor implemented Porter’s strategy well but the strategy didn’t work? If not, why not?
Was it missteps, such as chasing consulting revenue from the likes of the Gaddafi regime in Libya? Or had the world changed and Monitor didn’t adjust? Or was it, as others suggested, that Monitor had priced itself out of the market? Or was Monitor’s bankruptcy, as some apologists claimed, merely a clever way of selling its assets to Deloitte?
Or was it, as Peter Gorski wrote, that “even a blindfolded chimpanzee throwing darts at the Five Porter Forces framework can select a business strategy that performs as well as that prescribed by Dr. Porter and other high-paid strategy consultants?” If so, are other strategy consulting firms also doomed?
The answers to these intriguing questions are strange and troubling. We can find some of them in the work of consulting insider, Matthew Stewart, and his enlightening, but misleadingly-titled, book, The Management Myth (Norton, 2009).
In his book, Stewart tells how in 1969, when Michael Porter graduated from Harvard Business School and crossed the Charles River to get a doctorate in Harvard’s Department of Economics, he learned that “excess profits were real and persistent” in some companies and industries, because of barriers to competition. To the public-spirited economists, the excess profits of these comfortable low-competition situations were a problem to be solved.
Porter saw that what was a problem for the economists was, from a certain business perspective, a solution to be enthusiastically pursued. It was even a silver bullet. An El Dorado of unending above-average profits? That was exactly what executives were looking for—a veritable shortcut to fat city!
Why go through the hassle of actually designing and making better products and services, and offering steadily more value to customers and society, when the firm could simply position its business so that structural barriers ensured endless above-average profits?
Why not call this trick “the discipline of strategy”? Why not announce that a company occupying a position within a sector that is well protected by structural barriers would have a “sustainable competitive advantage”?
Why not proclaim that finding these El Dorados of unending excess profits would follow, as day follows night, by having highly paid strategy analysts doing large amounts of rigorous analysis? Which CEO would not want to know how to reliably generate endless excess profits? Why not set up consulting a firm that could satisfy that want?
Thus it was that in March/April 1979, Michael Porter published his findings in Harvard Business Review in an article entitled “How Competitive Forces Shape Strategy” and followed it up the next year with a a very long book. The writings started a revolution in the strategy field. Michael Porter became to the new discipline of strategy “what Aristotle was to metaphysics”.
Better still, the new-born discipline of strategy was able to present itself as “the discipline that synthesizes all of the other functional sub-disciplines of management into a meaningful whole. It defines the purpose of management and of management education.”
In 1983, Porter co-founded his consulting company, the Monitor Group, that over the years generated hundreds of millions of dollars in fees from corporate clients (as well as from clients in the nonprofit sector), and also providing rich livelihoods for other large consulting firms, like McKinsey, Bain and BCG.
“Among academics,” writes Joan Magretta in Understanding Michael Porter, “he is the most cited scholar in economics and business. At the same time, his ideas are the most widely used in practice by business and government leaders around the world. His frameworks have become the foundation of the strategy field.”
There was just one snag. What was the intellectual basis of this now vast enterprise of locating sustainable competitive advantage? As Stewart notes, it was “lacking any foundation in fact or logic.” Except where generated by government regulation, sustainable competitive advantage simply doesn’t exist.
Porter might have pursued sustainable business models. Or he might have pursued ways to achieve above-average profits. But sustainable above-average profits that can be deduced from the structure of the sector? Here we are in the realm of unicorns and phlogiston. Ironically, like the search for the Holy Grail, the fact that the goal is so mysterious and elusive ironically drove executives onward to continue the quest.
Hype, spin, impenetrable prose and abstruse mathematics, along with talk of “rigorous analysis”, “tough-minded decisions” and “hard choices” all combined to hide the fact that there was no evidence that sustainable competitive advantage could be created in advance by studying the structure of an industry.
Although Porter’s conceptual framework could “help explain excess profits in retrospect, it was almost useless in predicting them in prospect.” As Stewart points out, “The strategists’ theories are 100 percent accurate in hindsight. Yet, when casting their theories into the future, the strategists as a group perform abysmally. Although Porter himself wisely avoids forecasting, those who wish to avail themselves of his framework do not have the luxury of doing so. The point is not that the strategists lack clairvoyance; it’s that their theories aren’t really theories— they are ‘just-so’ stories whose only real contribution is to make sense of the past, not to predict the future.”
How did all this happen? Porter began his publishing career in his March-April 1979 Harvard Business Review article, “How Competitive Forces Shape Strategy”, with a very strange sentence: “The essence of strategy is coping with competition.” Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a business is to create a customer, Porter focused strategy on how to protect businesses from other business rivals. The goal of strategy, business and business education was to find a safe haven for businesses from the destructive forces of competition.
By defining strategy as a matter of defeating the competition, Porter envisaged business as a zero-sum game. As he says in his 1979 HBR article, “The state of competition in an industry depends on five basic forces… The collective strength of these forces determines the ultimate profit potential of an industry.” For Porter, the ultimate profit potential of an industry is a finite fixed amount: the only question is who is going to get which share of it.
Sound business is however “unlike warfare or sports in that one company’s success does not require its rivals to fail. Unlike competition in sports, every company can choose to invent its own game.” As Joan Magretta points out, “a better analogy than war or sports is the performing arts. There can be many good singers or actors—each outstanding and successful in a distinctive way. Each finds and creates an audience. The more good performers there are, the more audiences grow and the arts flourish.”
What’s gone wrong here was Porter’s initial thought. The purpose of strategy—or business or business education—is not about coping with competition–i.e. a contest in which a winner is selected from among rivals. The purpose of business is to add value for customers and ultimately society. There is a straight line from this conceptual error at the outset of Porter’s writing to the debacle of Monitor’s bankruptcy. Monitor failed to add value to customers. Eventually customers realized this and stopped paying Monitor for its services. Ergo Monitor went bankrupt.
In the theoretical landscape that Porter invented, all strategy worthy of the name involves avoiding competition and seeking out above-average profits protected by structural barriers. Strategy is all about figuring out how to secure excess profits without having to make a better product or deliver a better service.
It is a way of making more money than the merits of the product or service would suggest, or what those plain folks uncharitable to the ways of 20th Century business might see as something akin to cheating. However for several decades, many companies were ready to set aside ethical or social concerns and pay large consulting fees trying to find the safe and highly profitable havens that Porter’s theory promised.
Although Michael Porter, the human being, appears to be a well-meaning man of high personal integrity, his framework for the discipline of strategy “isn’t just an epistemological black hole; in its essence, it’s antisocial, because it preserves excess profits, and it’s bad for business, because it doesn’t work. It accomplishes the unlikely feat of goading business leaders to do wrong both to their shareholders and to their fellow human beings.”
It is only recently that Porter’s writing has begun to include any awareness that creating safe havens for businesses with unending above average profits protected by structural barriers is not good for customers and society, with his advocacy of shared value. This recognition has come, however, without yet jettisoning any of the toxic baggage of sustainable competitive advantage.
The disastrous consequences of thinking that the purpose of strategy, business and business education is to defeat one’s business rivals rather than add value to customers has of course been aggravated by the epic shift in the power of marketplace from the seller to the buyer. In the studies of the oligopolistic firms of the 1950s on which Porter founded his theory, it appeared that structural barriers to competition were widespread, impermeable and more or less permanent.
Over the following half century, the winds of globalization and the Internet blew away most of these barriers, leaving the customers in charge of the marketplace. Except for a few areas, like health and defense where government regulation offers some protection, there are no longer any safe havens for business. National barriers collapsed. Knowledge became a commodity. New technology fueled spectacular innovation. Entry into existing markets was alarmingly easy. New products and new entrants abruptly redefined industries.
The “profit potential of an industry” turned out to be, not a fixed quantity with the only question of determining who would get which share, but rather a highly elastic concept, expanding dramatically at one moment or collapsing abruptly at another, with competitors and innovations coming out of nowhere. As Clayton Christensen demonstrated in industry after industry, disruptive innovation destroyed company after company that believed in its own sustainable competitive advantage.
The business reality of today is that the only safe place against the raging innovation is to join it. Instead of seeing business—and strategy and business education—as a matter of figuring out how to defeat one’s known rivals and protect oneself against competition through structural barriers, if a business is to survive, it must aim to add value to customers through continuous innovation and finding new ways of delighting its customers. Experimentation and innovation become an integral part of everything the organization does.
Firms like Apple [AAPL], Amazon [AMZN], Salesforce [CRM], Costco [COST], Whole Foods [WFM] and Zara [BMAD:ITX] are examples of prominent firms pursuing this approach. They have shifted the concept of the bottom line and the very purpose of the firm so that the whole organization focuses on delivering steadily more value to customers through innovation. Thus experimentation and innovation become an integral part of everything the company does. Companies with this mental model have shown a consistent ability to innovate and to disrupt their own businesses with innovation.
Thus what is striking about continuous innovation is that the approach is not only more innovative: it tends to make more money. The latter point is important to keep in mind. For all the hype about innovation, unless it ends up making more money for the firm, ultimately it isn’t likely to flourish. Making money isn’t the goal, but the result has to be there for sustainability.
Is continuous innovation sustainable? Firms like those I mentioned have been at it for one or more decades with extraordinary results. What’s interesting is that they are consistently disrupting others, rather than being disrupted themselves. Will they survive for 50 or 100 years? Time will tell. What we do see is that they are doing a lot better than firms pursuing shareholder value or focusing merely on defeating rivals.
In this world, the value proposition of a supposed sustainable competitive advantage achieved by studying the numbers and the existing structure of the industry became increasingly implausible and irrelevant. Its consultants were not people with deep experience in understanding what customers might want or what is involved in actually making things or delivering services in particular industries or how to innovate and create new value.
They were part-time academics who promised to find business solutions just from studying the numbers. They had no idea how to build cars or make mobile phones or generate great software. They were numbers men looking for financial solutions to problems that required real-world answers.
The important question is not: why did Monitor go bankrupt? Rather, it is: how were they able to keep going with such an illusory product for so long? The answer is that Porter’s claim of sustainable competitive advantage, based on industry structure and the numbers, had massive psychological attractions for top management.
Porter’s theory thus played to “the image of the CEO as a kind of superior being.” As Stewart notes, “For all the strategy pioneers, strategy achieves its most perfect embodiment in the person at the top of management: the CEO. Embedded in strategic planning are the assumptions, first, that strategy is a decision-making sport involving the selection of markets and products; second, that the decisions are responsible for all of the value creation of a firm (or at least the “excess profits,” in Porter’s model); and, third, that the decider is the CEO. Strategy, says Porter, speaking for all the strategists, is thus ‘the ultimate act of choice.’ ‘The chief strategist of an organization has to be the leader— the CEO.”
Strategy leads to “the division of the world of management into two classes: “top management” and “middle management.” Top management takes responsibility for “deciding on the mix of businesses a corporation ought to pursue and for judging the performance of business unit managers. Middle management is merely responsible for the execution of activities within specific lines of business.”
The concept of strategy as it emerges “defines the function of top management and distinguishes it from that of its social inferiors. That which is done at the top of an organizational structure is strategic management. Everything else is the menial task of operational management.”
Practitioners of strategy “insist on this distinction between strategic management and lower-order operational management. Strategic (i.e. top) management is a complex, reflective, and cerebral activity that involves interpreting multidimensional matrices. Operational management, by contrast, requires merely the mechanical replication of market practices in order to match market returns. It is a form of action, suitable for capable but perhaps less intelligent types.”
This picture of “CEO-superdeciders” helps justify their huge compensation and the congratulatory press coverage, and yet again, it also has little foundation in fact or logic. The strategy business thus lasted so long in part because it supports and advances the pretensions of the C-suite.
Porter’s strategy theory “is to CEOs what ancient religions were to tribal chieftains. The ceremonies are ultimately about the divine right of the rulers to rule—a kind of covert form of political theory.” Stewart cites Brian Quinn that it is “like a ritual rain dance. It has no effect on the weather that follows, but those who engage in it think that it does.”
Does strategy consulting have a future? When rightly conceived as the art of thinking through how companies can add value to customers–and ultimately society–through continuous innovation, strategy consulting has a bright future. The market is vast because most large firms are still 20th Century hierarchical bureaucracies that are focused on “the dumbest idea in the world”: shareholder value. They are very weak at innovation.
Consultancies that can guide large firms to move into the world of continuous innovation in the 21st Century have a bright future. To succeed in this field, however, consultants need to know something both about innovation and about the sectors in which they operate and the customers who populate them. Merely rejiggering the financials or flattering the CEO as the master strategist is not going to get the job done. Managers and consultants are going to have to get their hands dirty understanding what happens on the front lines where work gets done and where customers experience the firm’s products and services. To prosper, everyone has to become both more creative and more down-to-earth.
What has no future is strategy conceived as defeating rivals by finding a sustainable comparative advantage simply through studying the structure of the industry and juggling the numbers.
Eventually even attractive illusions come to an end: people see through them. Ceremonial rain dances come to be viewed for what they are. The financial crisis of 2008 was a wake-up call that reminded even entrenched firms how vulnerable they were. Today, large firms have little interest in paying large fees to strategists to find sustainable competitive advantage just from studying the numbers.
Monitor eventually learned the hardest lesson of all: strategy, business and business education are not about pursuing the chimera of sustainable competitive advantage.
Monitor wasn’t killed by any of the five forces of competitive rivalry. Ultimately what killed Monitor was the fact that its customers were no longer willing to buy what Monitor was selling. Monitor was crushed by the single dominant force in today’s marketplace: the customer.