The Irrelevance of Porter’s Five Forces for the B2B Software Industry

The Irrelevance of Porter’s Five Forces for the B2B Software Industry

For the software industry the use of strategic market and competitive intelligence has not been particularly well executed by many vendors. MI and CI for software vendors differs greatly from the more established practices for CPG, Pharma or manufacturing – often what works well for these other industries has little relevance for software vendors. The main difference: the intensely fast pace of constant change for most of the software industry. "Time" is measured in nanoseconds. As such the software industry requires a greater focus on MI and CI, but often actual practice does not include the most beneficial aspects.

Market Intelligence is essential for creating strong product strategy and for fine-tuning that strategy as industries, markets, customers, the product space, and competitors evolve over time – again usually very small windows of time. Core decisions for businesses must be based on reasonable understanding of significant and likely future events – what the potential impact could be, good and bad. Market intelligence is the dynamic means for uncovering the right future-pointing intelligence as early as possible, averting "nasty surprises" and discovering new opportunities.

Strategic market Intelligence differs from business research (and traditional business intelligence) through context -- a certain mindset held while the research and analysis phases are done. The market intelligence professional always has in mind the organization, its business and product space, the industry, customers and target markets, and the drivers behind the need for intelligence. It's an ongoing sense of the impact of what could be uncovered -- the ramifications of what seemingly unconnected items of intelligence could mean for the company. It ensures that business decisions and product direction are customer-focused, market-driven, and reality-based.

Where software companies go wrong with MI and CI efforts is limiting activities to directly supporting sales in tactical ways, focusing only on pointless programs for "killing the competition", and endless feature/function battles that are meaningless in today's commoditized markets for software solutions. Another wrong turn has been the adherence to Porter's Five Forces as a model for product strategy and for market and competitive intelligence, undoubtedly influenced by MBA school curricula in the eighties and nineties, much of which has now proven useless to many enterprises.

                                                PORTER'S FIVE FORCES 

Porter's Five Forces: The Magic Model that Doesn't Work

I recently read Steve Denning's article on the demise of Michael Porter's Monitor Group consulting firm. Porter invented a model for corporate "strategy" based on 'Five Forces' that has been treated almost as a reverential artifact for many years. Denning's article brought me back to my own thinking years ago on why Porter doesn't work for software companies. I never have really used Porter for strategic market intelligence for the software industry – instead I developed a matrix that holds more relevance to the needs of software companies.

I refer to Porter's model as an "artifact" because it is no longer relevant to today's markets, if it ever really was. It's linked to a business context set in the Eighties, when corporate strategy focused on inside-out objectives such as beating competitors and sustaining profitability with no connection to value delivered to customers – chest-thumping instead of serving customers. There was a great deal more market predictability and regularity. Today's markets obviously have become volatile and not so predictable; businesses are now challenged to create new business models multiple times during the life of the enterprise to survive and thrive.

Five Forces Model Fails the Software Industry

Because Porter's Five Forces model is based on non-changing market conditions, it is limited or even harmful for dealing with dynamic, ever-changing industries and markets. Well, the software industry never sits still, and this has intensified in recent years. And the customers of software vendors are also facing uncertain and fluctuating markets, which adds further complexity when seeking insight for future trends regarding customer needs and wants.

Professionally, Porter was not experienced in any industry, in any hands on sense, when he created the Five Forces model, so he didn't have practical experience to fully explore or prove out his model. If you don't understand the software industry, how people interact with software and rely on software to improve their own enterprises, then any indirect models will likely have little relevance.

Under Porter, competitive intelligence is not about going to market competitively to meet customer needs and desires - it's about "beating" everyone including the customer. The customer is not a partner but a conquered spoil of war. Not exactly the best path to engendering customer experience excellence – perhaps Porter's model is one of the reasons that many enterprises have done such a bad job of focusing on the customer. MI and CI better serve a software company when its purpose is to understand the competitive landscape well enough to seek out paths that diverge from the "herd" so that the company carves out underserved markets and better understands customer needs. Porter's aggressive modeling around "competition" has misguided organizations into becoming obsessed with destroying the competition.

Other areas where Porter's model comes up short:

• The value of partner ecosystems including supply chain
• Predicting future trends
• Identifying new customer segments
• Understanding that software solution spaces are commoditized
• When it's time to sunset solutions and markets

These are all essential to growth and evolution for sustaining success.

Defining and Sizing Markets – Another Porter Failure

For software offerings, market sizing used to be a fairly straightforward task, when technology problems and solutions were seemingly distinct and silo'd from other technology areas. Market sizing is important but many software vendors don't consider all of the parameters that actually define the markets and the customers that are the best fit for software offerings.

An example of market sizing that has become more complex – and that certainly would be poorly served by using Porter's model – is the software market for what used to be called Web Content Management and is now frequently called Web Experience Management. The use of websites and web presence by organizations to promote and sell their products has evolved to sophisticated levels where multi-channel customer experiences have greater importance and often involve Internet venues that are not controlled by the organization.

WEM is actually a composite of a solution ecosystem – understanding this leads to a better calculation of the overall market size. Although some market forecasts from analyst firms are stretching to include more of this ecosystem, often multiple market forecasts must be considered and added into the final market potential for WEM solutions. The overall solution ecosystem becomes compellingly relevant when taking the customer's point-of-view for the desired end-to-end solution.

Porter's model is ill-equipped to handle such converging markets or ecosystems. Often Porter's model is used in business school in simplistic calculations of market size where the 'profit potential' is the real goal, unfortunately without considering the many variables that go into real market potential. And of course such simplistic calculations also lead to the allocation of 'market share' – once again focusing on competitors rather than customers.

The complex variables for real market potential primarily center on the customer: meeting customer needs and desires, improving customer experiences with the organization, understanding who the customer is through useful segmentations mapped to solution scenarios, addressing usability and problem-solving effectiveness for the software offering, from the customer perspective. But these are harder variables to try to quantify and often are left out of the 'equation'.

Another aspect of WEM markets is the fact that there are two sets of customers to be considered: the customer who buys the WEM software, and the target customer for the web properties that will be built with the WEM software. Since WEM solutions impact two levels of buyers, the technology exists as a means to an end – it is the "end" that really matters and must be foremost in the minds of vendors and solution buyers. Porter's model has little to account for the complexities of 'customer' in this scenario.

So Why Am I Concerned about Porter

As many have pointed out, Porter's Five Forces seemingly didn't save Michael Porter's own high-dollar consultancy, so how can it have relevance to the needs of other organizations. Even Porter's consultancy wasn't part of the simple market construct that is the best fit for gaining benefit from the Five Forces model.

Steve Denning asks in his article:  

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?

Denning further explains what was greatly lacking from Porter's model:  

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.

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.

For strategic purposes alone, a lot of time has been wasted on trying to align an organization's management with Porter's model when it just plain wasn't useful for most software companies. Many industries have spent way too much time and resources on building complicated and non-scaling frameworks that never really help the organization with strategic decision-making and don't provide real-time responsiveness to market changes. And if the model is applied only to particular segments of a complex corporation, important aspects will be missed by working without the context of interrelations across product groups and segments, as well as across organizational functions.

Source: Julie Hunt Consulting

Customer-Focused Strategic Market & Competitive Intelligence

Many software companies continue to think of market and competitive intelligence as tactical methods to attack competitors, to convince a customer not to buy from a competitor, instead of: developing their own strategic solution offerings, building strategic relationships with customers, and understanding how to help customers really solve their problems and support their business initiatives with reliable solutions.

Focusing on Customers should be the starting point for MI and CI initiatives for software vendors. It is essential for software vendors to attract customers, and eventually sales, through true ROI and through differentiation other than feature/function minutiae. Market Intelligence programs, in collaboration with product marketing, are important sources of comprehensive research, analysis and recommendations for providing the elements of a software solution that can set it apart, from the customer perspective.

Strategic MI makes a significant difference for the competitiveness of software companies:  

• New opportunities – identify new trends that will matter to target markets and customers; how to get there before the competition (whenever possible)
• Enhanced customer interaction – understand customer POV, goals, needs, strategic direction
• Stronger target market selection & positioning – research, validate go-to-market and positioning; locate under-served markets for target customers and solution space; guide how to articulate positioning well for customers, analysts, industry
• Strategic view of competitive landscape – figure out true differentiation, figure out where competitors are not operating; understand the issues that matter to customers and the solutions they seek from competitors
• Early warning of industry and/or competitor changes – take advantage of opportunities and leverage/deal with threats and risk

Related links:

Software companies still fail to tap into top benefits from market and competitive intelligence programs

Market Intelligence – Making Better Business Decisions at the Core of the Company

Shallow Thinking Ensures Bad Business Decisions

Provocation-based Market Intelligence in a Market-Driven world

Moving beyond WCM - Web Experience Management software solutions and markets

Internal Disruption–No Longer Business As Usual

Customer Buying Criteria - Applying customer & competitive intelligence to selling tools leads to strategic internal benefits

In Pursuit of Customer Experience Excellence

Achieving the Social Business, Inside and Out

About the author: Julie Hunt understands the overlap and convergence of many business processes and software solutions that once were thought of as "separate" – and how this impacts both software Vendors and Buyers, as well as the strategies that enterprises implement for how technology supports the business and its customers. Julie shares her takes on the software industry via her blog Highly Competitiveand on Twitter: @juliebhunt For more information: Julie Hunt Consulting – Strategies for B2B Software Solutions: Working from the Customer Perspective