Recently the McKinsey Quarterly asked the above question in relation to the traditional strategy development tools such as Porter’s 5 Forces, BCG Growth-Share Matrix, etc. The question really is, do these techniques remain relevant in today’s business environment or not? While they certainly have their place in the strategy process I would argue that they are relevant only with some modifications.
First, the above mentioned frameworks, as the McKinsey article points out, have three assumptions at their core:
1. The industry under study is comprised of unrelated buyers, sellers, and competitors.
2. Structural advantages are the primary source of value.
3. Uncertainty is at a low enough level that competitor moves and responses can be anticipated.
Taking these assumptions individually we see that they really are not relevant in most cases today. In today’s business environment industry are not straight-forward and we find that buyers of a service can also be competitors in closely related areas. Industry structure is clearly not arms length anymore. A key strategic component that is missing is the idea of alliances where the combination of products and services create value.
Given this change in industry structure we can easily see that value, extremely high value, can be driven from areas that are not structural in nature. The technology advantage is one that has driven tremendous value for companies over the last decade plus yet it is not structural in nature. In fact, technology has shown that it can hurdle all of these structural barriers to entry. A couple of people in a garage, or dorm room as we have seen happen, can take on the industry titans and they have no advantage related to structure.
Little needs to be said regarding the increased level of uncertainty in the business environment. The pace of change has led to less than rational decisions to be made covering everything from acquisitions of questionable value to expansion into unrelated industries. The emergence of ‘non-traditional’ competitors creates a playing field where it is difficult to anticipate the moves of who you think your competition is. And consider the tremendous power consumers of your product and service now have and another element of uncertainty gets brought into the mix.
This is not to say that the more traditional frameworks have lost their value. On the contrary, they still have relevance but in a different way. They are great for framing the discussion but they are not tools to be used exclusively in developing strategy and need to be augmented in order to gain a view of the entire landscape.