Thursday, November 14 2019

Michael Porter is Bankrupt AND the Framework of a Blindfolded Chimpanzee.

This post is dedicated to a good friend of mine and a loyal reader, Diego del Rio Diaz-Jara, who found a programming bug in my blog. Big tx, Diego!

This weekend I was sitting in a lecture by Michael E. Porter‘s former apprentice and current teaching professor at Wharton School of Business. Porter’s paper on Five Forces became one of the most influential frameworks for performing industry analysis and business strategy development. It absolutely makes sense: five forces influencing business strategy… wow, so easy but yet so powerful…

Surely, Dr. Porter must be a successful businessman? Not so fast, amigo… This week, Monitor Group, the consulting firm set up in 1983 by him and another strategy guru Mark Fuller, just filed for bankruptcy protection. The firm has specialized in strategy consulting to senior officials of businesses and governments. At the time of filing the firm had approximately 1,500 employees, making it smaller than some of its peers in the top-tier strategy consultancy league (including Bain, BCG and McKinsey), but still a highly influential firm on the global management consulting stage due to the senior relationships that it had.

In court bankruptcy documents, Monitor wrote that demand for consulting work slowed dramatically during the financial crisis of 2008. Revenues shrank and liquidity tightened. The firm’s partners advanced $4.5 million to the company and passed on $20 million in bonuses in 2009. It also raised $51 million by issuing notes to private equity firm Caltius Capital Management.

Experiencing serious financial difficulties this year was the final straw for Monitor. In September and October 2012, the company was unable to pay rent on its Cambridge, Mass., headquarters. However, the company negotiated a plan to catch up on the payments but the following month announced that it simply was unable to make another payment. Monitor also missed an interest payment to Caltius, putting the notes in default.

Despite receiving near-universal acclaim from both business people and top MBA programs, Porter’s framework has been challenged by other academics and strategists such as Kevin P. Coyne and Somu Subramaniam. They have pointed out to these three questionable assumptions made by the model:

  1. Buyers, competitors, and suppliers do not interact, and will not collude
  2. The source of value is structural advantage (creating barriers to entry)
  3. Business certainty is high, allowing market participants to plan for and respond to competitive behavior.

In the mid-1990s using game theory, Brandenburger and Nalebuff successfully argued for adding another force, complementors (also called “the 6th force”), helping to explain the reasoning behind strategic alliances.

In its Chapter 11 filing in federal bankruptcy court in Delaware, Monitor reported having between 1,000 and 5,000 creditors, including RBS Citizens Bank, Standard & Poor’s Capital IQ, and various real estate, consulting and audit firms.

Under the asset purchase agreement with Deloitte, the purchaser will take over Monitor’s US practice, while its foreign arms get the foreign offices of Monitor.

My Two Cents…

Could it be that Porter’s firm became a victim of his own work, the dubious assumption of “low business uncertainty”? My belief is that while analyzing all of the six forces can be a helpful exercise in resolving some of the business uncertainty, the rapid pace of change in our physical environment makes many strategy decisions quickly obsolete. The fate of Monitor seems to confirm my long-standing suspicion: 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.

Let’s agree to call this, The Framework of One Force and A Blindfolded Chimpanzee.

Entrepreneur, award-winning start-up founder

  • Comments
  • Agree, disagree? I want to hear from you!