The eager and almost rabid application of Porter’s “Five Forces” (Supplier Power, Customer Power, Threat of New Entrants, Threat of Substitute Products, Industry Rivalry) to technology products and services has bred an entire generation of MBAs in marketing positions dedicated to developing and maintaining closed systems and closed hardware platforms. This is particularly egregious in the case of business models that are effectively based on distribution channels. In conventional analysis there is nothing wrong with making your living on distribution channels. Remember, that in 1979, when Porter developed the Five Forces framework, distribution channels were highly expensive to create and maintain and, owing to these costs, constructing them effectively presented a significant barrier to entry. Your product didn’t even have to be particularly good, because the threat of substitutes was reduced via the difficulty and expense of the competition actually getting those substitutes (however good they might be) to your customers. Suppliers, if they wanted access to your customer base as a proxy to sell their raw materials, had to go through you. New entrants had to build an entirely new distribution channel. Customers were stuck. You owned the market. But you had to guard this distribution channel carefully. And you had to make sure you hadn’t forgotten something simple and critical. That’s not part of a conventional Porter analysis. But why would it be? Conventional distribution channels are quite physical, antique and boring.The article goes on to detail how Blockbuster used the old Porter model of closed distribution channels and Netflix used an existing open distribution channel: the U.S. Postal Service.
— The Five Forces/Circles of Hell, a Private Equity Professional, Going Private, 27 April 2008
To spell out the telco connection:Continue reading