At one time or another, most of us in the field of marketing have undertaken the task of developing a 5 Forces Analysis as part of a long range planning exercise. A framework for industry analysis developed by Harvard Business School Professor Michael Porter, the model is most often used for analyzing the competitive dynamics of a given industry.
Porter first proposed the model in 1979 as an alternative to traditional SWOT analysis, which he found to be highly subjective and less than rigorous. The five competitive forces considered in the model are illustrated in the accompanying figure.
To say that Porter’s model has shaped an entire generation of academic research and business practice is an understatement. Consultants and strategists alike most often use the framework to evaluate a firm’s strategic position. However, like all frameworks, Porter’s model has its critics, many of whom cite its qualitative versus quantitative nature.
In this week’s exploration, we’re going to attempt to bridge the quantitative gap by fusing Porter’s framework with the second most famous formula in all of physics.
Extending the Concept of Force to Business
In the physical world, when we push or pull on an object, we are said to exert a force on it. Most forces occur when two objects come in direct contact with each other. However some forces, like gravity and magnetism, can exert themselves without direct contact.
F = m * a
Let’s take a closer look at the concept of force in business using a real world example. For this scenario we’ll consider Nokia Corporation, a titan of the mobile phone industry. Nokia’s revenue from 2002 through 2011 is illustrated in the chart below. We’re going to take a much closer look at one specific period, namely 2007 – 2009.
As the graph illustrates, 2007 was a pivotal year for the mobile phone industry. Apple unveiled the first iPhone on January 9th, after months of rumors and speculation. Google followed with a one-two punch, announcing its Android operating system in concert with the founding of the Open Handset Alliance – a consortium of hardware, software and telecommunications companies devoted to advancing open standards for mobile devices. As Porter’s framework suggests, the force associated with these new entrants dramatically altered the industry’s balance of power. Nokia’s revenue has been in decline since.
Lets zoom in and take a closer look at revenue during the 2007-2009 time frame.
Revenue (2007-2009) = -3.99x2 + 8.08x + 70.47
Taking the 1st derivative of revenue provides a model for business velocity (red), which in this case happens to be a linear equation of the form:
Velocity (2007-2009) = -7.98x + 8.08
Likewise, the 1st derivative of velocity yields acceleration, which in this case is constant for the period in question at -$7.98B per year2.
Now that we’ve derived valid models for velocity and acceleration, we can focus on mass. A few posts ago, we put forward the idea that in the context of business, employees served as the primary source of inertial mass (Mass Hysteria). Nokia’s mass (based on employee count) is included in the table below.
At this point, we simply need to multiply mass by acceleration to yield a value for the force responsible for Nokia’s deceleration between 2007 and 2009. However, before we do, we also have to propose a system of units applicable to a business context. In classical mechanics, the SI unit of force is the Newton (N). One Newton is defined as the force required to accelerate a mass of one kilogram at a rate of one meter per second squared, or kg·m·s−2.
Within a business context, I would propose the “Business Equivalent Newton,” (NB) pronounced “newbe”. I would further propose we define the standard NB as the force required to accelerate a mass of one employee at a rate of $100,000 per year squared, or:
1 NB = 1·emp·$100,000·yr−2.
(While it may seem arbitrary, it’s no less valid then the SI kg·m·s−2.)
We’re now in a position to quantify the force associated with the “Threat of New Entrants” during the period in question.
In addition, now that we have a valid model for business velocity and acceleration, we can also determine if the standard equations of motion can be applied to calculate revenue:
r2009 = r2007 + V0t + ½ at2
r2009 = $74.56B + $0.1B (2) + ½ (-$7.98B) (22) = $58.80B
Why is any of this relevant? For starters, we’ve quantified the concept of force in a business context by incorporating some basic tools from classical mechanics. In addition, we’ve opened the door to expanding the capabilities of Porter’s 5 Forces framework beyond simple qualitative analysis. Finally, we’ve demonstrated that the equations of motion can be used to analyze the behavior of business systems within a defined set of boundary conditions.
While we’re still at the very beginnings of our journey, we’ve actually come a long way in just a few posts:
- We’ve descended from Marketing’s Tower of Babel to begin building a shared vocabulary predicated upon some basic concepts and definitions.
- To Lord Kelvin’s delight, we’ve given concrete definitions to a set of previously undefined and overused business terms like velocity and acceleration.
- We’ve established rules for calculating these quantities in terms of other measurable quantities.
- We’ve answered the long-standing question: “What happens when you cross Michael Porter with the second most powerful formula in all of physics?”
We’ve reached a point where we’re ready to tackle another important business concept in more detail: momentum.