This week, I read a scathing article on the demise of Michael Porter’s consulting firm:
If you are in management, you will find this article fascinating. If you are in the habit of using expensive “strategy” consultants, you will find this article both fascinating and discomforting.
Beyond its general insights, this article contains a timely message for technology companies. Michael Porter has argued for years that companies should identify “sustainable competitive advantages” that are hard to replicate. These advantages translate to higher company profits. As this article highlights, in reality, THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES. Unless a company has an unfair advantage through government regulation or some other market anomaly, ALL CAPABILITIES can eventually be replicated.
The technology industry has enjoyed very high margins and profits over the past forty years. In mature industries, best in class companies can be expected to generate an operating income of 8% to 15%. In tech, companies are expected to generate operating incomes above 20%. Today, there are tech companies generating operating incomes well north of 30%.
Past success has made tech executives believe their high margin business models should be the perpetual norm. I would argue these business models are a function of unsustainable competitive advantage. These business models are a result of consumption models that require customers to make massive up front commitments to technology—and then make it very difficult for customers to change their mind if they are not satisfied with their decision. This approach to technology consumption is not sustainable. Business customers are rapidly exploring new “pay as you go” models designed to match value received with the price paid. In other words, the tech industry is gravitating to more normal market dynamics between buyer and seller.
Our last book, Consumption Economics, has become one of the top five sellers on Amazon in the category of high tech investment:
This book defines how tech business models will need to rapidly change as the tech market matures. Many in the industry have read the book. Some readers believe the book is an accurate portrayal of how the tech industry will change. Some readers are convinced their high margin business models will not be changing anytime soon. For all past and future readers of the book, I would repeat these words: THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES. The consumption models in tech are changing. Get ready.