The Golden Passport

by Duff McDonald

  To the likes of HBS professors Ken Andrews and Joseph Bower, Porter’s work was sacrilege. Specifically, they felt it lacked both nuance and an appreciation of the very different situations that individual companies faced. But it was more than that. While the following is a bit of an oversimplification, and using language that only crystallized later on, there are two broad streams of thought in business strategy. The first is the industry paradigm, of which Porter is the exemplar. The most hard-nosed version of that paradigm is that a company is merely a pawn in a bigger game, that even if it does try new things, its destiny is pretty much determined by the structure of its industry. The other stream is the historical HBS view that Andrews represented—what came to be known as a “resource-based” view of the firm—and that paradigm says that each firm has unique strengths and distinctive capabilities that allow it to compete in a superior way to other firms, independent of industry structure. Of course, neither of the two is entirely correct. Like most things in life, the truth lies somewhere in between. In any case, the battle lines were drawn.

  According to Walter Kiechel, when Porter, who had returned to HBS as an assistant professor in the Business Policy group in 1973, first came up for promotion, all but one member of the group’s faculty voted against him.2 John McArthur, soon to become dean, wisely suggested that they table the decision, and in the meantime moved Porter out of Business Policy and into the Executive Education program. Five years later, in 1978, Porter introduced an elective into the MBA curriculum, Industry and Competitive Analysis, which quickly became one of the most popular in the School’s history. In 1979, he published “How Competitive Forces Shape Strategy” in HBR. And then, in 1980, he published Competitive Strategy: Techniques for Analyzing Industries and Competitors. The only other book on strategy that comes even close to rivaling its renown, writes Kiechel, is Porter’s next book, 1985’s Competitive Advantage,3 which included his concept of the “value chain,” a “systematic way of examining all of the activities a firm performs and how they interact”—those included the “primary activities” of inbound and outbound logistics, operations, marketing, sales, and service, and the “support activities” of human resources, technology development, and procurement.

  When he came up for promotion again in 1982, Porter was a shoo-in, and at thirty-six years old became one of the youngest tenured professors in the School’s history. The lions of Business Policy had realized that the sun was setting on their influence, and they stepped aside to let Porter step forward. The significance of the transition cannot be understated. For years, in the face of an academy-wide shift toward the quantification of management, HBS had managed to hang on to the belief that so-called general management (which includes strategizing) lives or dies on the use of judgment in circumstances that cannot yield answers through analysis alone. Porter’s concept of strategy, however, was rooted, at least in part, in an empirical quantitative tradition.

  But Porter changed the game at HBS in more ways than just a reconfiguration of its strategy discipline. He also fashioned himself as the exemplar of a new breed of professor at the School, one who could do serious, refereed research of the type that goes on in economics departments, but which was also palatable to practitioners—and MBA students, too. “Porter was the opening wedge in that new orientation,” says Don Hambrick (’72), a professor of management at Penn State. “At that point, they started hiring a lot more people trained in the basic disciplines outside of HBS.” Porter himself agrees: “Before me, everybody had a DBA,” he once said. “After me . . . I wouldn’t hire you in my group unless you had either business economics or some economics training. We were going to bring a new level of rigor in. I think I started this at the School; I was the one who got the PhD, business economics, hire-from-the-outside thing really going, because of my case.”4 Hopeful that the marriage of new rigor to the historical influence of HBS would create genetically superior offspring, the Economist noted, “If anyone is capable of turning management theory into a respectable scholarly discipline, it is Michael Porter.”

  What’s notable about Porter’s claim to bring a “new level of rigor” into strategy via the five forces is that it went largely uncontested. While on the one hand, it certainly had more numerical rigor—his predecessors at HBS focused more on people, ethics, and judgment, whereas Porter focused on “facts” and competing firms—in the end, they both landed in the same place, which was helping the general manager making decisions. Indeed, if Porter was headed in any particular direction, it was away from pure economic analysis and toward judgment.

  So it wasn’t a complete departure from the past. Indeed, in one important way, Porter’s work solidified a central premise of his predecessors in strategy at HBS. It confirmed the division between the two types of management, strategic and operational. In this worldview, it is the job of line managers to take care of operations, and it is the job of top management to engage in the much more cerebral exercise of strategic management.

  All of this reinforced the favored HBS notion of the CEO as the strategizer in chief, and the separation of thinking from doing that stretches all the way back to Frederick Taylor. “Embedded in strategic planning are three assumptions,” says Matthew Stewart. “First, that strategy is a decision-making sport involving the selection of markets and products; second, that the decisions are responsible for all of the value creation of a firm (or at least the ‘excess profits,’ in Porter’s model); and, third, that the decider is the CEO. Strategy, says Porter, speaking for all the strategists, is thus ‘the ultimate act of choice. . . . The chief strategist of an organization has to be the leader—the CEO.’”5

  Henry Mintzberg places Porter’s Five Forces framework in what he calls “the positioning school” of strategy, which shared with the design school the notion that strategy formation is “a controlled, conscious process that produce[s] full-blown deliberate strategies, to be made explicit before being formally implemented.”6 In that, it helped perpetuate the myth that effective strategy development takes place independent of actual action. Where it departs from the design school is in its emphasis on calculation and on its insistence that the number of strategies did have a limit, and weren’t that unique from one company to the next.

  It is illustrative that at HBS, in 1979, Business Policy was separated into two courses, Business Policy I, which was about the formulation of strategy, and Business Policy II, about the implementation of it. The first was taught in the first year, the second was the only required course in the second year. Porter took over Business Policy I in 1983, and in 1986 the name of the course was changed to Competition and Strategy. No professor was able to develop or sustain a meaningful effort in Business Policy II. But that’s not too surprising. For decades, McKinsey & Company suffered from a similar emphasis on the former to the exclusion of the latter—on thinking as opposed to doing. That’s because actually doing things is for suckers; the real heroes in business are the ones with the big ideas, not the ones who actually carry them out.

  That many practitioners find Porter’s work useful is beyond doubt. Some would even go so far as to call him a national treasure. In 2008, the U.S. Department of Commerce awarded him its first-ever Lifetime Achievement Award in Economic Development. This despite the fact that Porter’s Five Forces framework was really just a new recipe using the age-old ingredients of product, customer, supplier, and competitor. And it did as every strategy framework has purported to do since the very start: to help managers contemplate their competitive position in a brand-new light. It’s about injecting a new energy into how you think about what you do, not that dissimilar from what Tom Peters, the management guru (and former McKinsey consultant), does.

  Porter also created an entire cottage industry for other academics who have spent a large part of their careers trying to refute his ideas. Some flaws revealed themselves immediately, including his suggestion that a company could not be both a low-cost and high-quality competitor at once. The Japanese invasion, both
in electronics and automakers, stood in direct opposition to that claim. Subsequent studies have also shown that company-specific characteristics, not industry-specific ones, are more powerful determinants of sustainable excess profits.

  One of the central critiques of Competitive Strategy was that the book is more a laundry list of things a manager could or should analyze about their company’s competitive position rather than a truly integrated—and prescriptive—view thereof. “In spite of the title this book is not about strategy,” wrote Bruce Henderson, the founder of the Boston Consulting Group. “It does not attempt to integrate this material into a system of relationships. . . . The substance of the book is a catalog of things to be considered in doing an analysis of the competitive situation. . . . But it evokes a feeling of frustration. Which of these factors are critical? How do they trade off against each other?”7 That’s a whole different level of “rigor,” and one that Porter apparently didn’t feel obliged to meet.

  Other criticisms come at it from a higher level, not seeking to disprove its granular conclusions, but to attack the premises on which it is based. For starters, there is the question of whether the entire world can, in fact, be broken down through analysis. Michael Porter and his ilk seem to think it can. But that is an inherently limiting view. After all, analysis is naturally drawn to that which can be measured, which leads back to a problem that has dogged instruction at HBS all along: There is always going to be more data on costs than there is on quality. And cost management is not strategy. “The message of the positioning school is not to get out there and learn, but to stay home and calculate,” says Mintzberg.8

  Not only that, but there’s an even bigger question, which is whether CEOs are actually strategizing in such a way at all. A McKinsey survey from 2007 showed that only 8 percent of 2,000 managers surveyed said that the CEO is primarily responsible for setting strategy in their firm. And yet the notion persists that they do. Stewart suggests two reasons for this. The first one explains why CEOs are okay with it: It helps justify their outsize compensation and self-congratulatory press coverage. The second is why the rest of us go along for the ride: It’s called anthropomorphic fallacy. When we think of huge, multinational organizations as if they had a single conscious mind with a unitary set of intentions—when we humanize them, in other words—we also tend to think of the CEO as the person who embodies that collectivity.9 It’s where the cult of the CEO comes from, and it’s something HBS has been pushing since the start. Another way to think about it: Strategic planning is simply another form of rhetoric, a claimed expertise that seeks to justify managerial authority at the very top.

  And finally, there is the fact that almost no manager—whether he or she is “strategizing” about it or not—explicitly sets out to seek excess, or monopoly, profits. That’s wrong in the same way that shareholder value is wrong. While neat and tidy models may work in the classroom, in the real world, nobody makes decisions that way, and for any number of reasons: Managers lack complete information, managers are irrational, or managers are too busy doing rather than thinking. Most are content with making a decent return. The quest for monopoly derives from the ideological roots of the business school enterprise itself, the dream that the practitioners of management “science” can wield it in triumph over markets in much the same way as chemists and biologists have in bringing the physical world to heel.

  With his influence in the academy growing stronger by the day, Porter decided to cash in. After all, if you’ve got a framework, you can sell a framework, and it didn’t take more than a few years before Porter began doing so. In 1982, along with five HBS graduates in their twenties, Porter founded a strategy consulting firm, the Monitor Group. At thirty-six, Porter was the elder statesman of the bunch, and its marquee attraction, but Monitor was actually Mark Fuller’s baby. An assistant professor at HBS who had helped Porter research his book, Fuller had the idea that the time was ripe to monetize Porter’s sudden fame. Porter had a substantial ownership stake, second only to Fuller’s, but he wasn’t leaving his job at HBS.

  Over the next two decades, they monetized like hell, bringing in hundreds of millions of dollars in fees. The company, which had some 350 consultants on staff in 1990, grew to more than 1,500 employees, with 30 offices around the globe. In the 1990s, Monitor was still pretty much all about Michael Porter’s ideas, although it had added his framework of the value chain and the selling power of his 1990 book, The Competitive Advantage of Nations. McKinsey & Company had been advising national governments for some time, and while Monitor never rivaled the larger firm in size or influence, the upstart firm had a ringer in Porter, who in 1985 was named to President Ronald Reagan’s Commission on Industrial Competitiveness.

  Porter didn’t just help bring in business; he also proved a potent recruiting tool. “That’s precisely why I joined the firm,” said a former partner. “Our bread-and-butter was competitive assessment, industry structure analysis, and the five forces. Michael Porter was the firm.” And the HBS connections ran deep. Roger Martin, later dean of the University of Toronto’s Rotman School, was an early partner. Jan Rivkin, a professor of strategy at HBS, was there too. As was Chris Argyris, known for his work on “learning organizations,” in particular the concept of “double-loop learning.” Michael Jensen became a partner in 2000. Tagg Romney, Mitt’s son, also worked at Monitor for a time.

  In time, however, tensions arose. Porter, who has never been accused of having a small ego, began demanding more out of Monitor’s profits, despite the economics of the partnership agreement being crystal clear. The other cofounders resented the demands, and in the early 1990s, they restructured the firm’s finances and the relationship with Porter became much more transactional. “Michael has extraordinarily high energy,” recalls the partner. “He’s incredibly smart, and still very curious for an academic who hit the equivalent of a grand slam very early on in his career. But I think when he moved from advising CEOs to advising prime ministers and presidents, it really went to his head.”

  Monitor had a good run—for a time, it was the fourth-largest consulting company, after McKinsey, Bain, and the Boston Consulting Group. But it was a one-trick pony, and the same thing happened to its great ideas as happens to any great ideas in consulting, particularly when it comes to frameworks that really aren’t that complicated when it comes down to it. Eventually, the MBAs working inside client organizations had internalized everything about competitive advantage and industry structure, the result of which was that Monitor ended up with no means through which to sustain its own excess profits. While it did develop some new ideas, including the use of pattern recognition in the service of business model innovation, by the end the consulting firm’s loss of focus was epitomized by the launch of entities such as Monitor Talent, which booked speakers for corporate events, and Monitor Quest, which provided bodyguards for billionaires. Michael Porter became famous for arguing that companies needed to focus their energies in those areas in which they had a competitive advantage. And Monitor ended up doing just the opposite, becoming “stuck in the middle.”

  But it wasn’t simply that. When the global recession hit in 2008, all consulting firms suffered, but especially Monitor, which lacked both the size to ride out the downturn as well as the one thing that companies kept buying, so-called operational consulting, which is another way of saying cost-cutting. And then, in 2011, both Porter and Monitor were caught up in controversy for serving as whitewashers for Qaddafi, which only hastened the demise. When the end finally came, nobody really blamed Porter, because at that point his involvement with Monitor was minimal. Most insiders blamed the Fuller brothers. Joseph Fuller (’81), widely regarded as a top-notch consultant, was not a success as the firm’s CEO. And his brother Mark fell victim to the classic founder’s dilemma—he was unable to let go. Monitor had a few opportunities to sell itself for significantly more than it ended up being worth in the end, when it was forced into bankruptcy protection and sold to Deloitte for $116 million
in late 2012. Joseph Fuller is back at HBS, where he coleads The Entrepreneurial Manager course. HBS takes care of its own.

  While the schadenfreude brigade whooped with glee when Monitor collapsed, asking how a firm cofounded by the world’s best-known expert on strategy could have strategized itself into failure, the fact is that while Porter did continue working à la carte for the consultancy, the bulk of his energies were devoted elsewhere. Rather, everywhere. When he wasn’t advising nations—Canada, India, Ireland, New Zealand, Portugal, the United Kingdom, and the seven nations of Central America among them—he was trying to foster urban renewal. In 1994, he founded a Boston-based nonprofit, the Initiative for a Competitive Inner City, to help urban businesses grow. According to Porter, as of 2015 it had helped create more than 133,000 jobs and raised more than $1.2 billion in capital to lend to nearly 700 entrepreneurs.10

  A 2011 paper, “Creating Shared Value,” outlined Porter’s unsurprising thesis that capitalism holds the “best route to real solutions to many social problems.” In 2014, the School launched a new executive education program, Creating Shared Value: Economic Success and Social Impact, with the hope of convincing companies that the goals of addressing pressing social problems and strengthening competitive strategy aren’t mutually exclusive but actually intertwined.

  At some point, he turned his eye to health care, the result of which was his 2006 book, Redefining Health Care: Creating Value-Based Competition on Results. Calling for “value-based health care delivery,” Porter has sought to “maximize value to patients (patient health outcomes achieved per dollar spent).” Henry Mintzberg had something to say about that, too, starting with the sheer gall of business school professors thinking that they had all the answers for a realm completely outside their primary area of expertise. In a paper, “Managing the Myths of Healthcare,” he took dead aim at them, in particular those at HBS. One myth, Mintzberg suggested, was that the health care system can be “fixed” by clever social engineering. “The system is broken so the ‘experts’ have to fix it: usually not people on the ground, who understand the problems viscerally, but specialists in the air, such as economists, system analysts, and consultants, who believe they understand them conceptually,” he wrote. “Thanks to them, in health care we measure and merge like mad, reorganize constantly, apply the management technique of the month, ‘reinvent’ health care every few years, and drive change from the ‘top’ for the sake of participation at the bottom.”11