When the renowned Michael Porter published his “five forces” analysis in his book Competitive Strategy, he created a framework that is now ubiquitous in MBA programs, corporate strategy departments, and among management consultants. The concept introduces five indicators that, when aggregated together, form a clearer picture on the attractiveness of a certain industry: threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers, and overall rivalry.
One popular notion from this approach is that consolidation of an industry increases the overall attractiveness by suppressing the five challenges that Porter poses. In other words, by increasing scale and eliminating competitors, barriers to entry would be too high and the competitive environment too strong for any small firm to succeed in. However, as recent events in the aerospace world have shown, that is not the case and the reality is actually more dynamic.
Let’s take United Technology’s (UTC) 2011 acquisition of Goodrich for $18 billion as the first example. UTC, which at the time operated three different aerospace businesses, wished to expand its product portfolio and become an integrated systems provider. By acquiring Goodrich, according to Porter’s framework, UTC would reduce the industry rivalry, increase their bargaining power in supplier and customer negotiations, and supposedly mitigate the threat of new entrants by increasing the barriers to entry with economies of scale. With the upcoming contract to build the 777X landing gear, UTC would be in a good position to secure the lucrative long-term work.
In 2013, it came as a surprise to most industry followers that Boeing awarded the contract to Héroux-Devtek and that UTC lost out. Héroux-Devtek, based in Longueuil, Canada, is a manufacturer of landing gear systems for smaller helicopters and business jets, and the new Boeing contract was the largest in the company’s history. While the contract would require a major investment in capabilities to adequately supply the larger and higher-volume 777X landing gear, it would also represent the opportunity to compete at a higher level amongst larger suppliers.
This month, Boeing pulled a similar move again, this time among seat suppliers. Airbus and Boeing view customized interiors as a large chokepoint in their production processes, and would like to streamline the process. Consequently, the large incumbent seat suppliers, Zodiac Aerospace and B/E Aerospace, have been under public pressure to improve their processes to reduce production delays at Boeing and Airbus plants.
Seemingly fed up with the delays, Boeing announced that a new supplier, LIFT by EnCore, a California-based startup led by former executives of C&D Aerospace (now part of Zodiac), will be the sole supplier of 737 seats to Boeing. By directly purchasing the seats, this also represents a break in the traditional practice of allowing airline customers to select their seats.
The lesson to be learned here is that immunity from the threat of new entrants does not come with scale and size. In both cases, Boeing spurned large incumbent suppliers on significant long-term contracts, and instead chose smaller firms that do not yet have a history of delivering on large scale programs. From a supply chain point of view, this represents an element of risk in the medium term, but also means that Boeing can bring these companies up and keep future negotiations more competitive in the long term.
In this sense, Porter’s five forces analysis should be viewed as more of a system of checks and balances, rather than a framework to achieve absolute power and leverage, particularly in the business-to-business (B2B) world. Once the five indicators appear too strong, it may be time for the large influential customers to reboot and redistribute the balance of bargaining power; hence the title of this article.