Porter’s Classic strategy established the importance of comparing the internal competences with the external environment. His model of strategic analysis is physically inspired, he usually talk about forces and equilibrium. This is an easy way to understand economy, as different forces that can be added or subtracted in order to provide a movement from the current position towards a different one.
Although Porter’s structural analysis of markets is a useful and common tool in many business, nowadays there are many economists that consider it obsolete or at least incomplete. Although I am a defender of physically inspired techniques to analyze economy and markets, this fact does not sound odd for me. Porter’s physical vision of economy under his classic structural analysis of markets is Newtonian and the Newtonian vision of physics is obsolete from the twentieth century.
As in physics, there are two important things to consider when we are talking about Newton’s Laws. Physical laws at microscopic dimensions are under high uncertainty although we can explain with more perfect models the behavior of macroscopic bodies. On the other hand, Newton’s laws requires that the hypothesis that time is absolute for any coordinate system, and from Einstein, we know that this is not true.
Macroeconomics is an integration of the effect of microeconomics on many little businesses. Macro results do not explain the behavior at a lower scale of the economy of that is driven by higher uncertainty although the global effect could seem more perfect with less uncertainty. The smaller the size of the business, the greater the error of Porter’s simplification.
And, at last but not least, we can be considering that many of our state variables are independent, and this is not necessarily true. Porter’s theory was developed in a much less complex word. For instance, today a financial agent can operate practically instant in every point of the planet due to the globalization of the financial system, but with the abandon of gold pattern and the capability of the governments to print money, the value of a business in monetary units is not independent of the reference system. Many considerations of old paradigms can have been changed.
In a previous article, I was discussing the possibility that an absolute measure of risk of a business could be non-sense due to the increase of complexity at the global economy that can make it coupled to other aspects that we use to make decisions. I will not continue with it here, I only want to remark that the risk, especially the associated one to the acquisition of public debt for banks, can be relative to the local economy of the investor, then, an absolute concept of risk must be considered carefully.
Today, I prefer to discuss about the other aspect related to microeconomics. In a more complex world there are a lot of interconnections between our business and the environment that in the previous times. If we follow Porter’s directives to turn the menaces of environment into opportunities we can be making the error to limit our capability to manage our own company by the strategist, and putting the direction or our business in the hands of the uncertain environment (when uncertainty is very high), because an uncertain environment is not predictable. Our actions only will be responses to the external activity without any possibility to find a way of improvement.
From a complexity viewpoint we can get a better understanding of what is happening and a better explanation of the best action, the fragility of a company is a function of the internal complexity and the external uncertainty. We cannot act on the external uncertainty; we only can act on our own complexity. Although Porter’s conceptual scheme is theoretically good, it can be useless when the uncertainty of the environment is high, and in this case we had better to center our actions in increasing our robustness to cope with the external uncertainty. When fragility is lower, we will be able to go back to more classical actions.
Quantitative complexity analysis techniques let us to study the complexity of the market, and to get a map of the links among different companies in competition, suppliers and clients. This approach can be a real improvement to the classic structural analysis.