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Is Partner Power The 6th Competitive Force?

Last month I wrote about the business justification for business eco-systems such as developer and partner program. I referred to Partner Power as the sixth competitive force to be added to Michael Porter’s five competitive forces and thus I thought that I would elaborate on the topic.

Michael Porter from Harvard Business School first proposed the five forces as a way to determine the competitive nature within a given market [1]. The five forces are:

  1. Buyer Power – this force is created by the dynamic between the buyers and the sellers in a market place. The desires of buyers and sellers are at odds with each other. Buyers want more product or service at a lower price while sellers want to provide less product or service at a higher price. The goals of buyers and sellers are opposed to each other creating the force. In markets where buyer’s get their way, buyer power is stronger; in markets where seller’s get their way, buyer power is weaker.
  2. Supplier Power – this force is also a buyer/seller dynamic but this time it it turned upon suppliers who become the sellers. Like Buyer Power, the supplier and the maker are at odds with each other. Suppliers want to provide less product or service at a higher price while makers want to more supplies at a lower price. In the markets where the supplier has the upper hand and gets what they want, supplier power is stronger; in markets where suppliers don’t get what they want, supplier power is weak.
  3. Threat of New Entrants – having a new entrant in your marketplace is not something that businesses welcome. If your market is to attractive, then prospective new entrants might be interested in joining the competition. Thus, existing rivals are interested in creating barriers to new players entering their. Barriers include but are not limited to regulation, capital requirements, customer loyalty, or brand. Incumbent players want barriers to new entrants but they want them in ways that won’t spoil their market. New entrants are really only interested in entering markets that are attractive, and a crowded market becomes a barrier to entry because it is less attractive.
  4. Threat of Substitution – technology can and does disrupt existing markets. Yellow Cab, the largest taxi company in San Francisco just filed for Chapter 11 Bankruptcy Protection as a result of Uber which used superior technology to provide a substitution for both car ownership and taxi’s. Uber disrupted the taxi industry by creating a substitute service. Unfortunately, most industries do not take the threat of substitution seriously, if they did, they would be innovating and trying to cannibalize their own markets – but they rarely if ever do.
  5. Existing Rivalry – within the marketplace existing players compete for the same customers. Each player is at odds with each other making for a vibrant market, but too many rivals with undifferentiated products, will increase buyer power. This in turn depresses prices and margins making the market less attractive the new entrants. Thus, you can see how the forces are inter-related.

Porter, first introduced the five forces to understand the competitive nature of a market. Although many, including myself, have used the five forces model to analyze companies it was originally designed to analyze markets. Let’s see why.

If a market is in a commodity space with little differentiation, then Buyer Power increases, Supplier Power increases, and Existing Rivalry increases. This is because the interplay of these three forces creates intense discounting by the rivals to secure business which depresses prices and drives margin towards zero. Prospective new entrants are not attracted to the market and thus this force shrinks. Finally, the threat of substitution might increase because the revenue is attractive even if the margins are not and if I can figure out a better mouse trap, perhaps I can capture the revenue with better margins. It should be noted, that the overall industry attractiveness does not imply that every rival in an industry will return the same profitability – this is a point that we will come back to later.

There is a modern Chinese proverb that says the wise businessman chooses markets carefully. Five forces analysis was designed to help wise businessmen to create a business strategy by helping them figure out the dynamics of any market.

In the mid-1990’s Adam Brandenburger and Barry Nalebuff of Yale used game theory to add a sixth force created by what they called complementors[2]. Complementors are present in some industries in the form of strategic alliances in which related products and services from different company combine to create competitive advantage for both parties. Andy Grove, former CEO of Intel and lecturer at Stanford Business School, spoke about complementors frequently making the idea more popular. Andy’s view was formed by the relationship between Intel and Microsoft in the PC marketplace. Intel and Microsoft did not compete nor did they purchase products from each other. Instead, Microsoft wrote their software to run on Intel CPUs and Intel supplied the CPUs to PC makers. Intel and Microsoft complemented each others offerings and both became powerful.

If we look at the computer market through the 1960s and 1970s, there were no complementors; computer companies where vertically integrated and customers bought everything from one supplier (e.g., IBM or Digital Equipment Corporation). But then things changed. The computer industry grew so large; it was no longer possible to get everything from a single vendor. Instead, the power shifted to the more open complementor model and a new vendor, Wintel, became the new king (NOTE: Wintel refers to Microsoft Windows+Intel). Today, industry power has shifted again. Today’s powerhouses are companies like Apple and who do not have a single strategic complementor but a host of complementors that allow the buyer to have choice. Managing a host of complementors are what we now call Developer Programs and Partner Programs. These programs that are designed to scale to hundreds, thousands, and even hundreds of thousands of developers and partners who provide the platform buyer with choice to customize the platform for their precise needs.

Look at Apple. The success of the iPhone stems from not a single app vendor that made a killer app for the iPhone, rather it stems from the 100,000’s of apps that are available for the iPhone that I can be mixed and matched to anyone’s exact requirements. Today, it is important to have as many Partners as possible to allow choice for your potential customers and to make it more difficult for your customers to switch (e.g., the app that I use everyday is only available on the iPhone).

So, what was the sixth force of complementor power, I’ve upgraded to a new sixth force of Partner Power. How does that work? Well, when you have a technology platform (e.g., SaaS, API, software, hardware, etc.) you want to have as many complementors (i.e., developers and partners) as possible to build on-top of your platform such that you get to offer incredible choice to your customers. But it is not that easy, there are forces that will work against you; as the very developers/partners that you want to attract, ideally want:

  • an exclusive relationship to create barriers to entry for their competitors in their own marketspace
  • to reduce porting and software engineering costs by limiting the number of platforms that they support

Ideally, a developer will only want to port to a single platform and that one is the largest player (i.e., the gorilla in the market) because the gorilla platform will be the one that will bring them the more business than the rest. Thus we see that the dynamic of Partner Power; the platform owner wants as many developers/partners as possible because it opens up more revenue opportunities while the developer/partner wants to limit the number of platforms supported because of cost relative to revenue potential. When developers have more say in the platforms that they support Partner Power is greater, but when the Platform can call the shots, then Partner Power is diminished.

But Partner Power is different than the other forces in that it is not an attribute of the market as much as it is an attribute of the company. Mobile app developers write apps for iOS and Android because Apple and Android have a significant and loyal customer base. The significant and loyal customer base comes from the Mobile apps that the customer chooses. This becomes a virtuous cycle which locks out Windows Phone and others. If you’re part of the virtuous cycle, you’re relevant; if not, your irrelevant. Apple tried but was unable to lock out Android because Google worked very hard to build out their developer network and partner program to make themselves relevant.

Because Partner Power is a force that is company specific, it has a greater impact upon the valuation of a company than it does on the attractiveness of a market. What I mean by this, is that Apple and Google are much more valuable than their competitors such as HP and Yahoo because they have more sway over their developers – in fact, their Price Earnings (PE) ratios are an order of magnitude higher at the time of this writing.

So what is the key learning? I think that it is simple. If you have a product or service that is a platform, you MUST build out a viable developer program to generate complementor power to improve the value of your company.

[1] Porter, M.E., How Competitive Forces Shape Strategy, Harvard Business Review, March–April 1979

[2] Nalebuff, Barry and Brandenburger, Adam M., Co-opetition: A Revolution Mindset that Combines Competition and Cooperation… The Game Theory Strategy that’s Changing the Game of Business, 1996