Pendragon

Once in a lifetime, Porter’s Five Forces and the Memory Market



Michael E. Porter

In 1979 Michael Eugene Porter, of Harvard Business School, developed a simple framework for accessing and evaluating the competitive strength of a business. The theory is based on the idea that there are five forces that determine the competitive intensity and attractiveness of a market. This theory, referred to as Porter’s Five Forces of Competitive Position Analysis (“Five Forces”), helps investors study the evolution of an industry and a company. The Five Forces, determined in the theory are: 1) threat of new entrants, 2) bargaining power of buyers, 3) threat of substitute products or services, 4) bargaining power of suppliers, 5) rivalry among existing competitors. Many investors rely on this study as the basis of their bottom up analysis of a company and an industry. Using his Five Forces theory, Porter identified areas in the global economy where major changes were occurring.

 
Porter's Five Forces

Westinghouse Electric Corporation was founded in 1886 by George Westinghouse and was the company that brought electricity to the world. George Westinghouse’s adoption of alternating current was the driving force behind the second industrial revolution. Without it, the Digital Economy would not exist. Westinghouse was also involved in nuclear power. That division filed for bankruptcy while it was owned by Toshiba. This presented a clue that most investors had ignored. Simply put, Toshiba had to sell one of its most profitable divisions, Toshiba Memory, to raise enough capital to offset the losses incurred by the bankruptcy of its Westinghouse’s nuclear division. It was during the auction process of the Toshiba Memory division that the clue lay.

 

Companies such as Apple, Dell Technologies, Amazon.com, and Google indicated interest in bidding for memory assets. Using Porter’s Five Forces as a guide, some investors asked the question “Why would a company, that in the past had market power as a buyer of memory, now want to purchase and own a supplier?” To some this was an indication that the market forces within the memory market were evolving. Buyers (the smart money) saw that the global economy was evolving into the Fourth Industrial Revolution. With 5G about to be rolled out, technological innovation in memory, coupled with the consolidation of the memory industry (from many sellers and few buyers to few sellers and many buyers), meant the memory industry structure was about to be turned on its head. Simply put, the industry evolved from one that was purely competitive (with a product that was a commodity) into an industry that is an oligopoly (whose product no longer has a high degree of technological innovation).

 

Today, many still believe that the memory business is exactly the same as it was the last cycle, that it has not evolved at all. For those investors, the cycle is over, they sell everything because memory is a commodity and it is about PC sales and smartphone sales, and not alternative intelligence, machine learning, data centers, the Intelligent Edge, autonomous cars, the digitization of health care, the Internet of Things and 5G. The consensus view echoes that of the Talking Heads’ song Once in a Lifetime, “Same as it ever was, same as it ever was”. Alas, Toshiba Memory was sold for $19 Billion USD to a consortium lead by Bain Capital which included Dell Technologies. Dell Technologies has the largest market share in data center servers, and Apple Computer is a leader in mobile communications and media devices. We believe Tim Cook and Michael Dell may be on to something.

 

Dr. James E. Thorne
Chief Capital Market Strategist & Senior Portfolio Manager

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