Lecture 2

1
Lecture 2 SWOT Analysis Porters Five Forces
Model

• Steve Montgomery

2
Strategy

• Overview of competitive strategy What are the
  high level goals of any company?
• Differentiation and pricing power
• Survival and profitability
• Porters Five Forces Model
• How to assess the landscape of your market
• Blue Ocean Strategy
• A toolkit to identify areas to explore creating
  a competition-free zone to reach the above
  objectives

End goal Understanding your business allows you
to pick smart projects
Kim, W.C. and Mauborgne, R., 2005, Blue Ocean
Strategy How To Create Uncontested Market Space
and Make the Competition Irrelevant, HBS Press.
(Well also be using their HBR articles for
brevity)
3
Lecture 2 SWOT Porters 5 Forces Model

• Business strategy overview
• Strengths, weaknesses, opportunities threats
  (SWOT)
• Porters five forces model
• Class discussion Microsofts market position and
  future options/opportunities (freeform SWOT
  analysis application of Porters)

4
Introduction To SWOT
5
SWOT Analysis Thinking Strategically

• Strengths
• What aspects of a firm are its strengths?
• Can be structural, market based, IP, etc.
• What gives a firm its competitive advantages?
• Weaknesses
• What aspects of a firm are weak?
• Can be structural, legal, market based, etc.
• What hinders a firm from competing well?
• Opportunities
• What areas/markets are there that a firm can grow
  into?
• Do the above strengths contribute, or do new
  capabilities need to be created?
• Threats
• What will stop a firm from growing into new
  spaces?
• What out there threatens a firms existing market
  share and product line?
• What is the nature of this threat?
• Competition?
• Political environment? Something else?

6
SWOT Scorecard
Strengths Threats
Weaknesses Opportunities
7
Steves Organization An Applied Strategy
8
Some Background

• Steves team Just coming off a successful
  project. 100 functional on 1st design spin.
  Product team decided not to do it.
• Steves boss You need to put that behind you.
  Work on this other stuff.
• The environment Cost-cutting has everyone
  nervous. Headcount is under pressure. Everyone
  is looking over their shoulders.

9
The Cast of Characters

• The staff Years and years of doing I/O (USB and
  PCIe invented here)
• Big team Has a culture of I win, you lose. Is
  at a remote site that is out of the mainstream
• Jims team Doing a chip, on its 3rd or 4th
  design revision
• Bobs team Doing spec-related work. Has a big
  lab, but doesnt have silicon expertise.
• Staff Arch 1 Overworked and needs help
• Staff Arch 2 Waffles between Big and Steves
  team (tries to please everybody)
• Staff Arch 3 Was Steves main advocate, told by
  Steves Boss to find something else to do (laid
  off)
• Staff Arch 4 Was working on SOCs (big growth
  area for the company), but told not do anything
  about it

10
What Should Steve Do?

• So how should this be handled?
• Some topics of leading technical people in the
  next class in the program!

11
SWOT Scorecard Steves Team
Strengths Best silicon guys, understand it better than anyone in org. Understand relationship building Team very cross-trained Flexible, independent, respond well to ambiguity and uncertainty Threats Big Group would love to minimize Steves team Steves Boss (es) looking to lay low, not take any risks (might cut headcount who needs a team of 4-5?) Team hates new work, might quit
Weaknesses Angry and upset about product snub Perceived as junior power delivery guys politically unpopular with bosses Main staff advocate going away Trying to play new game for first time, going against veterans No lab, so no motivation to spend money in WA Old network doesnt apply here Opportunities Big Group on East Coast, far from action. Doesnt work well with others. Also doesnt own anything (but thinks it does). Staff Arch 1 owns lots of stuff and needs help badly. Has boss ear. Bobs team has limited expertise but a great lab. Also has boss ear. Staff Arch 4 knows about growth area
12
SWOT

• Can be applied at all levels
• Your career
• Your team
• Your business
• Your industry

13
Firm Example Automobiles

• Question How can the new GM compete against
  Toyota, Ford, et al. post-bailout?

14
SWOT Scorecard The New GM
Strengths Partially owned by taxpayers and the govt More nimble than before Starting to build some better vehicles Have a jump on electric vehicles, flex fuel Still have strong brand recognition Threats Backlash against bailouts Perception of weak quality Strong product offerings from competitors Brand damaged by bankruptcy Culture not really understanding of issues (same people still running the show)
Weaknesses Partially owned by the taxpayers and the govt Union owns significant of company Badly damaged brand image and reputation for poor quality Operations damaged by restructuring (have to take time to do this right) Opportunities Can load unproductive divisions/assets into liquidation company and unload Can use gov.t ties to influence flex fuel regulations, EPA standards, etc. to get ahead Can launch new ad blitz to re-introduce themselves Can re-boot dealer network
15
What Should GM Do?
16
One Opinion

• More marketing dollars to Chevy
• Chevy has near 100 brand recognition very hard
  to achieve capitalize
• Chevy 70 of GMs sales
• 16 of GMs 33 models
• Spread offerings around all market segments
• Make Buick, Cadillac, GMC niche brands
• Chevy has near 100 brand recognition very hard
  to achieve

17
Another Opinion

• Bankruptcy and restructuring could take years
• Build politically unpopular cars
• Still have too much capacity and restrictive
  labor agreements

18
SWOT Summary

• Is a good technique to get the strategy
  discussion going puts a lot of high-level
  information in context
• Use it to assess situations and think more deeply
  about tactical moves
• If the SWOT picture looks really misaligned with
  the market/your firm, can tell you that your
  overall strategy should be reassessed
• Is only as good as the thinking that went into it

19
Porters Five Forces Model

• Five Forces Model A framework for shaping
  competitive strategy
• Like SWOT, gives a repeatable set of criteria to
  judge a situation by

20
Goal of Any Business

• Identify external threats and undue influence
• Maximize own influence
• Minimize negative influences
• Create differentiation
• By maximizing/minimizing influence, and creating
  differentiation you get pricing power (assuming
  there is a market)

21
Threat Of New Entrants

• AKA, Barriers to Entry
• Essentially How hard is it for other firms to
  enter your business?
• Do you have IP protection, trade secrets, etc.
  that everyone else doesnt have?
• Is there significant cost associated with
  entering your market?
• Are there regulatory barriers?
• Branding, marketing, advertising?
• Network effects? (More on this in a minute)
• Does one firm enjoy a production cost advantage?
• High switching costs?

22
Barriers to Entry - Examples

• Microprocessors Large capital required to
  build a fab
• NOT true anymore!
• More companies going fabless, more quality
  competition from foundries
• Pharmaceuticals FDA approval required for sale
  of new drugs patent protection
• Lengthy process, thousands of pages of documents
  multiphase clinical trials massive non
  recurring costs
• Automobiles Big 3 foreign firms have
  extensive relationships with suppliers and large,
  modern factories
• Extensive regulatory protection
• Collective bargaining UAW in play (gets great
  deal from Big 3)
• Is this still true? New electric car firms
  popping up to take advantage of green shift
• Back-office software High switching costs keep
  existing IT infrastructures in place
• WARNING Todays barrier to entry could be a
  liability tomorrow!

23
Barriers to Entry cont.

• Network effects Arise when your product is used
  by a large group of users
• and the value of the product increases the more
  people who use it
• Examples Telephone, iPod, MySpace, Facebook (and
  all social networking media content), Windows,
  MS Office, Xbox Live!,
• Network effects can be an extremely powerful
  barrier to entry
• Your entry forces other people to change their
  behavior. VERY tough to do!

24
Barriers to Entry, cont.

• One more thought on network effects
• Network effects often determine winner and
  losers, even if the loser is the superior
  product.
• Example Network effect loser
• Sony Betamax
• Better picture quality than VHS, better sound,
  smaller tape size
• But JVC opened up the VHS standard and allowed it
  proliferate in the market, sacrificing high
  prices for volume
• End result? Consumers snapped up cheap VHS VCRs.
• Example Network effect winner
• Apples iPod
• Dozens of MP3 players on market millions of
  songs
• Apple launches iPod using MPEG-4 encoding (.mp4)
• Co-launched iTunes as a complementary product.
  Users could easily buy a full album or 1 song at
  a time legally from central point
• iPod/iTunes sales took off, dominating market
  (Apple now worlds largest music retailer)

25
Power Of Suppliers

• Put simply How much influence do suppliers have
  over your business?
• Are you dependent on a component to succeed?
• Are people buying your product because it
  contains x or y from another supplier?
• Are there high switching costs to use another
  firm?
• Are there any substitutes?

26
Power Of Suppliers - Examples

• (High power example)
• PC Business Intel gtgtgt Dell, Compaq, etc. for
  computers (buying decision was Intel Inside)
• (Low power example)
• Dell computer Dell is ruthless at keeping parts
  costs low. (Also Apple)
• US Auto industry Parts suppliers dependent on
  Big 3 for large orders (changing. Why?)

27
Power Of Buyers

• Flip side of supplier power
• Put simply How much influence do
  buyers/customers have over your business?
• Are you a commodity? (Customers can get what you
  have from anywhere)
• Do buyers of your product have significant
  negotiating leverage?
• Are you dependent on 1 or 2 buyers for the
  majority of your business?
• Are you developing a standard product?
• Low switching costs to go to something else?
• Can your buyer threaten to produce your product
  themselves?
• Where are the end-users eyeballs?

28
Power of Buyers - Examples

• PC Memory vendors Prices set on open market,
  designs driven by JEDEC, so no ability to
  differentiate or charge more
• Suppliers to MSFT MSFT has enough resources to
  work-around most software inputs
• Apples iPhone Customers head to ATT wireless
  to buy the phone, not the service
• Orange sellers to Tropicana
• Lettuce to Subway or McDonalds

29
Threat Of Substitutes

• Put simply Is there something else out there
  similar to your product thats Good Enough?
• Interwoven with power of buyers/suppliers
• Undifferentiated products never earn high profits
  market mechanisms (supply and demand) take over
• When there is an acceptable substitute out there,
  you will require another edge (marketing,
  branding, regulatory edge, etc.)
• New technologies can make products obsolete
• Sometimes economic conditions come into play,
  making other substitutes more attractive

30
Threat Of Substitutes - Examples

• Land lines vs. cell phones
• DSL vs. FIOS vs. Cable Internet
• Steve very happy with his new Cable internet
  service
• Cable TV vs. Satellite
• New technology displacing old
• Zip Drives ? Killed by CDRs ? Killed by Flash ?
  Killed by net backup
• Economic conditions (In this case, the weak
  dollar)
• Rising aluminum prices makes carbon fiber more
  competitive
• Biodiesel vs. Regular diesel
• Sometimes, substitutes can cross industry lines
  (well see this when we look at Southwest Air
  next time) key is proper frame of reference (in
  this case, the travel industry)

31
Rivalry Among Competitors

• The more energy you put into fighting off
  competition, the less you have for profitability
• Potential for price wars (everyone loses)
  subject of game theory
• Increased expenditures for marketing, ads, etc.
• Intensity increases where there are
• Mature, slow growth industries ( pie is fixed)
• Participants enjoy roughly same amount of power
• Products and services are indistinguishable
• Fixed costs are high, marginal costs low
• Rivalry can be good for all
• For average consumer, competition tends to lower
  prices and drive new offerings to market
• For market participants, competition leads to
  better products and profitable market
  segmentation (Blue Ocean Strategy module Toyota
  example)

32
Rivalry - Examples

• Airlines
• Fare cuts and price wars are common
• Cell phones
• Warring rate plans and feature offerings
• Boeing/Airbus
• Intel/AMD
• Microsoft/Google
• Fox/MSNBC/CNN
• Automotive Industry
• Interesting one Different types of competition
  across different market segments
• Who makes the highest MPG car?
• Who makes the toughest truck?
• Who makes the fastest sports car?

33
Rivalry - Examples

• Steves friend Sean in grad school
• Every 2 months, would get a call from a long
  distance phone provider
• Hi, this is ---- from Sprint and we have a deal
  for you! Would you be willing to switch your
  long distance service?
• Sean Sure. What are you offering?
• The next month, hed get a call from ATT asking
  why he left
• Needless to say, Sean was a nightmare customer
• He wheedled better and better deals out of all of
  his suitors every other month
• Also had a way to get free electronics from
  Target
• Example of rivalry leading to better deal for end
  user. Of course, in the end, no phone company
  ever made any money off of Sean.

34
Five Forces Summary

• Is a good generic framework is as detailed as
  you make it
• Curious treatment of the government should
  there be a 6th force?
• Complementary products can make or break an
  offering
• iPod example
• Cars are pretty useless without roads or gas
  stations
• Airlines irrelevant without airports
• Does not tell you how to exploit a market, just
  helps ID the forces driving it
• There are other strategies for that
• Industry structure changes Another item to watch
  for
• Example Newspapers. News is available 24/7 on
  the web. Is print dead?
• Does it make sense for big city newspapers to
  have foreign bureaus?
• Like other tools, is applicable up and down the
  chain

35
How These Tools Relate To You

• Using SWOT and Five Forces in tandem allows you
  to
• Identify the strategic environment
• Make an assessment of your strength relative to
  other players
• If youre thorough in gathering information and
  disciplined in its presentation, the right answer
  can leap off the page
• Apply these tools to
• Your company
• Your business unit
• Your organization
• Your team
• You
• Strategy is a mindset

36
Class Discussion Microsoft vs. Google
37
Intro And The Players

• Who are the players?
• Whats MSFTs motivation in pursuing search?

38
Case Questions

• Questions to ponder for the MSFT case
• Whats MSFTs motivation in pursuing search?
• Has Marc Andressons vision come true? How does
  this relate to Googles overall strategy (you may
  need to Google Googles strategy if youre not
  familiar already.)? Have Gates fears come true?
• How has MSFT fared historically in its strategic
  moves?
• What key insight about the search market did
  Yahoo! overlook and Google exploit?
• Did Google rest on its search accomplishments, or
  did it branch out?
• Can you see a pattern in the functions Google
  created?
• In light of your answer above, does MSFTs moves
  make sense? Why or why not?
• In the search market, outline Porters five
  forces for discussion. Use MSFT as your
  reference point

39
SWOT Scorecard - MSFT
Strengths Threats
Weaknesses Opportunities
40
SWOT Scorecard - GOOG
Strengths Threats
Weaknesses Opportunities
41
Steves SWOT Scorecard MSFT
Strengths LOTS of cash. Can buy technology or companies if they need to Own the worlds most popular OS, browser and have gtgtgt hardware experience than rivals 1 browser Are excellent strategists (Linux) Has extensive partner network w/MSN, Netflix, etc. Threats Googles domination of search Apple has the cool factor and is harming MSFTs brand with ads Caught looking the wrong way WRT mobile devices - biz model compromised
Weaknesses 3 in search Considered to be Big Brother Has run afoul of regulatory agencies before Profitability depends on OS, Office sales market trending away from these (and toward GOOGs model) Opportunities Can still buy Yahoo! Or Facebook. IE is the internet portal of choice can interlink Bing into code and minimize GOOG have enough infrastructure to negate GOOGs Can adopt new usage model and beat GOOG to online app game Can intertwine Bing with Xbox, MSN, etc. sites partners have an existing network already
42
Steves SWOT Scorecard Google
Strengths Invented the best search algorithm Is considered the it company for the internet Quirky culture drives lots of innovation High stock price ready access to capital Threats MSFT has cash and a will to win GOOGs phone overshadowed by iPhone No real hardware expertise will need help from INTC Apple owns content, OS, devices
Weaknesses Main product dependent on connection speed Security and privacy concerns among users Main source of content (YouTube) is constant focus of legal action rivals have much more and better content Opportunities Can try to influence new regulatory structure (Net Neutrality) Market trend is towards mobile devices, supporting cloud computing theory Can draw on MSFTs unpopularity Can cut into MSFTs profits by launching more net apps
43
Porters Five Forces Model Search

• Threat of new entrants?
• Bargaining power of buyers?
• Threat of substitutes?
• Bargaining power of suppliers?
• Rivalry?

44
MSFTs Entry Into Search Some Comments

• Googles overall strategy Make the internet the
  new PC
• Reduce the PC to a old-style terminal (Green
  screen box hooked to a mainframe)
• Eliminate the need for local OS (operating
  system) or apps put them all on the web. Offer
  net storage of data to eliminate need for local
  hard drives, etc.
• Maximize eyeballs to Googles search engine and
  ad machines, which could then custom-tailor ad
  views to your content
• Willing to influence government to set
  regulations beneficial to Google
• MSFTs revenue in this scenario is compromised
  severely
• PC and OS combination would lose relevance no
  need for local performance or storage big cash
  cow for MSFT
• MSFT needs to rethink its business model somewhat
  to encompass mobile devices old model of high
  OS is threatened by cheap netbooks
  smartphones

45
MSFTs Entry Into Search, cont.

• MSFT has no choice but to enter search, to affect
  GOOG
• They have a track rec
• Sometimes companies go against their image to get
  what they need
• MSFT embraced Linux, found a way to protect
  business and make money while defusing threat
• Google creating lobbying effort and attempting to
  influence government despite
• Some hidden players Cable companies, i.e.
  Comcast, Apple
• The internet is about content. Whoever has the
  content wins, no matter the gateway
• Comcast, Apple own significant chunks of online
  content. Comcast in reported talks to buy NBC
• MSFT has partnership with Netflix on Xbox and
  Windows Media
• Googles content offerings consist of what its
  users supply (YouTube, etc.)

46
One Opinion

• Remember Firms respond to incentives
• Why shouldnt Google want to exploit the rules?
• Google recently hired Sen. Dorgans top staffer
  (who was working on net neutrality) for Federal
  Policy Outreach Manager position

47
Strategy Takeaways

• Sometimes the competition isnt obvious
• Pay attention to what people say and more
  attention to what people do
• Incentives matter!
• When youre profitable, others will attempt to
  take it away. No business model is permanent
• Therefore, always look to defend your ability to
  differentiate
• Sometimes, it will mean throwing your strength
  against others. Find ways to leverage yours in
  unexpected ways

48
For Next Time

• Blue Ocean Strategy
• Read
• Kim and Maubornge, Blue Ocean Strategy
• (Either the paper or the book. Youll get more
  out of the book)
• At the end of the session, youll receive your
  first HW assignment (and most important)