Lecture 2 SWOT Analysis & Porters Five Forces Model

Steve Montgomery

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)
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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)

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Introduction To SWOT

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?

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SWOT Scorecard
Strengths: Threats:

Weaknesses:

Opportunities:

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Steves Organization: An Applied Strategy

(Steves Boss)3 I/O Guy

(Steves Boss)2 I/O Guy

Steves Boss I/O Guy

Big Group In Mass 10+ I/O guys

Bobs Team in Oregon 12 I/O Guys

Staff Arch 1 (Needs help)

Steves Team in WA 4 Power Circuit Guys

Staff Arch 2 (Straddling Fence)

Staff Arch 3 (Out of Favor)

Jims Team in SC 7 I/O Chip Guys

Staff Arch 4, Wants to Work on SOCs

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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.
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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

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What Should Steve Do?

So how should this be handled?

Some topics of leading technical people in the

next class in the program!

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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 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 11 3/25/2013 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 45?) Team hates new work, might quit 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

SWOT
Can be applied at all levels

Your career Your team Your business Your industry

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Firm Example: Automobiles

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

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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

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What Should GM Do?

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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

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

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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

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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

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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)
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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?

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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!

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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!

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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. 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 loser

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)

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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?
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Power Of Suppliers - Examples

(High power example)

PC Business:

Intel >>> 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?)

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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?

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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 AT&T wireless to buy the phone, not the service Orange sellers to Tropicana Lettuce to Subway or McDonalds

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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
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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 Rising aluminum prices makes carbon fiber more competitive Biodiesel vs. Regular diesel

Economic conditions: (In this case, the weak dollar)

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)

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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. 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 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)

Intensity increases where there are:

Rivalry can be good for all:

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Rivalry - Examples
Airlines:

Fare cuts and price wars are common Warring rate plans and feature offerings

Cell phones: 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?

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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 AT&T 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.
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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 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?

Industry structure changes: Another item to watch for

Like other tools, is applicable up and down the chain

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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

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Class Discussion: Microsoft vs. Google

Intro And The Players

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

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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

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SWOT Scorecard - MSFT

Strengths: Threats:

Weaknesses:

Opportunities:

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SWOT Scorecard - GOOG

Strengths: Threats:

Weaknesses:

Opportunities:

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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 >>> hardware experience than rivals #1 browser Are excellent strategists (Linux) Has extensive partner network w/MSN, Netflix, etc. 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) 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

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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

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 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 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 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

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Porters Five Forces Model: Search

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

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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 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

MSFTs revenue in this scenario is compromised severely

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MSFTs Entry Into Search, cont.

MSFT has no choice but to enter search, to affect GOOG

They have a track rec 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 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.)

Sometimes companies go against their image to get what they need:

Some hidden players: Cable companies, i.e. Comcast, Apple

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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

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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

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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)

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