Lecture 2 – SWOT Analysis & Porter’s Five Forces Model

1. Lecture 2 – SWOT Analysis & Porter’s 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 • Porter’s 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. (We’ll also be using their HBR articles for brevity)

3. Lecture 2: SWOT & Porter’s 5 Forces Model • Business strategy overview: • Strengths, weaknesses, opportunities & threats (SWOT) • Porter’s five forces model • Class discussion: Microsoft’s market position and future options/opportunities (freeform SWOT analysis + application of Porter’s)

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 firm’s existing market share and product line? • What is the nature of this threat? • Competition? • Political environment? Something else?

6. SWOT Scorecard

7. Steve’s Organization: An Applied Strategy

8. Some Background: • Steve’s team: Just coming off a successful project. 100% functional on 1st design spin. Product team decided not to do it. • Steve’s 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 • Jim’s team: Doing a chip, on its 3rd or 4th design revision • Bob’s team: Doing spec-related work. Has a big lab, but doesn’t have silicon expertise. • Staff Arch 1: Overworked and needs help • Staff Arch 2: Waffles between Big and Steve’s team (tries to please everybody) • Staff Arch 3: Was Steve’s main advocate, told by Steve’s 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: Steve’s Team

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

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 GM’s sales • 16 of GM’s 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. Porter’s 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 doesn’t 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: Today’s 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 • Apple’s 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 world’s 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 >>> 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 • Apple’s iPhone – Customers head to AT&T wireless to buy the phone, not the service • Orange sellers to Tropicana • Lettuce to Subway or McDonald’s

29. Threat Of Substitutes • Put simply: Is there something else out there similar to your product that’s “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 CDR’s  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 (we’ll 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 • Steve’s 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, he’d 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.

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 you’re 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? • What’s MSFT’s motivation in pursuing search?

38. Case Questions • Questions to ponder for the MSFT case: • What’s MSFT’s motivation in pursuing search? • Has Marc Andresson’s vision come true? How does this relate to Google’s overall strategy (you may need to Google Google’s strategy if you’re 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 MSFT’s moves make sense? Why or why not? • In the search market, outline Porter’s five forces for discussion. Use MSFT as your reference point

39. SWOT Scorecard - MSFT

40. SWOT Scorecard - GOOG

41. Steve’s SWOT Scorecard: MSFT

42. Steve’s SWOT Scorecard: Google

43. Porter’s Five Forces Model: Search • Threat of new entrants? • Bargaining power of buyers? • Threat of substitutes? • Bargaining power of suppliers? • Rivalry?

44. MSFT’s Entry Into Search: Some Comments • Google’s 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 Google’s 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 • MSFT’s 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. MSFT’s 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 • Google’s content offerings consist of what its users supply (YouTube, etc.)

46. One Opinion • Remember: Firms respond to incentives • Why shouldn’t Google want to exploit the rules? • Google recently hired Sen. Dorgan’s top staffer (who was working on net neutrality) for “Federal Policy Outreach Manager” position

47. Strategy Takeaways • Sometimes the competition isn’t obvious • Pay attention to what people say and more attention to what people do • Incentives matter! • When you’re 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. You’ll get more out of the book) • At the end of the session, you’ll receive your first HW assignment (and most important)