Lecture 2

Blue Ocean strategy & Porters

Five Forces Model
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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 08/10/16
Mauborgne, R., 2005, Blue Ocean Strategy How To Create Uncontested Market Space and Make
the Competition Irrelevant,
Irrelevant, HBS Press. (Well
(Well also be using their HBR articles for brevity)

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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 assessing the industrys structure.
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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.

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)
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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?

Linked 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
Traditional taxi service vs. Uber/Grab

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

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

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)
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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?
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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

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

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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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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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Moving on
More than two decades later, W. Chan Kim
and Renee Mauborgne argued in their 2005
book Blue Ocean Strategy, that the
competitive approach of strategy is
pretty flawed.
They stated that the field of strategy
provides an array of tools to compete in
the red ocean, including the five forces
and the three generic strategies for
analyzing existing industry.
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