Lecture 2 – SWOT Analysis &
Porter’s 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
● 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)
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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)
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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 firm’s existing market share and product line?
What is the nature of this threat?
– Competition?
– Political environment? Something else?
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SWOT Scorecard
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Strengths:
Threats:
Weaknesses:
Opportunities:
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Steve’s Organization: An Applied
Strategy
(Steve’s Boss)3
I/O Guy
(Steve’s Boss)2
I/O Guy
Steve’s Boss
I/O Guy
Big Group
In Mass
10+ I/O guys
7
Bob’s Team
in Oregon
12 I/O Guys
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Staff Arch 1
(Needs help)
Steve’s Team
in WA
4 Power
Circuit Guys
Staff Arch 2
(Straddling
Fence)
Staff Arch 3
(Out of Favor)
Jim’s Team in SC
7 I/O Chip Guys
Staff Arch 4,
Wants to Work
on SOCs
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.
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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
•
•
•
•
•
•
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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
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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: Steve’s 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
Steve’s team
●Steve’s 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
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
network doesn’t apply here
11●Old
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Opportunities:
●Big Group on East Coast, far from
action. Doesn’t work well with others.
Also doesn’t own anything (but thinks
it does).
●Staff Arch 1 owns lots of stuff and
needs help badly. Has boss’ ear.
●Bob’s 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
gov’t
●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
gov’t
●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 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
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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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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
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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
•
•
•
•
•
•
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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?
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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: Today’s 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
•
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)
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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
•
•
•
•
•
•
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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
● 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
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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
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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 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)
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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:
•
•
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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)
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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
● 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.
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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 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
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Class Discussion: Microsoft vs.
Google
Intro And The Players
● Who are the players?
● What’s MSFT’s motivation in pursuing
search?
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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?
•
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In the search market, outline Porter’s 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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Steve’s SWOT Scorecard: MSFT
Strengths:
●LOTS of cash. Can buy technology or
companies if they need to
●Own the world’s most popular OS,
browser and have >>> hardware
experience than rivals
●#1 browser
●Are excellent strategists (Linux)
●Has extensive partner network w/MSN,
Netflix, etc.
Threats:
●Google’s domination of search
●Apple has the ‘cool’ factor and is harming
MSFT’s 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 GOOG’s 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 GOOG’s
●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
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Steve’s 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
●GOOG’s 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 MSFT’s unpopularity
●Can cut into MSFT’s profits by
launching more net apps
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Porter’s Five Forces Model:
Search
●
●
●
●
●
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Threat of new entrants?
Bargaining power of buyers?
Threat of substitutes?
Bargaining power of suppliers?
Rivalry?
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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
•
•
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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
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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.)
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One Opinion
● Remember: Firms
respond to
incentives
• Why shouldn’t
•
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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
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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
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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)
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