Hi! In this post, we will continue from where we left off last time and focus on the next set of management concepts. Today, we will look at the classic strategy frameworks developed by great management thinkers. Those of you who have done your education in Management will find it easy to relate to these concepts. It will also help those who have not had any formal introduction to strategy as a subject.
1. Porter’s five forces analysis [wiki article]
First published in an HBR article in 1979, by Michael E. Porter of Harvard University, Porter’s five forces analysis is one of the most widely used frameworks to ascertain attractiveness of an industry.
Porter’s five forces include three forces from ‘horizontal’ competition – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from ‘vertical’ competition – the bargaining power of suppliers and the bargaining power of customers. We will also perform the Five forces analysis on Starbucks.
Threat of new entrants: If an industry has low entry barriers, the threat of new entrants is high as anyone can enter the industry. For Starbucks, threat of new entrants is low because significant capital investment would be required for a new entrant to compete with Starbucks. A local coffee joint contributes towards industry rivalry more than towards this particular force.
Threat of substitutes: Anything that satisfies a similar need or objective is a substitute. Starbucks serves two needs – (1) Coffee (2) Space for people to meet up and have something. For this entire experience, substitutes can be tea, ice-cream, soft-drinks, juice, etc. at any place which offers it. If I decide to go out with my friends to Starbucks and it is completely occupied, we can always go to the nearest McDonald’s and have burgers/fries/coffee, etc. or we can go to the nearest Baskin-Robbins and have ice cream.
Bargaining power of customers: Think of what you do when you think something is over priced. You find alternatives that offer better product or service at the same price or you go to a lower price variant. As a buyer, you have that power. That’s what bargaining power of customers is all about. If someone isn’t happy with the quality or pricing or ambiance or whatever it is that Starbucks stands for, the customer can go to a Barista or a Café Coffee Day or a Costa Coffee.
Bargaining power of suppliers: For any business process, there are inputs. Starbucks, for example, is dependent on coffee beans and the pricing and supply of coffee matters to their survival. So how much power does the supplier have? Can a supplier raise their prices or reduce their supply for their own gain? That’s bargaining power of suppliers. High demand for Coffee worldwide and strict weather and geographical conditions required for production ensures that the suppliers have a higher bargaining power.
Competitive rivalry: If there are too many players in the industry, the rivalry will be high. Starbucks is in a highly competitive market where any small or large player offering similar service becomes its competitor and starts grabbing a piece of the pie.
That’s how you can look at any player and perform the Five Forces Analysis. Do give it a try. It is interesting to know that Michael Porter came up with his five forces as a reaction to SWOT, which he found to be lacking in thoroughness. That’s what we are going to check out next.
2. SWOT Analysis [wiki article]
SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats.
Strengths: characteristics of the business or project that give it an advantage over others.
Weaknesses: characteristics that place the business or project at a disadvantage relative to others.
Opportunities: elements in the environment that the business or project could exploit to its advantage.
Threats: elements in the environment that could cause trouble for the business or project.
The analysis considers strengths and weaknesses as internal which makes them more controllable. On the other hand, Opportunities and Threats are external and hence an organization doesn’t have control over these two parameters.
Let’s take Apple Inc., for example:
Strengths: Apple is an innovative company and has produced not only some great hardware and software, but have also created product categories. The profit margins are pretty high as they operate in the premium segment. The brand recall and identity is really strong and they enjoy a loyal customer base. Apple has also become a status symbol which users want to flaunt.
Weaknesses: As there are fewer product variants unlike other players, Apple can’t cater to certain segments of the market. The price sensitive users are discouraged by the premium pricing.
Opportunities: The applications of software designed by Apple are immense. They can easily scale up in new categories such as Apple TV+ or Titan (Apple electric car project) and can enter new markets. As the demand for tech goes up, the opportunities for Apple go up as well.
Threats: The smartphone market is highly competitive. Apple has been criticized for some of their business strategies and policies in various geographies.
Let’s now look at the final strategic management tool of this post.
3. Growth–share matrix (BCG Matrix) [wiki article]
BCG matrix was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units, that is, their product lines. To use the chart, you are supposed to plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and market growth rates. To understand this better, we are going to consider some of the offerings from Adidas.
Cash cows is where a company has high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. These units generate more cash with as little investments as possible and the cash generated from such cows should be used to fund stars and question marks. Think of the apparel offerings from Adidas. The industry growth pace is low but Adidas has a good presence in the market.
Dogs are units with low market share in a mature, slow-growing industry. These units typically “break even”, generating barely enough cash to maintain the business’s market share. As they don’t generate a lot of cash, it is better to get rid of them after break-even or at the right time/sell-off opportunity. For Adidas, dogs are their hats, eyewear that they create. They have limited offerings in this vertical and the industry isn’t growing as such.
Question marks are businesses operating with a low market share in a high-growth market. These units have a potential to gain market share but if they do not succeed they might even turn into dogs after the industry growth slows down. These need to be analyzed carefully before making investment decisions. The sports equipment and bags offered by Adidas fall into this category.
Stars are units with a high market share in a fast-growing industry. Stars require high funding to fight competitors and maintain their growth rate. When industry growth slows, if they remain a niche leader or are amongst the market leaders, stars become cash cows; otherwise, they become dogs due to low relative market share. Sports shoes made by Adidas are Stars as the industry growth rate is high and at the same time Adidas has a high market share.
The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually, the market stops growing; thus, the business unit becomes a cash cow. At the end of the cycle, the cash cow turns into a dog.
Hope this helps! Please give your feedback in the comments section and if you want me to cover any specific points. Do attempt the case which was posted in the part 2 of this series. Do share with your friends and co-aspirants. Happy prepping! 🙂