Strategic Management - From Porter 5 forces to the Blue Ocean Strategy

DAVIDE GAMBA Teaching Assistant of Strategic Management Business Analyst at Media Market – Media Saturn Holding Research and Teaching Assistant at Center for Young and Family Enterprise (CYFE) - University of Bergamo

STRATEGIC MANAGEMENT

An overview on Strategy Frameworks From 'Porter 5 forces' to the 'Blue Ocean Strategy'

Lesson STR C01 - Course Number ITA 37056 / ENG 37176 – Fall 2016 / Spring 2017 prof. Lucio Cassia

Strategic Management (Theory and Practice) Lucio Cassia Università degli Studi di Bergamo

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What you get from this lesson

The aim of this lesson is to provide a quick guide that:

• gives short and clear overviews about typical frameworks and techniques used to support strategic decisions: a Vademecum of books and references to be further in-depth analyzed when needed (e.g. Project Works)

• helps to understand how to select the right framework in order to address different business issues

• helps to understand how to draw business recommendations based on strategy frameworks


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Overhead analysis

Innovative Frameworks

Internal analysis

External analysis

Topic Main content

Introduce the most important theoretical models historically used to understand the Internal environment, in reference to: most important players and factors that influence organizations mission statement business units productivity

Introduce the most important theoretical models used to analyze the internal context compared to external context

Provide reference frameworks useful in understanding and decision-making processes, when it is necessary to analyze the external competitive environment

Identify and study the most innovative strategy theories that go beyond classical models, but that companies are exploring and adopting (with success) in order to find and open new ways of doing business in the current hypercompetitive market

Executive Summary


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The evolution of strategic thinking

Strategy frameworks are the result of perpetual analysis and development of strategic thinking in order to help companies to face continuously challenging and changing competitive contexts

Internal analysis

Growth-Share Matrix (BCG Matrix) Value Chain analysis


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Corporate diversification and firm performance

An inverted U-shaped relationship between the type of diversification and overall firm performance

Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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Growth – Share Matrix (BCG Matrix)

• A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis).

• SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.



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• Relative market share = the product’s share relative to its largest competitor

– It indicates cash generation because the higher the share the more cash will be generated

• Market growth rate = average growth rates of different market segments

– It indicates product’s position and it is a good indicator of market’s strength and its future potential

– A growing market share requires investments in assets to increase capacity and therefore results in the consumption of cash

Source: Carl W. Stern, George Stalk, Perspective on Strategy from The Boston Consulting Group Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015

“To be successful, a company should have a portfolio of products with different growth rates

and different market shares. The portfolio composition is a function of the balance between

cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed

simultaneously”. (B. Henderson, BCG)


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Placing products in the Matrix provides 4 categories in a portfolio of a company:

• Stars: high market share in a fast-growing market; earnings are high and either stable or growing; invest to hold or improve the star’s position

• Cash Cows: low-growth market but considerable market share; high and stable earnings and cash flows; invest enough to hold their current position

• Dogs: small market share in a low-growth market; low and unstable earnings; neutral or negative cash flows; divest or harvest

• Question Marks: low market share in high growth market; earnings are low and unstable, but they might be growing; cash flow is negative; invest to turn them into stars

“Cash cows” finance “Question marks” to turn them into “Stars” that grow to

become “Cash cows”

Source: Carl W. Stern, George Stalk, Perspective on Strategy from The Boston Consulting Group Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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Dynamic corporate strategy: Nike vs Adidas

• Corporate strategy needs to be dynamic over time

• As firms grow, they tend to diversify and globalize to capture additional growth opportunities



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BCG matrix – The case of Apple

Because Apple runs a relatively limited line of products it is quite simple to plot their portfolio of products onto the BCG matrix. Please consider the five products represented in the following table.

Source: www.statista.com, 2015


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BCG matrix – The case of Apple


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Value Chain analysis

• The value chain describes the internal activities a firm engages in when transforming inputs into outputs.

• Each activity the firm performs along the horizontal chain adds incremental value. Each activity the firm performs along the value chain also adds incremental costs.

• A careful analysis of the value chain allows managers to obtain a more detailed and fine-grained understanding of how the firm’s economic value creation ( V - C ) breaks down into a distinct set of activities that help determine perceived value (V) and the costs (C) to create it.

Source: Porter, M., Competitive Advantage, Free Press, New York, 1985 Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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• The primary activities add value directly as the firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service.

• Other activities, called support activities , add value indirectly. These support each of the primary activities.

Source: Porter, M., Competitive Advantage, Free Press, New York, 1985 Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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There are two different approaches on how to perform the analysis, which depend on what type of competitive advantage a company wants to create (cost or differentiation advantage).

Source: Porter, M., Competitive Advantage, Free Press, New York, 1985 ; http://www.strategicmanagementinsight.com/tools/value-chain-analysis.html

Cost advantage Differentiation advantage

This approach is used when organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs.

The firms that strive to create superior products or services use differentiation advantage approach.

• Step 1. Identify the firm’s primary and support activities

• Step 2. Establish the relative importance of each activity in the total cost of the product

• Step 3. Identify cost drivers for each activity • Step 4. Identify links between activities • Step 5. Identify opportunities for reducing costs

• Step 1. Identify the customers’ value-creating activities • Step 2. Evaluate the differentiation strategies for

improving customer value • Step 3. Identify the best sustainable differentiation


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Value Chain analysis – The case of Illy Caffé

An Italian manufacturing case

ILLY CAFFÉ


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Primary activities

• Supply chain management Activities associated with harvesting, quality control and purchasing within countries where the coffee beans are grown, and shipping the beans in bags to company plant in Trieste (Italy).

• Operations They mainly include blending, roasting and packaging coffee beans in Trieste. Basically, internal operations consist of a set of consequent processes as a result of which coffee beans in bags are turned into paper packages and metal cans, depending on the nature of each individual product.

• Distribution Activities involved in shipping products to consumers. Illy products are realized in more than 100,000 plants in more than 140 countries across the world, sold through three major channels: Ho.Re.Ca, retail outlets, and vending machines.

• Marketing and sales These activities consist in the communication of the value promise to the target customer segments through offline and online marketing.

• After-sales service They include a wide range of activities that relate to the maintenance of product performance after the sale, facilitated by offline and online customer service channels.

Source: http://www.illy.com/wps/wcm/connect/it/home


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Support activities

• Infrastructure It involves a set of support functions and systems. In specific, Illy is governed by the Board of Directors and the governance is assisted by Executive Committee, Appointments and Remuneration Committee, Supervisory and Monitoring Body and Internal Audit and Risk Assessment.

• Human resource management Illy employs almost 900 people in its HQ and in the 14 subsidiaries.

• Technology development It is associated with intangible intellectual assets of the firm, such as patents, innovations and their protection. Since 1932, Illy has registered 433 patents in total.

• Procurement Illy adopts a strategic approach in dealing with its suppliers aiming to build long-term relationships.

Source: http://www.illy.com/wps/wcm/connect/it/home; Illy's sustainability value report, 2011, http://valuereport.illy.com/en/the_company

External analysis

PESTEL Framework Porter’s 5 forces model


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PESTEL framework

• The PESTEL model groups the forces in the firm’s general environment into six segments: Political, Economic, Sociocultural, Technological, Ecological, and Legal.

• These forces are embedded in the global environment and can create both opportunities and threats.

1. Use PEST to brainstorm the changes happening around you

2. Brainstorm opportunities arising from these changes

3. Brainstorm threats caused by them

4. Take appropriate action

Source: A. Francis, Scanning the Business Environment., New York, Macmillan 2006 Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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PESTEL framework

• Political environment: the processes and actions of government bodies that can influence the decisions and behavior of firms

– E.g. the U.S. government exerted political pressure upon BP in the aftermath of the Gulf of Mexico oil spill

– E.g. Political stability can influence investment decisions

• Legal environment: the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm’s profit potential.

– E.g. Many industries in the United States have been deregulated over the last few decades, including airlines, telecom, energy, and trucking, among others. Removing or reducing government regulations tends to lead to new firm entry, intensified competition, innovation, and higher value at lower prices for consumers.



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PESTEL framework

• Economic factors:

– Growth rates: measure of the change in the amount of goods and services produced by a nation’s economy. It indicates what stage of the business cycle the economy is in—that is, whether business activity is expanding (boom) or contracting (recession).

– Interest rates: the amount that savers are paid for use of their money and the amount that borrowers pay for that use. Low interest rates have a direct bearing on consumer demand which in turn fuels economic growth

– Levels of employment: In boom times, unemployment is low, and skilled human capital becomes a scarce and more expensive resource. In economic downturns, unemployment rises. As more people search for employment, skilled human capital is abundant and wages usually fall -> training, entrepreneurial opportunities (e.g. Microsoft, GE, FedEx)

– Price stability: When there is too much money in an economy, we tend to see rising prices— inflation. Inflation tends to go along with higher interest rates and lower economic growth (Argentina, Brazil, Mexico, and Poland). Deflation describes a decrease in the overall price level. It is serious threat to economic growth because it distorts expectations about the future (Japan).

– Currency exchange rates: determines how many dollars one must pay for a unit of foreign currency. It is a critical variable for any company that either buys or sells products and services across national borders.



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PESTEL framework

• Sociocultural factors:

– Society’s cultures, norms, and values: e.g health consciousness (Whole Foods vs McDonald’s), career attitudes and emphasis on safety

– Demographic trends: they capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class. Demographic trends present opportunities but can also pose threats (e.g. Spanish language networks in the US)

• Technological factors: they capture the application of knowledge to create new processes, products and services. Changes in the technological environment bring both opportunities and threats for companies (e.g. iPhone vs. BlackBerry)

• Ecological factors: they concern broad environmental issues such as the natural environment, global warming, and sustainable economic growth. Organizations and the natural environment coexist in an interdependent relationship.

– Business organizations have contributed to the pollution of air, water, and land, as well as depletion of the world’s natural resources (e.g. BP’s oil spill in the Gulf of Mexico).

– Ecological factors can also provide business opportunities (e.g. zero-emission battery-powered vehicles by Tesla Motors)



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PEST(EL) Analysis – The case of Twitter

Political Economic

Social

Technological

Legal Environmental


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Political Economic

Social

Technological

Legal Environmental

Not relevant

Not relevant


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Political Economic

Social

Technological

Legal Environmental

Not relevant

Not relevant User’s privacy

(e.g., analytics, personal information)

Governments'’ restrictions

(e.g., Middle-East situation)

IoT, proximity strategies

and mobile technology

Social trend

(i.e., the “need to share”)


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Porter’s 5 forces model

• Five forces model A framework developed by Michael Porter that identifies five forces that determine the profit potential of an industry and shape a firm’s competitive strategy.

– Industry A group of (incumbent) companies that face more or less the same set of suppliers and buyers; these firms tend to offer similar products or services to meet specific customer needs.

– Industry analysis A method to (1) identify an industry’s profit potential and (2) derive implications for a firm’s strategic position within an industry.

– Strategic position A firm’s strategic profile based on value creation and cost. The goal is to generate as large a gap as possible between the value the firm’s product or service creates and the cost required to produce it ( V - C ).

• Competition must be viewed more broadly (beyond firm’s closest competitors) to encompass not only direct rivals but also a set of other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes.

• Profit potential of an industry is a function of the five forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms.



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• The five forces model enables managers to understand their industry environment, and to shape their firm’s strategy:

– The stronger the five forces, the lower the industry’s profit potential—making the industry less attractive for competitors.

– The weaker the five forces, the greater the industry’s profit potential-making the industry more attractive

• The 5 forces relative strengths are context dependent

Porter’s 5 forces model

• Managers need to craft a strategic position for their company that leverages weak forces into opportunities, and mitigates strong forces because they are potential threats to the firm’s ability to gain and sustain a competitive advantage.



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An extension looking to digital era

• Suggested extension of Porter’s 5 forces model

• Complement A product, service, or competency that adds value to the original product offering when the two are used in tandem.

• Complementor A company that provides a good or service that leads customers to value your firm’s offering more when the two are combined

– Examples are:

• Google and Samsung in the smartphone industry

• iTunes music stores and iPod/iPhone music player



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Competitive positioning & the 5 forces


Overhead analysis

SWOT Analysis


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SWOT Analysis

• A framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T).

• Internal strengths (S) and weaknesses (W) concern resources, capabilities, and competencies. Whether they are strengths or weaknesses can be determined by applying the VRIO framework

• External opportunities (O) and threats (T) are in the firm’s general environment and can be captured by PESTEL and Porter’s five forces analyses

• Problem: a strength can also be a weakness, and that an opportunity can also simultaneously be a threat.

Source: Humphrey A., Stakeholders Concept and SWOT Analysis, Stanford University Source: Frank T. Rothaermel, Strategic Management: Concepts, McGraw-Hill Education, 2015


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SWOT Analysis

• VRIO framework assesses the competitive implications of a firm’s resources

• For a firm’s resource to be the basis of a competitive advantage, it must have VRIO attributes: valuable (V), rare (R), and costly to imitate (I). The firm must also be able to organize (O) in order to capture the value of the resource.

– A resource is valuable (V) if it allows the firm to take advantage of an external opportunity and/or neutralize an external threat.

– A resource is rare (R) if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition.

– A resource is costly to imitate (I) if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost.

– The firm is organized (O) to capture the value of the resource if it has an effective organizational structure, processes, and systems in place to fully exploit the competitive potential.



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SWOT Analysis

Key Questions to Ask are:

• Strengths

– What advantages does your organization have?

– What do you do better than anyone else?

– What unique or lowest-cost resources can you draw upon that others can't?

– What do people in your market see as your strengths?

– What factors mean that you "get the sale"?

– What is your organization's Unique Selling Proposition (USP)?

• Weakness

– What could you improve?

– What should you avoid?

– What are people in your market likely to see as weaknesses?

– What factors make you lose sales?

Source: Humphrey A., Stakeholders Concept and SWOT Analysis, Stanford University


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SWOT Analysis

• Opportunities

– What good opportunities can you spot?

– What interesting trends are you aware of?

– Useful opportunities can come from such things as: Changes in technology and markets on both a broad and narrow scale; Changes in government policy related to your field; Changes in social patterns, population profiles, lifestyle changes, and so on; Local events

• Threats

– What obstacles do you face?

– What are your competitors doing?

– Are quality standards or specifications for your job, products or services changing?

– Is changing technology threatening your position?

– Do you have bad debt or cash-flow problems?

– Could any of your weaknesses seriously threaten your business?

Source: Humphrey A., Stakeholders Concept and SWOT Analysis, Stanford University


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SWOT Analysis

Managers use the SWOT matrix to develop strategic alternatives for the firm using a four-step process

1. Focus on the Strengths–Opportunities quadrant (top left) to derive “offensive” alternatives by using an internal strength in order to exploit an external opportunity.

2. Focus on the Weaknesses–Threats quadrant (bottom right) to derive “defensive” alternatives by eliminating or minimizing an internal weakness in order to mitigate an external threat.

3. Focus on the Strengths–Threats quadrant (top right) to use an internal strength to minimize the effect of an external threat.

4. Focus on the Weaknesses–Opportunities quadrant (bottom left) to shore up an internal weakness to improve its ability to take advantage of an external opportunity.



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SWOT Analysis – The case of McDonald’s

McDonald’s is the world’s largest chain of hamburger fast-food restaurants, operating more than 34,000 restaurants in some 120 countries



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SWOT Analysis – The case of Media-Saturn Holding

A service company case – Media-Saturn Holding

Media Markt is a German chain of stores selling consumer electronics founded in 1979 with

numerous branches throughout Europe and Asia and the e-commerce sale channel. It is Europe's

largest retailer of consumer electronics, and the second largest in the world after American retailer

Best Buy. In Italy, it trades with the brand Media World through more than 110 physical stores.

Today, it is owned by Media-Saturn Holding, which also owns the Saturn chain. Media Markt and

Saturn operate in mostly the same markets, but with different concepts, and as competitors. Media-

Saturn Holding in turn is owned by the German retail company Metro AG. In Europe, its main

competitors are Euronics and Expert.

Parallel, focusing on-line channel, Media-Saturn Holding operates through its own e-commerce web

sites with the brands Media Markt, Saturn, and RedCoon, facing the strong competition of colossus

as Amazon, E-Price, Alibaba, and GearBest.


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• Strengths

– It has well established brand equity as it is Europe’s largest retailer and second largest retailer in world for consumer electronics

– The company is present in Europe, East Europe and North Africa

– It is specialized in limited range of products and generous profit margins

– Strong brand visibility (e.g., FIFA World Cup 2006)

– Barriers of market entry

• Weakness

– The brand recall is limited outside Europe and has less global exposure

– Brand portfolio (e.g., internal competition)

– Weak on-line presence with respect to its competitors


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• Opportunities

– Tapping emerging economies

– Consumer preference changes frequently so being customer oriented is sign of success in this industry

– Export “brick and mortar” reputation on-line

• Threats

– Increasing raw material prices required for making consumer electronics instruments

– The quality of Chinese brands perceived by Western consumers is increasing (e.g., Ulefone, Xiaomi, etc.)

– Evolving consumer preferences

Innovative frameworks

Business Model Canvas Blue Ocean Strategy & Value curve


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Business Model Canvas

A strategic management template for developing new or documenting existing business models by using 9 basic elements called “building blocks”

Source: Osterwalder, Alexander, and Yves Pigneur. Business model generation: a handbook for visionaries, game changers, and challengers. John Wiley & Sons, 2010.

https://www.youtube.com/watch?v=wlKP-BaC0jA


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Business Model Canvas - #1 Customer Segments

• People or organizations that we would like to reach. Customers are the crucial point of a business model

• The groups of customers represent distinct segments if:

– They have different needs and/or behaviors;

– They are reached through different channels;

– They require different types of relationships;

– They generate different margins;

– They are interested in different aspects of the offer.

Did I identify a problem (or a set of problems) which is worth

to solve?


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Business Model Canvas - #2 Value proposition (VP)

• The set of products or services which create value for a specific customer segment

• The VN is a set of benefits, from the customer's perspective, which summarizes why customers choose us.

• VP differentiates our company from others.

• Translate the offer in the customer's perspective

• A company need a VP for each customer segment, as well as a VP for each role identified within a customer segment (e.g. In B2B: user, decision-maker, buyer)

Did I build «something» that

people want?


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Business Model Canvas - #3 Channels

• Channels are the points of contact with the customer segments and are critical to the customer experience.

• Channels concern both communication distribution.

• Tre main functions:

– Grow customers’ awareness of products and customers;

– Present their offers to customers;

– Provide customers with after-sales service.

How customers can find and buy

our products?


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Business Model Canvas - #4 Customer Relationships

• The typologies of relationships that the company establishes with a specific customer segment.

• Goals:

– Customers acquisition

– Loyalty

– Increase in Sales (upselling)

How customers can establish a

relationship with us?


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Business Model Canvas - #5 Revenue streams

• The cash generated by each customer segment

• 2 macro-typologies:

– Revenues from transaction: lump sum payments

– Recurring revenues: ongoing payments

How do we generate

revenues?


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Business Model Canvas - #6 Key resources

• The assets from which the functioning of the model depends:

– Physical resources

– Human resources

– Financial resources

– Intangible resources


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Business Model Canvas - #7 Key activities

• The activities from which the functioning of the model depends:

– Production

– Problem solving

– Supply chain


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Business Model Canvas - #8 Key partners

• The network of partners or suppliers from which the functioning of the model depends

• Possible goals of partnerships:

– Optimization and economies of scale;

– Reduction of risks and / or uncertainties;

– Acquisition of special resources.


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Business Model Canvas - #9 Cost structure

• How much is the business model?

• Business models can be:

– Cost driven

– Value driven

• Profit is generated if: revenue stream > cost structure


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Some successful examples of companies who innovate with this tool:


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Business Model Canvas vs Business Plan

1. The business model

2. Financial analysis

3. Analysis of the external environment

4. Outline of realization

5. Risk analysis

6. Description of the team


Business Plan


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Business Model Canvas – The case of U.Go!

www.universitygo.it

A start-up case

U.GO!


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• Italian startup

• The business idea aims to solve the student’s transportation constraints to reach university through a dedicated carpooling service.

• Two sided market platform: drivers and passengers

• Advantages:

– Reduced costs of transportation

– Reserved parking area

– Reduced environmental impact

– Safety


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Disclaimer. This is the very first U.Go!’s Canvas Model designer in April 2015.


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Blue Ocean Strategy

• Competing in overcrowded industries (red oceans) is not the best way to sustain high performance, the real opportunity is to create blue oceans of uncontested market space

• There are two ways to crate a Blue Oceans:

– launch completely new industries (e.g. eBay with online auctions, Cirque du Soleil)

– create a blue ocean from within a red ocean, expanding the boundaries of an existing industry (e.g. Yellow Tail)

Source: W. Chan Kim, Renée Mauborgne, “Blue Ocean Strategy”, 2004


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Value curve & Blue ocean strategy

The value curve (a graphical depiction of the way a company or an industry configures its offering to customers) is a powerful tool for creating new market space. The key to discovering a new value curve lies in asking four basic question:

• Reduce: what factors should be reduced well below the industry standard?

• Eliminate: what factors should be eliminated that the industry has taken for granted?

• Raise: what factors should be raised well beyond the industry standard?

• Create: what factors should be created that the industry has never offered?

Source: W. Chan Kim, Renée Mauborgne, “Blue Ocean Strategy”, 2004; Source: http://jeffcarter.me/blue-ocean-strategy


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Value Curve – The yellow tail example

Source: http://jeffcarter.me/blue-ocean-strategy