Frameworks Porter’s Five Forces Value Disciplines Buyer; Supplier; Substitutes; Entry Barriers; Competitive Rivalry Value Disciplines Operational Excellence; Product Leadership; Customer Intimacy “What you seek is seeking you.” ~Rumi Salman Azhar & Friends in 2018

Porter’s Five Forces Who is Michael Porter? Patron saint of business students & consultants Excellent tool for framing market entry questions Focuses on profitability Applicable across multiple industries & markets The importance of each force varies based on the situation Rivalry among Existing Competitors Entry Barriers Buyer Power Substitute Power Supplier Power Salman Azhar & Friends in 2018

Porter’s Five Forces: Buyer Power Buyers/seller ratio Number Frequency Substitute products or services Loyalty Switching costs Differentiation Price sensitivity (relative price) Consequences Examples? iPhone Android phones Angiomax Rivalry among Existing Competitors Entry Barriers Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power Supplier Power What factors impact Buyer Power? Can use iPhone and Angiomax if they don’t come up with anything else Salman Azhar & Friends in 2018

Porter’s Five Forces: Supplier Power Concentration & size relative to the industry Fragmented vs. consolidated % of purchases from a supplier Alternative suppliers Contracts Switching costs Differentiation Price sensitivity (relative price) Consequences Examples Labor: doctors & pilots Raw materials iPhone parts Rivalry among Existing Competitors Entry Barriers Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power Supplier Power * Concentration & size relative to the industry * Alternative suppliers What factors impact Supplier Power? About 6! How many parts in an iPhone? ~1000 Salman Azhar & Friends in 2018

Porter’s Five Forces: Substitute Power Decision factors: Relative price Relative quality of substitute Switching costs High switching costs reduce substitutes’ power Key features Meet same need/want in a same/different way Hard to anticipate Examples: Mac vs. Windows? iPhone vs. Android? Rivalry among Existing Competitors Entry Barriers Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power * Relative price * Switching costs * Quality * Features Supplier Power * Concentration & size relative to the industry * Alternative suppliers Why? How can substitutes be a threat? Corporate culture of self-congratulatory delusion! Salman Azhar & Friends in 2018

Porter’s Five Forces: Entry Barriers Product differentiation Access to distribution channels Economies of scale Spread fixed costs Lower supplier power Network effects Value to users increases as the number of users grows E.g., Facebook, Google Capital requirements Threat of retaliation Legal barriers Regulatory barriers IP protection (workarounds?) Rivalry among Existing Competitors Entry Barriers * Product differentiation * Distribution channels * Economies of scale * Network effects * Threat of retaliation * Capital/Legal Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power * Relative price * Switching costs * Quality * Features Supplier Power * Concentration & size relative to the industry * Alternative suppliers What prevents new entrants into the market Salman Azhar & Friends in 2018

Porter’s Five Forces: Rivalry Competitors Number Relative size Intensity of competition Sustainable competitive advantage through innovation Industry growth rate Degree of transparency Rivalry * Competitors * Innovation * Industry growth rate * Transparency Entry Barriers * Product differentiation * Distribution channels * Economies of scale * Network effects * Threat of retaliation * Capital/Legal Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power * Relative price * Switching costs * Quality * Features Supplier Power * Concentration & size relative to the industry * Alternative suppliers What types of rivalries exist between competitors? Salman Azhar & Friends in 2018

Porter’s Five Forces: Summary Excellent for deciding which markets to enter Focus on forces applicable to your business Ignore others Rivalry * Competitors * Innovation * Industry growth rate * Transparency Entry Barriers * Product differentiation * Distribution channels * Economies of scale * Network effects * Threat of retaliation * Capital/Legal Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power * Relative price * Switching costs * Quality * Features Supplier Power * Concentration & size relative to the industry * Alternative suppliers Salman Azhar & Friends in 2018

Salman Azhar & Friends in 2018 Value Chain You’re part of a value chain Value creating activities need to be: Identified Tracked Improved Benchmarked against competitors Success depends on how well each department: Works to deliver value Coordinates within and outside the company Or food chain  Salman Azhar & Friends in 2018

Value Creation: Core Business Processes Gather and act on market information Market-sensing: R&D and launch within budget New-offering realization: Identify target markets & gain customers Customer acquisition: Build deeper understanding of & relationship with customers CRM: Processing & shipping goods, collecting money Fulfillment Management: Salman Azhar & Friends in 2018

Value Disciplines Operational Excellence: Operational Excellence: Running an extremely efficient operation Walmart, McDonald’s, FedEx, … Product Leadership: Being the Lead Innovator Company Apple, Nike, Google, .. Customer Intimacy: Being close to the customer; Excellent customer service E.g., Nordstrom, Zappos, … Operational Excellence: Product Leadership: Customer Intimacy: Salman Azhar & Friends in 2018

Building & Eroding of Competitive Advantage Buildup Period Benefit Period Erosion Period Re-alignment of strategies in line with the changing basis of competition Size of Competitive Advantage Examples? Strategic moves are successful in building a competitive advantage Size of competitive advantage Forces eroding competitive advantage Time Source: Adapted from Thompson Jr., A.A. and Strickland III, A.J. (2003) Strategic Management: Concepts and Cases, McGraw-Hill. Salman Azhar & Friends in 2018

Frameworks Recap: Porter’s Five Forces Rivalry * Competitors * Innovation * Industry growth rate * Transparency Entry Barriers * Product differentiation * Distribution channels * Economies of scale * Network effects * Threat of retaliation * Capital/Legal Buyer Power * Buyers/seller ratio * Substitute products or services Substitute Power * Relative price * Switching costs * Quality * Features Supplier Power * Concentration & size relative to the industry * Alternative suppliers Salman Azhar & Friends in 2018

Salman Azhar & Friends in 2018 Frameworks Recap: Value Disciplines Value creating activities need to be: Identified Tracked Improved Benchmarked against competitors Value Disciplines Operational Excellence: Running an extremely efficient operation Product Leadership: Being the Lead Innovator Company Customer Intimacy: Being close to the customer; Excellent customer service Salman Azhar & Friends in 2018