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Is your enterprise too reliant on a rear-view mirror?

 

Rear view Mirror

A range of local and global forces continue to pound the markets for our products and services. In the past, many industries had the luxury of time to adjust to these market forces. As these forces are NOW creating ever more rapid changes in our markets we need to sense and respond more quickly so that we continue to grow our revenues and profits.

“we compete against market transitions, not competitors. Product transitions used to take five to seven years; now they take one or two.”

John Chambers the CEO of CISCO [1]

Drawing on Industrial Organisation theory from Economics, Michael Porter of the Harvard Business School developed a 5-force framework that considered the supply-side of the economics of a business to assess the competitive intensity of a market. The underlying assumption is that the more intense the competition, the less profitable a market will be.

The Porter 5-force framework considers:

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  1. Three “horizontal” influences – the threat of new entrants to the market, the threat of substitute products and the competitive rivalry amongst the enterprises competing in a particular market. New and evolving technologies increase the probability of new entrants and substitute products arriving in your market place from potentially unexpected sources. For example, will developments in software-defined networks be a foundation for Amazon or Google to compete with established telecoms networks? If your products and services provide more sophisticated capabilities than your customers use, you may be at a particular risk of new entrants offering simple basic offerings at materially lower cost [2]. As these new disruptive entrants to the market gain in experience and scale they may well develop more cutting-edge products and services that are a threat to all the established enterprises in the particular marketplace. Smartphones are an example. The early phones offered as niche products (with limited performance) were not a substitute for personal computers. After a few years the market went into an explosive growth period after the launch of the Apple and Android Smartphones. Now, many people access the internet using a Smartphone rather than a Personal Computer.
  2. Two “vertical” influences – the power of buyers of your product / service and the power of sellers of the inputs you need to produce your product or service. For example, if one company purchases the bulk of your products, your buyers have a potentially worrying degree of power as some suppliers to large retailers have found out (just before their business ceased to exist).  In the original Porter 5 forces framework Buyers and Sellers were considered as a potential drain on profitability and strategic actions to limit their power were encouraged.

In the November 2014 Harvard Business Review, Michael Porter demonstrated the effectiveness of this long-established framework in analysing the markets for “Smart Connected Products” – evidence that the tool remains an effective way of developing insights [3] on developing and maintaining competitive power through combating the five forces.

 

After Porter’s original work the late Andy Grove, the former CEO of Intel, argued that the power of complementary products should also be considered. For example, when Microsoft stopped supporting Windows XP, companies had an additional incentive to upgrade to newer versions of the Windows operating system and in many cases this necessitated purchasing new Personal Computers – increasing the demand for Intel chips etc.  Shopping centres are another example of an enterprise benefiting from customers being able to benefit from other products and services while purchasing / consuming yours.

 

 

In recent years this thinking has been extended further to include Network effects that flow from being part of a community that can enhance the value obtained from using your product or service. The applications stores developed for the Apple and Android Smartphones, for example, provided material competitive advantages over the more restricted offering provided by the likes of Blackberry. Whilst the original Porter 5 Forces focused on the Supply-Side drivers, in our internet economy demand side economies of scale develop as networks expand and where effective platforms emerge that match sellers and buyers of services new forms of competition can emerge quickly. As Clayton Christensen (2016) has pointed out, new disruptive entrants to a market may initially offer  different, and generally inferior service / product characteristics (for example limited software functionality in a purchase from an application store). As the new entrant gains experience and scale, they offer more sophisticated offerings that become viable alternatives for your clients.

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Subsequently others have suggested that the Porter framework should also recognise the influence of governments and regulation. When the US government deregulated the trucking industry and opened up the opportunity for entrepreneurs to create the modern courier companies, opportunities to improve the efficiency and effectiveness of existing industry supply chains mushroomed. Moreover the infrastructure that was created provided a foundation for Amazon etc.   Looking to the future, if for example regulators simplify the process and requirements for banking licenses, the Threat of New Entrants to the Banking market is likely to rise. This is being seen in the United Kingdom as this book is being written.  On the other hand, Aereo, the New York based start-up that enabled streaming of High Definition TV programmes to Smartphones, Laptops and Tablets etc. was overcome by the weight of legal and regulatory barriers after lobbying from media incumbents in 2014 [4].

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Sustainable businesses do not rely on rear view mirrors to detect competitive threats. They encourage their people to THINK about their competitive environment and support a culture that encourages people to spot opportunity and managers to recognise them. I feel strongly that it is the role of every Director and Manager to do this so that they lay a foundation for sustained enterprise growth.  Proactive use of frameworks such as the one in this blog can help people broaden their thinking. This can then be a foundation for growing the capabilities needed for future success. What does this mean for you and your people? Can you be encouraging projects to look at new opportunities alongside people’s main jobs?

“I skate to where the puck is going, not where it has been.”

Wayne Gretzky [5]

I would welcome an opportunity to discuss how the thinking in this blog could help you improve the agility of your enterprise.

Huw Morris

This Blog is based on a chapter from my new book Strattomics – Sustained Growth for your Enterprise.  Available from Amazon: https://goo.gl/eMqvYg

[1] Schumpeter Column in The Economist, 19 March 2016:  http://www.economist.com/news/business-and-finance/21694962-managing-them-hard-businesses-are-embracing-idea-working-teams

[2] Clayton Christensen (2016) observed that “Disruptive innovations create an entirely new market through the introduction of a new kind of product or service, one that’s actually worse, initially, as judged by the performance metrics that mainstream customers value.”

[3] Porter, M.E., Heppelman, J.E., How Smart, Connected Products Are Transforming Competition, Harvard Business Review, November 2014.

[4] The Financial Times, Disrupters bring Disruption and Opportunity, 28 December 2014.

[5] Quoted by Alastair Campbell in Winners and How they Succeed, Hutchinson, Randon House, 2015.

 

 

 

 

 

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