Blog #2: Analyzing the External Strategic Environment and Evaluating Industry Dynamics

For this week’s readings, “The Five Competitive Forces That Shape Strategy” (Porter, Harvard Business Review, January 2008) was the article with the most interesting key takeaways for me. The article starts off with the following quote: “Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack.” I completely agree with Michael Porter’s opinion, and have had a first-hand experience at this myself a couple of years ago.

During my undergraduate studies, I took a course called “Strategic Management” at Emory University’s Goizueta Business School, where we spent some time learning about Porter’s Five Forces. During my time as a management consultant, before coming to CMU, I was able to use my knowledge of Porter’s Five Forces while I worked on a project with an agriculture chemicals manufacturer. We worked on a supply chain strategy project, involving global procurement strategy. My team needed to understand from both a cost and strategy perspective whether manufacturing these chemicals in-house or outsourcing them to India and/or China was strategically better for our client. When we considered Porter’s Five Forces, we concluded the following:

1.       Bargaining Power of Suppliers: high – there are only a few suppliers able to make chemicals that were high enough quality and had all government permits in place

2.       Bargaining Power of Buyers: high – the volume to be outsourced was incredibly high and would bring los of business to the chosen company, plus the buyer still had the option of manufacturing in-house if negotiations didn’t work in its favor

3.       Threat of New Entrants: low – very difficult chemicals to make and lots of government regulations don’t make this an easy and attractive market to enter

4.       Threat of Substitutes: low – our client had patents on their chemicals and wanted to make sure to use them before they expired

5.       Industry Rivalry: medium – as patents were starting to expire, more manufacturers were able to make products, and the rise in technological innovations brought new chemicals to the market from competitors

The Porter’s Five Forces framework was incredibly helpful as a starting point to gather our findings before diving deep into decisions for our client. During our project we also found a white paper called “Revisit Porter’s Five Forces to Unleash Procurement Innovation” (https://medium.com/procurement-musings/how-porters-five-forces-can-help-unleash-procurement-innovation-33393261aa2b) that helped us frame the forces specifically for the procurement strategy that we were working on.

There are other tools that can be used to evaluate the strategic attractiveness. An example is the PEST Analysis (Political, Economic, Social, Technological), used to assess major external factors that influence a company’s operation to become more competitive in the market. Moreover, we can argue that since the Porter’s Five Forces were developed in 1979, they could be outdated. In fact, the article “The Four Global Forces Breaking All the Trends” (McKinsey Quarterly, April 2015) could have some interesting forces to consider:

1.       Beyond Shanghai: The age of urbanization

2.       The tip of the iceberg: Accelerating technological change

3.       Getting old isn’t what it used to be: Responding to the challenges of an aging world

4.       Trade, people, finance, and data: Greater global connections

The article states: “These four disruptions gathered pace, grew in scale, and started collectively to have a material impact on the world economy around the turn of the 21st century. I believe that these four global forces can be integrated into Porter’s Five Forces, allowing for a stronger analysis of strategic effectiveness, rather than having them in silos.

Blog #2 - Autonomous Vehicles : The next Industrial Revolution?

The article “The four global forces breaking all the trends” by McKinsey amazes me at how fast the world is evolving and  the industries are revolutionizing to sustain growth with the changing trends.

The industry that I could think of which has shown a huge transformation from the 18^th century to the present is the automotive industry. In 2020,Autonomous Vehicles(AVs) have changed the entire landscape of this industry. The race towards developing AVs have taken a big leap as many automotive conglomerates and tech companies are investing huge capital in it. AVs have shown that they are market disrupters and trend setters by satisfying their strategic positions in all of these four global segments which are the key forces in  breaking the current trends.

Emerging Markets-Towards Urbanization

There is a paradigm shift in the approach where companies are moving towards emerging markets from the developed ones. With the growth potential in these new markets we can see tremendous opportunities for AVs. For example, Even though Google first started experimenting with AVs in the USA, Baidu ( Internet giant in China) owned Apollo, is doing extremely well in AVs when it comes to testing miles driven and collaborating with global partner adoptions[1]. According to McKinsey, China could potentially become the largest market of AVs with faster implementation of Robo- taxis and self-driving initiatives[2]. We can attribute this to the rise of urbanization with more city dwellers having higher purchasing power to invest and take advantage of the AVs.

 Accelerating Technological change

As rightly quoted in the article “Accelerated adoption invites accelerated innovation”. Car manufacturers that invest in innovation welcome advanced technology implementation to change their approach with the current trends. With the advent of serious technological advances one can be sure that the trends are volatile and cut throat. AVs technology needs have spearheaded best of the organizations to change their inherent strategy to survive this tide. Daimler, Tesla, Uber, Waymo, Ford, General Motors, Audi, Nissan ,Toyota and Honda all are rigorously working to develop AVs to disrupt this new trend.

Responding to the challenges of an aging world

Severe pressure on the government to cater to a large number of aging populations financially and by creating platforms to provide them services is a serious concern among all nations. With the advent of new autonomous passenger and delivery vehicles we can expect to improve the lifestyles of people aged above 50. People who are too old to drive or those with disabilities can also benefit with this initiative and won’t be restricted to move around without help[3]. Mobility will no longer be a hindrance for these people provided companies are mindful of catering to the needs of this segment judiciously.

Trade ,People, Finance and data : Global connections

The AVs advances will change people’s perception of mobility in urban environments with the greatest impact seen on public transportation use. With markets becoming global, flow of people across different parts of the country and world will increase and with AVs, it would facilitate ease of travel and transportation of people and goods.

 I strongly believe that autonomous vehicles are at the forefront of meeting and exceeding the expectations of the four global forces outlined by McKinsey.

[1] https://www.futurecar.com/3946/Chinas-Baidu-Completes-its-Apollo-Park-the-Worlds-Largest-Autonomous-Driving-&-Intelligent-Vehicle-Testing-Site

[2] https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/how-china-will-help-fuel-the-revolution-in-autonomous-vehicles#

[3]https://www.aarp.org/auto/trends-lifestyle/info-2019/self-driving-car-benefits.html

https://www.washingtonpost.com/local/trafficandcommuting/driverless-cars-promise-far-greater-mobility-for-the-elderly-and-people-with-disabilities/2017/11/23/6994469c-c4a3-11e7-84bc-5e285c7f4512_story.html

 

Blog 2 The pursuit of recognizing global disruptive forces to a competitive mental health arena in Chicago

The two articles that are the most salient for me are the "The Four Global Forces Breaking All the Trends" and "The Five Competitive Forces That Shape Strategy". I would like to reflect on my experience as a Vice President at a community mental health center on Chicago's Westside for just under 3 years and how I came to the conclusion that strategy could be viewed as a luxury for underserved nonprofits.    

Fortunately, in the last 10 years there has been substantial growth and innovation in healthcare, and the team over at McKinsey, Richard Dobbs, James Maniyika, and Jonathan Woetzel indirectly alludes to this with recognizing the opportunity for products and services specifically for the aging population. Many within this subpopulation faced depression, loneliness and the lack of engagement, during time our Executive Director outlined a vision of the bringing access mental health services with the use of technological aids to underserved Chicago seniors his ideas included mindfulness applications, medication reminders, and "face to face" counseling via Skype or Zoom. The benefits could be varied such as eliminating the stressors associated with transportation (parking, commuting) and an extra layer of privacy because many would dear not to physically go and see a counselor for fear that they may come across someone they may know in a clinic waiting room. This vision was further supported with a grant from the Chicago Community Trust, a local prestigious foundation. 

The most challenging aspect was that our leadership team were so farsighted with looking at the top of the staircase that they stumbled upon the stairs. The midlevel management baulked at the fact that they were given "unfunded mandates" and figured that it would be another grand idea without the resources and tools necessary to operationalize the vision and "it will pass". As I was the liason, I could see that their frustration was that they agreed with the vision and wanted to support the vision but did not feel that they were provided with the tools to materialize this ambition. Unfortunately for this Executive Director, he did not even bother assembling the individuals with domain knowledge to transform the organization to being ready for the visionary endeavor.

In the "The Five Competitive Forces That Shape Strategy" Porter outlines barriers to entry with two aspects being, "New entrants. Incumbents possess substantial resources to fight back, including excess cash and unused borrowing power, available productive capacity, or clout with distribution channels and customers, however, with the lack of resources and the lack of qualified individuals in the Chicagoland area that would be open to providing intervention the elderly on Chicago's Westside was a reduction in productive capacity and the lack of resources such as donors had forced midlevel managers into focusing just on tactical day to day operations/activities and in a fragmented form as different departments focused on their own agendas. As a result the program was not funded the following year. So the question remains that how do organizations overcome this dilemma with the lack of resources? Would the focus be shifted on minor cost saving sutleties that could at least stir the organization in the strategic direction aiming further toward the vision? 

Open interactive precognizes this 

Blog #2 Rising from the Low-end Market

In the year of 2018 in China, it seems true for everyone that the e-commerce market is almost saturated with heavy-weight contenders like Alibaba, JD, and many other retail giants transitioned from offline to online. Who would have thought: out of nowhere, a newcomer founded in 2015 became the next unicorn in e-commerce and went public with its name as Pingduoduo (NASDAQ: PDD). Within a short span of three years, PDD earned a user base of size over a hundred million with annual revenue over a billion dollars. PDD’s success seems miraculous, but it is actually the result of well-positioned marketing strategies. Seemingly, the e-commerce market is occupied by big names like Alibaba and JD, leaving no space for another business to grow. However, with careful analysis, there’s a huge gap in between:

When Alibaba made its name and expand rapidly, there were about 40 million internet users in China with the dominant way of internet access through computers. However, by 2015, when PDD comes into play, that number nearly doubles. Additional to rapidly growing internet users base, the dominant way of accessing the internet also shift toward mobile devices, mainly smartphones. Beneath the surface of this enormous expansion of internet availability, there was a huge change in internet demographics. Quick profiling of these new internet users tells a lot about this shift: reside in non-major cities or countryside, span a much lower income range and have lower education background. As a result, when it comes to purchases, these users are more sensitive to price over brands, and they do not fully understand the concept of customer service and product warranty. Meanwhile, there are a lot of small manufactures in China crafting products at a lower cost but with lesser quality and they do not have the capability to provide warranty or customer service. Therefore, there is a big gap to be filled: selling extremely low-priced products at the compromise of all other factors. PDD aims for this market as the starting point and quickly wins over a huge number of users over a short period of time.

The unique aspect of this market position is that the giant was very unlikely to compete. Lowering the price as at cost can lead to all kinds of compromises such as poor product quality and bogus/copycat products. Aiming as such market risk the potential of hurting brand image, so e-commerce giant like Alibaba and JD won’t take this risk entering this market, leaving opportunities for PDD.

The strategy of PDD inspired a bunch of other startups following the same idea aiming for the lower-end market, such as Tik-Tok and Toutiao (a subsidiary of ByteDance). However, as the growth trajectory of all of these companies shows, the lower-end market has a very limited capacity. Once the companies reach the market capacity, they have to find another way out-migrating to higher-tier markets: PDD now compete directly against Alibaba and JD, offering similar products and services in e-commerce; Tik-Tok enters the international market and compete against similar rivals such as Instagram; Toutiao upgrades itself and competes against other mainstream social media platforms such as WeChat. The vacancies in the lower-end market offer great opportunities for other companies to quickly gain volume and capital, but it can also becomes a trap limiting the growth of startups if they fail to migrate to greater markets.

Blog #2 - External Strategic Environment for my future employer

            For this blog, I’d like to look out how the Porter’s Five Forces and environmental factors affect Cigna, the company I will be joining after graduation.

Cigna is interesting because it is a mature company operating in a highly regulated industry which is B2B and B2C. Global trends such as an aging population and increased disposal income have shaped certain healthcare products they offer (ex. Medicare Advantage) but what has been most interesting to track is how the recent elections have brought spotlight to the healthcare insurance market. Bernie Sanders’ push for Medicare for All would have great implications for a company like Cigna if the policy could go through but planning for policy changes is exceptionally hard given how the political system works in the United States. Political forces are important to consider but I think its important to consider the likelihood of them being disruptive. Therefore I agree with the point made in the piece from “Competitor Analysis: Understand Your Opponents” that it is important to look at the strength of a given factor and how it changes overtime. During an unpredictable election period, I would imagine that Cigna revisits an environmental force like politics frequently to determine its current threat.  

               In relation to Porter’s Five Forces which is also mentioned in the “Competitor Analysis: Understand Your Opponents” excerpt as well as the lecture, it is interesting to look at the threat of new entrants. When I think about Cigna broadly and traditionally, I think about how new entrants is not a big threat to the company due to the consolidation within the industry, the difficulty to maintain margins and high regulatory barriers that make it hard to set oneself up. I do not believe that firms in other industries have a great chance of offering substitutes in the market but when people are given options, which they aren’t always with health insurance, there is strong competition among rivals.

I recall from a Cigna recruiting event that the company wants to be viewed as a health service company, rather than a health insurance company which directly relates to the question of “which industry do you operate in?” In defining themselves this way, the Porter’s Five Forces now look different because they are competing with Pharmacy Benefit Management due to their Express Scripts division, for example and offering of insurance services abroad. This makes me think that it would be helpful for a company to use several Five Forces Models which roll up to an overarching one to remain organized.

Finally, I agree with the idea from McKinsey’s article on “The Global Forces Inspiring a New Narrative of Progress” that while globalization has occurred, localization is important for being effective in a new market. Cigna’s largest non-US market for membership is South Korea. Offering Cigna there would be much different than in a setting where large health insurers offering private insurance is commonplace, such as in the United States.  This difference is something that would justify why an individual Five Forces Model for international offerings would be helpful.

Blog 2: Functional and Non-functional Capabilities

Reading through “The Coherence Premium”, I learned that it is important for firms to recognize what their capabilities are, and formulate how to best leverage them. As companies grow, they look at the expansion and diversification of their products and services. In the process, careful analysis and examination of its current strengths are of considerable value, since this insight can be a strategy that can guide firms to utilize its internal expertise to building coherent products/services.

Competencies can be in the areas of marketing, innovation, sales, or in the organizational culture, even. All that drives a company’s energy and has worked for them well in the past forms their capabilities. Further enhancement of these quality factors also needs to be done to distinguish firms from their opponents, giving them a competitive push ahead.

As I was trying to look for firms that evidently show this behavior on the internet, it struck me how Apple banks on its design capabilities to do well in its market. Although Apple does not necessarily innovate new products, it does well in reinventing how products (phones, for example) are made, and its superior designs, which other brands find hard to match with. 

Another type of capability that firms can also focus on is organizational capability, which may include, collaboration, customer connectivity, learning, talent, speed of change, accountability, leadership, efficiency, etc., Having a set of functional capabilities like design skills, aggressive vendor management, customer service, to name a few, become even more effective when it is reinforced with organizational capabilities.

A Harvard Business Review article titled “Capitalizing on Capabilities” talks about building and taking advantage of such organizational capabilities. InterContinental Hotels Group (IHG) conducted an audit across the company to get an organizational review when it experienced a downturn in business in 2003. It gathered from this assessment that it needs to improve efficiency by reducing costs and to improve on collaboration. To do so, the firm unified its sub-regions to face challenges. This focus helped IHG to prevent itself from further downfall, instead lead to an increase in share price by 71% by 2004, and outperformed Financial Times Stock Exchange 100 by a factor of two.

This is an example of how a non-functional capability can add to functional capabilities and a reason why it should be considered while evaluating a firm’s current or required capabilities. Because “a capability is something that a company does well that customers value and the competitors can’t beat”, a functional capability can be enriched by a non-functional capability (organizational capability) to make it unique and of utmost value.

Sources:

§       1. Paul Leinwand and Cesare Mainardi, “The Coherence Premium”, Harvard Business Review

§       2. Norm Smallwood and Dave Ulrich, “Capitalizing on Capabilities”, Harvard Business Review, June    2004 issue - https://hbr.org/2004/06/capitalizing-on-capabilities

§       3. Building Capabilities for Performance- https://www.mckinsey.com/business-       functions/organization/our-insights/building-capabilities-for-performance

§      4. Tim Bajarin, “6 Reasons Apple is so Successful”, May 2012- http://techland.time.com/2012/05/07/six-reasons-why-apple-is-successful/