Blog #2 aging population, tech & outdated wisdom

The notion of accelerating technological change and a population that is getting older rapidly are both issues that I have read about as they relate to public policy. On the aging front, most of the western world is aging out of their prime working years. This creates all sorts of problems for government and business. For companies looking for qualified people who can adapt quickly in a changing technological environment, older and wiser is not better. Managers do often rely on industry standards of practice or past experience to guide them, but the faster things change the more irrelevant that wisdom becomes. Forecasting will become less important than being able to adapt quickly to a new situation. That type of creative thinking is often best suited to a younger more tech savvy workforce. Economic growth and pace can be correlated to average working age population to high degree. Older populations tend to have more sluggish economies that are slow to take advantage of new trends or technological opportunities. From a public policy perspective, and older population pays in less and takes out more from social welfare services, creating a sustainability problem for future taxpayers.

The speed of advancing technology also makes it hard for even young workers to adapt and keep their resume competitive. At my own job we are adopting two new software packages that I have been tasked with learning at double speed so I can show the older folks in my department. Currently this is slowing down our productivity but with the anticipated payoff of being more efficient in the near future. However the more constant the change in standard operations, the harder it is to get to a new more efficient status quo. Employees will be constantly adapting and not necessarily producing.

Another aspect of this failure to adapt quickly enough is missed opportunities. In my department one of the issues that is being talked about is capitalizing on the amount of information we have about our donors to help engage further with alumni and other prospects. There is allot of information and ostensible opportunity, but no one is entirely sure how to take advantage of it. In this regard the "Competitor Analysis" article seemed somewhat outdated to me. Companies offering similar products, substitutes, suppliers, rating competitors strengths, and Porter's 5 Forces, may have all been sage wisdom, but now for many companies the only thing that matters is speed of adaptation and identifying new opportunities in the data or the tech. This outlook is obviously industry specific, but in service & tech the competitors you analyse today may not be there tomorrow or if they are they will be doing something completely different. The opportunity cost in time spent doing this kind of analysis would be better spent looking for new opportunities that no one has thought of yet. Also given the move the gig economy and smaller subcontractor companies, a competitor may be a single individual you can hire. In Porter's five forces model the bargaining power of suppliers & customers, the threat of new entrants & substitutes should be assumed to be infinite all the time. This notion really negates the efficacy of the analysis at all. However the manufacturing section of the economy is probably not this bleak.

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: Who Takes Your Profit Away? – The Framework of Five Competitive Forces

Key Takeaways:

1.     The five forces influence the profit of one industry, and companies should make strategic positioning with the five forces in their industries.

2.     Investors can utilize the five force framework to estimate the future growth of a company.

3.     One example: the threat of new entrants sets up an up-limitation for the industry, and the size of the threat of new entrants depends on the entrance barrier.

 

Michael Porter elaborated on the five major competing forces that constitute the basic structure of the industry: the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, the threat of substitute products or services, and rivalry among existing competitors. He pointed out that these five forces have expanded the scope of competition, defined the structure of the industry, and also determined the nature of competitive interaction in an industry. By understanding these competitive forces and their underlying causes, we can discover the source of an industry’s current profitability and can predict and influence the long-term competitive situation and profitability. Understanding the industry structure is also crucial for effective strategic positioning.

 

The intensity analysis of the five major competitive forces shows that the industry structure determines the long-term profit potential of an industry. However, when conducting industry structure analysis, strategists should also avoid a common misunderstanding: mistake some of the significant attributes of the industry as its basic structure. These attributes include industry growth rate, technology, and innovation, government, complementary products, and services.

 

Porter pointed out that understanding the power that determines the competitive status of the industry is the starting point for making a strategy. Every company should know the average profitability of the industry and its long-term changes. The Five Forces model reveals the nature of the industry's profitability. Only after understanding these forces can companies integrate the industry's situation into strategy formulation. The most important thing is, The industry structure can guide managers to effectively take strategic actions. These actions may include: determining the position of the company to better respond to the current competitiveness; predicting and using these power changes; establishing a balance of power and building a Favorable new industry structure. Understanding the industry structure is not only important for managers but also crucial for investors.

 

The Five Forces model can reveal whether an industry is truly attractive, or it can help investors predict positive or negative changes in the industry structure in advance. The Five Forces model can distinguish between short-term changes and structural changes, enabling investors to take advantage of irrational pessimism or optimism in the market. I still remember a story when I interviewed venture capital. After I analyzed the influence of competitors, customers, and suppliers for a company, the interviewer asked me why not analyze substitutes and new entrants. At that time, I deeply realized the power of Porter’s Five Forces.

For U.S. Military, External Analysis Means An Existential Shift in Strategy

It goes without saying that the United States Military is one of the largest and most complex organizations on Earth.  But as the 20th century fades and the 21st century comes into its own, the military has made external assessments that are leading to a fundamental shift in its overall strategy.  This post will examine the external factors facing American Military as it makes the transition from cold war readiness to a post-cold war environment,  as well as the military's strategic reactions to these trends.

The most important external change the military has had to address is the end of the cold war, and as a corollary: the deëmphsasis of formal threats by sovereign states.  Since the inception of the United States, the military had generally focused its strategy on winning declared wars between sovereign states.  The new threat focus has shifted toward "non-state" actors, both within states and with no formal sovereign affiliation. Obviously, this is a fundamental strategic shift in not only how the military approaches conflicts (and potential conflicts), but also how it arranges itself and dedicates resources. Add to all of this, pressure economic and budgetary pressure from the military's civilian leadership, and the strategic shift is a military that is not only smaller, but more agile and cheaper while still maintaining strategic dominance.  Practically what this means is a shift away from large numbers of troops toward smaller, specialized units, and the increased use of unmanned drones.

Another significant strategic shift (the extent of which is still being debated internally) is from a traditional focus on the physical aspects of warfare to the psychological dimensions of war.  An article in World Politics Review examines this particular issue in great detail.  According to the article, the American military has always been more comfortable addressing the physical aspects of war, but recent analysis has led to the creation of the Office of Strategic Landpower to address the psychological components of conflict. While the physical components compel an adversary to act in a specific way through force, the psychological components are indirect and lead an adversary to choose to act in a specific way.  This uses the strategic advice offered by Sun Tzu: "The supreme art of war is to subdue the enemy without fighting." And given the economic and global changes discussed above, ultimately the objective of this strategic shift "is to make the American military more effective at identifying and creating desired psychological effects in diverse cultural settings, and hence more strategically efficient."

The Department of Defense has also announced that in the face of the new international framework it will begin to shift some of its emphasis toward establishing and maintaining defense alliances.  Again, because of the external factors discussed earlier, the military's alliances can be leveraged to increase efficiencies in any number of areas, and also gives weight to the psychological aspects of warfare discussed above.  And so these individual shifts in strategy all address different external changes, they are also a part of a greater unified shift in strategy.

An organization as large and with the longevity of the military is often resistant to change, especially changes as existential as the ones discussed here.  There is often institutional resistance baked into the structure of the organization itself.  What strategies should be used to implement fundamental changes in an organization as large and as old this?  In making the strategic shift to a smaller, more efficient military, what (if anything) is being lost in the shift?

Links:
BusinessWeek - "A Smaller, Cheaper, Stronger Military"
World Politics Review - "Strategic Horizons: U.S. Army Prepares for Human Domain ofWar"
U.S. Dept. of Defense - "Defense Alliances Key to 21st Century Security"
Time - "U.S. Military Might. Then Again, It Might Not."

What does *not* give your company a *long run* competitive advantage?

Almost all the organizations frame their strategy to have a long run competitive advantage. There are many supporting factors which are debatable if they add competitive advantage to the strategy or not. The question arises when the organization have multiple options but cannot have all of them included in their strategy. I would call such factors business enablers which could give a short run competitive edge but could not become business drivers in long run.

Financial Resources

Most of the firms and investors feel that companies which with a good cash flow has a competitive advantage on other growing firms. Having good amount of working capital definitely gives a competitive edge in short term but that can easily be achieved by a planned growth and the competitor firms can also invest in resources at some point of time. Hence, firms cannot compete based on strength of financial resources.

Technology

There are hundreds of examples where technology has helped business to sustain and grow but there are no examples where technology drives the business strategy of the company. Let us take an example from Silicon Valley itself: Facebook has a business model of “making the world more shared and connected”. Website is just a platform that they use to achieve their goals and it is equally available to their competitors. In future, Facebook might try some other kind of technology to implement their strategy and achieve the business goals. One of their competitors, Google+ also has an equally well or may be better technology but the business goals are different and that is what they are competing on. Even if Facebook tries to offer a new technology feature, it would not gain them a long run competitive advantage based on that because other platforms would easily be able to catch up with that technology.

Costs and Prices

Companies have been competing based on prices since years, but none have been able to sustain a competitive advantage over the others based on costs or prices. It does not mean that reducing costs and prices are not important, but they are important for survival in market. Many times, consumers go to a firm not because they are offering cheap products or services, but because of the overall experience the company offers. This experience is achieved by a good fit between distinct activities of the organization and not based on costs or prices.

Tangible Assets

This category includes the facilities and long term tangible assets that a company carries. They do not create competitive advantage because other firms can easily establish similar kind of asset network in more or less time. All that a firm can get is an early mover advantage for acquiring tangible assets and not a competitive advantage.

Employees and Customers

Human resources are of key importance to an organization and consumers are at the centre. But this is a generalized fact which applies equally well to all the organizations and industries. Having an employee friendly environment or consumer friendly products and services are necessary parts of a business strategy. They do not fetch any competitive advantage because all the companies are doing it or going to it soon. For example, some companies claim to be passionate about satisfying their consumer needs which every company is or can be.

Keeping the theory of competitive forces by Michael Porter valid, technology, tangible assets, financial and human resources are necessary for sustainable growth of a company but are not key to competitive advantage.