Porter’s Five Forces Model, Generic Strategies and the Saddle Curve

Most students of strategic planning are at least aware of Michael Porter’s five forces model of competitive advantage.  These forces – supplier power, customer power, threat of new entry, substitute products and industry rivalry – are an excellent way to understand the most powerful forces affecting a company’s competitive position and likelihood of profiting from a market.  In Simplified Strategic Planning, we examine the external variables which are most like to drive these forces for a company by researching the external data (such as the balance between number of customers and number of competitors in a segment, the threat of substitute products or services, and the economics of the supplier market).  Internally, a company’s strategy can be developed to adapt to, and sometimes, mold these forces as well, ideally by focusing on the use of a unique strategic competency that separates the company from competition and likely new entrants.

One great way to think about all of the five forces in your strategic planning is to think about the choices (outside of purchasing from your company) available to your customers and suppliers.  Anything that increases the choices available to customers decreases your power, and anything that decreases their choices increases your power.  

One of the key ideas we use in Simplified Strategic Planning starts with the basic question of how you can gain – or lose – market share to a competitor.  One of the most fundamental insights that affects market share is a behavior continuum we refer to as specialty and commodity behavior.  Michael Porter describes these behaviors in his “generic strategies”, but usually refers to them as “uniqueness as perceived by the customer” and “low cost position”.  As I state in the book “Simplified Strategic Planning:  A No-Nonsense Guide for Busy People Who Want Results”, both of the generic strategies that work for the specialty focused company are viable strategies for a profitable business – that is, the differentiation strategy (specialty/broad market) and part of what Porter calls the “focus” strategy (which he uses to cover both specialty and commodity/niche market).  I would contend that the commodity side of Porter’s “focus” strategy (what I call “alley shop”) is not viable – since it generally results in both low volume and low margins – and that is why we split the niche strategies into “segmentation” and “alley shop”.

In “Simplified Strategic Planning”, I noted the existence of the “Saddle Curve”, which is simply the tendency of companies to achieve higher profit on either end of the specialty/commodity continuum.  The basic idea behind this curve is that companies with a clear commodity or specialty strategy will be more profitable than those that flounder in between the two.  One of the reasons why the five forces exert such power on profitable strategies is that they tend to force companies away from the extremes of this curve and into the middle, where profit is minimized.  As an example, consider a situation where customers can choose substitute products.  The customers’ desire is inevitably to maximize value by getting better products, better service and lower prices.  Where the customer has less choice, the real-world trade-off between these can be forced into the customers’ decision-making processes (“Do I buy the expensive, better product or the cheaper, worse product?”).  Customers who have more choices can demand that these compromises not be made – which inevitable drives a company into the middle of the curve, where profit is lower.  The only force that usually does not show its main effect on the saddle curve is the power of suppliers.  When that force comes into play, the profit of the company is affected because profit can be the result of forcing suppliers to move towards the center of the curve.

Where do you see your company on this curve?  How do the five forces affect your position on the curve, and your strategies for positioning in your markets?  If you would like a straightforward, no-nonsense process for working these ideas into your strategic planning, consider attending our two-day simplified strategic planning seminar soon!

What is the best strategy for retailers?

There just doesn't seem to be a retail strategy that works these days.  If you've been watching the news lately, you've probably come to the conclusion that brick-and-mortar retailing is sick, if not dying.  Just check out this article:  "Everything must go".  But is this the end for retailers?  Is there any way forward?

Let's examine what looks like the biggest issue:  online sales are still growing, at the expense of traditional retail.  You don't have to be an expert in consumer behavior to understand why.  There are compelling reasons for consumers to prefer making their purchases online.  I call these the Four C's of Online Advantage:

1.  Cost - Online stores tend to be cheaper.  Without the expenses (labor and real estate) associated with brick-and-mortar, online stores can profitably offer products at lower prices.

2.  Choice - Online stores can offer a broader inventory.  Low turnover products are more practical when your traffic is virtual and you may not even have to own or store your inventory.

3.  Convenience - Bad snowstorm?  Don't feel like fighting traffic?  You can shop online without leaving your bed.

4.  Customization - Online stores get more data about shoppers more quickly and cheaply than brick-and-mortar stores.  This one is a hidden weapon, and a powerful one.  Even the smallest online retailer has better data about why traffic comes to their store and much easier means of reaching out to past customers.

With just these four advantages, brick-an-mortar retail looks like a bad bet.  Is there any way to beat these odds?  First, you have to accept a basic idea in strategy for consumer markets:  you cannot win fighting against what the customer wants.  If customers prefer the cost, choice, convenience and customization, they will prefer online.  Strategically, you can attempt to match these advantages, but you will be matching your weakness to the strength of online shopping.  This is not to say that you shouldn't try to be competitive in these areas, but rather that attempting to be equal will cost you more than it is worth.

So what are the advantages brick-and-mortar can bring to the battle?  There are several tremendous advantages you should be using in your retail business.

1.  Experience - No matter how great a website or shopping app is, it is simple not physical presence.  Customers can only see and perhaps hear a website.  In brick-and-mortar, customers can also feel, touch, smell, taste and physically interact with your store, products and people.

2.  Immediacy - Customers can walk into a brick-and-mortar store and walk out with a product in a matter of minutes.  Even the best online distribution systems can't perform that well for physical products. 

3.  Social contact - brick-and-mortar stores enable customers to interact with staff and each other.  In some cases, there is a social life centered around traditional retail that is hard to replicate online.  In all cases, customers get to conduct transactions with human beings, which is a preferred mode for some purchases.

4.  Distribution - in some markets, such as fresh produce, delivering the right product to the customer at the right time is a very difficult challenge.  Online distribution systems, especially the last leg from the retailer to the customer, face great difficulty delivering such products efficiently.

These four areas make up the basic reasons why some customers will always prefer brick-and-mortar for certain transactions.  By implication, there are some retail experiences that may always be local rather than online - farmers markets, bars and fitness centers, to name a few.

But what if you are in one of the retail markets that is more prone to online shopping?  The strategic options for those retailers become much more difficult.  Basically, to compete effectively with online retail, a brick-and-mortar store must deliver greater value from its advantages than it loses to disadvantages for each customer it seeks to win.  Mathematically, traditional retailers cannot win every contested customer, but they must win enough of those customers to create sustainable turnover.  Here are a few options that make sense:

1.  Give up the commodity customer - some customers will always seek the cheapest source, no matter what.  In many markets, these are simply not the right customer for brick-and-mortar.  The cost of getting these customers in the door far exceeds the margin you can make from them long term. 

2.  Make the store an experience - if the store is enjoyable, some customers may prefer the sensory stimulation and social experience.

3.  Put more social in the store - I am not referring to social networking, which may help, but rather making the store a focal point for the community it serves.  A store that facilitates community will be preferred by some customers.

4.  Emphasize the immediate interaction - a store that delivers value because the last leg of the transaction is nearly instantaneous gains a big advantage over online competition.

Examining these four ideas suggests that certain models of brick-and-mortar retail are going to be more successful than others.  Commodity strategies, such as those commonly seen in big box retail, will be more challenged than the strategies of niche stores.  Customers will not look favorably upon a bland, impersonal warehouse filled with products if they can get a better deal with wider selection online.  They will also not abide ill-trained and uncaring retail staff, since an impersonal transaction can be done much more efficiently online.

The road ahead for brick-and-mortar retail is not easy.  Some costs may go up, while many will feel tremendous pricing pressure from online competitors.  A clear strategy that targets and caters to a specific group of customers is required to succeed in the changing retail world.  Any retailer who fails at this is doomed - but those who succeed will find a strong long-term position in their markets.  Strategic planning is the key to finding this success.

What you mean vs. what you say in your strategic plan

Sometimes, in the strategic planning process, I encounter a situation where someone in the team - often the CEO - says "That's what we want, but we don't want to put that in our strategic plan".  This makes me cringe.  Your strategic plan is intended to be a clear, concise statement of where your organization is going.  There are two possible uses for a blatant omission in your plan - 1) You want to mislead your competition and 2) You want to mislead your customers, stockholders, employees or suppliers.  I could think of a case or two where the first use MIGHT be sanctioned - but, to me, this is also a big warning sign that we are putting tactics in our plan rather than strategies.  The second use is almost certain to backfire - even more today than, say, 10 years ago.  People HATE being misled, and to do so in your strategic plan is about the worst place I can think of to do it.
So...take a look at your strategic plan.  Is the truth in there, or does it contain elements you added strictly for PR purposes?  Why would you be willing to pay the price for something like this?

Would you prefer sales growth or profit growth?

Often, before I work with a company on strategic planning, I ask the owner or CEO what success would look like for him or her.  This simple question has been the source of some great soul-searching over the years.  One of my earliest clients answered – very quickly – that he wanted sales growth.  We created a plan that delivered that, and then some.  The company nearly doubled in size in a short period of time, but the next time we did strategic planning, the owner told me he wanted more profit – even if it meant slowing down growth.  This is not unusual – and many people try to pretend that there isn’t a trade-off.  While it is true that both profit AND sales growth are possible simultaneously, it is much, much more likely that you will experience one or the other.

Here is why most companies experience either sales growth or profit growth:  customers aren’t particularly interested in either of these things for you.  Customers want the best deal on the best products and the best services with the most features and the most convenience.  Try to do all those things at once, and you are going to lose money – unless you have a magic recipe somewhere (and granted, it’s possible, but much more rare than most gurus would have you think).  So…we can sell MORE to customers if we give up a little – or we can sell LESS and make more money.  Your competitors have the same deal going on – some may have special know-how that enables them to wiggle about a bit in this equation, but every company runs into this wall, sooner or later. 

A few years back, I analyzed the results of dozens of companies that I’ve worked with, and this tendency became very clear:  the top performers in sales volume growth were in the bottom quartile in profit growth, and vice-versa.  I find this result a little surprising:  most of us assume that overhead absorbtion creates an economy of scale as you get larger.  The problem with this assumption is that size attracts – you guessed it – competition, and so there is a higher need for investment and the overhead that comes along with it as you get bigger.  In other words, for most companies, there is no magic size you can reach where you are not going to be beset by competition.  If you don’t believe me, take a look at companies like Apple and Exxon-Mobil.  They make great money, and they are huge, but they have to invest heavily to maintain their position because a big company is essentially a HUGE target for competition.

So here is a question for you – would you like to see super high growth in sales or profits – or would you be happy with mid-range numbers in both?  If you can make a clear, focused choice, you will be far ahead of your competitors.

Are you REALLY doing strategic planning?

Do you think your company is doing strategic planning?  Many people do - but strategic planning is more than just an annual vague discussion about your business.  Real strategic planning can be characterized by three things:  SUBJECT, FOCUS and EXECUTION.
Subject is what you are really talking about when you are doing strategic planning.  As I said in my books, there are three questions that we ask in strategy - and if the subject isn't about one of these three questions, you aren't being strategic.  The questions are: 

1. What do we do?
2. For whom do we do it?
3. How do we beat (or better, avoid) competition?

Remember - if it doesn't address one of these questions, it's not strategic.
Focus is not, as most assume, about what you are going to do.  That's too easy.  Focus is about what you WON'T do.  With proper focus, you can tell the world who you are and they will look to you to deliver on the things that make  you outstanding.  The hard part is giving up the things you are NOT focusing on.  Strategic planning is not about what you should do, want to do or could do - it is about what you must do to succeed in a focused target area.
Execution is actually doing what you plan to do.  It's easy to say "we will go here and do this" - it's another thing entirely to DO it.  If you put little or not effort into your execution, you may have great strategy, but you will have disappointing results.
Does your organization do all of these things well in strategic planning?  Which of the three do you find the biggest challenge?

Video - How to Set and Reach Your Objectives

As a strategic planning speaker I am often asked "How can I implement my strategic plan?"  The short video on this page explains several key parts of the process, based upon 25 years of successful execution of plans in a variety of industries.

http://www.strategyspeakers.com/robert_bradford.php

What is strategic planning?

Strategic planning is something many people think they know because they have seen it done badly.  Strategic planning is NOT:

-SWOT analysis
-A list of objectives
-A book prepared for your board of directors
-Budgeting
-A nice looking document that no one looks at after completion
-A balanced scorecard
-A mission statement

Strategic planning is a process of setting the course and direction for an organization or other endeavor.  A well done strategic plan focuses the resources of the endeavor on those activities which will yield the best results.  For businesses, this means optimizing profitability, survive-ability and growth-ability.  

The best way to assess the quality of a strategic plan is to ask these questions:

-What did you do as a result of the plan?
-What difference did it make for your organization?

Considering the answers to these questions, how would you improve YOUR strategic planning?

Upstream and Downstream

One of the overlooked ways to improve your strategic planning is by thinking about how your organization fits into the bigger picture.  An excellent exercise in strategic thinking is to take a minute and think about why you are important both upstream and downstream in the value chain.  In other words, what makes you important to your suppliers, and what makes you important to your customers.
I like to closely examine any ideas this may spark about win-win activities that might involve the upstream or downstream players.  A good example would be a social networking site which encourages you to invite friends - you are helping them by growing their network, and helping yourself by expanding the network you can draw upon within that site.  This particular win-win activity goes a long way to explain the rapid growth of social networks as both a business and recreational tool.
Question to ask in your strategic planning:  What activities might you encourage that create a similar win-win situation for your upstream and downstream stakeholders?

Starting the year right

One of the best ways to assure your company has a good year is to have a concrete, documented strategic planning process.  Ideally, your strategic planning should occur during a time when it will have less impact on your routine operations, but the key point is that you actually schedule and hold strategic planning meetings.  To minimize conflict and schedule issues, it's also a good idea to plan your meetings one or two months in advance, and possible even longer if your team has difficult travel schedules.  I've found that you will get a lot more out of your team if you hold your planning meeting off-site and work with a professional strategic planner who is not going to try to use the process to sell you other consulting.  If you can afford to get your team out of town to a nice destination, it is definitely worth the effort, as your team will look forward to the process and view strategic planning as something to look forward to.  Start your year off well by scheduling your strategic planning this week!

What does a "Real" Strategic Plan look like?

Strategic planning is something many executives think they know all about.  In the past few months, I have hear a couple of CEOs comment on what a "real" strategic plan should look like.  These comments, sadly, show a lot of bad misconceptions about what a strategic plan is.  Here are some common misconceptions:
1.  A "real" strategic plan is verbose.
Or long.  Or written out like an article or a book.  This is one of the most common errors - and one of the stupidest.  Think about the last time you REALLY planned something.  Did you write an article?  No.  You probably wrote yourself a checklist.  Why?  Because that's how we get things done.  When was the last time you picked up a wordy article and said to yourself "Wow, I have to do this..."?
2.  A "real" strategic plan is overloaded with details and financial targets.
This is a sneaky one.  When people put lots of numbers in a strategic plan, it creates the illusion that they have a better plan.  But think about this - what do you REALLY know about those numbers?  Where did they come from?  I have seen companies with very, very detailed financial plans get in trouble because they focus more attention on their predictions than on the underlying strategic realities.  Strategic plans exist in the real world, where sales forecasts are almost always wrong and any number you predict in the future is highly suspect.  Instead of putting all that work into quantifying the unquantifiable, perhaps you should spend a little more time on realistic systems thinking about the nature of your industry, and how it is likely to change in the next few years.  Making your assumption a number will not make it a fact.
3.  A "real" strategic plan is insanely short.
I like some of the thinking behind this one.  Making your plan short does force you to focus on the reality behind your planning.  But just as one can put too much detail into a plan, you can also put in too little.  An effective strategic plan has enough detail to be useful, but not so much that it gets in the way of understanding - AND ACTING ON - your strategic thinking.
4.  A "real" strategic plan doesn't have implementation steps.
If all you want from a plan is a pretty document. bless your heart.  If, like most executives I work with, you actually want RESULTS from your strategic planning, you must have some detail and accountability on the implementation of your strategies.  If you don't, your plan will be - at best - a very clever documentation of your thinking, rather than a tool to get results.
Have you encountered any of these errors?  Does your company's strategic plan show signs of them?  Using the Simplified Strategic Planning process can greatly improve the usability and effectiveness of your plan.  Be sure to check out our popular and long-running seminar series (https://www.cssp.com/seminars) for detailed, step-by-step instructions on how to create a strategic plan that truly delivers results.

Is Retail Strategy different from other strategy?

When I do public strategic planning programs for a broad audience, I am sometimes asked “Is strategic planning for a retail business different from strategic planning for a different kind of business, such as a manufacturer?” The answer, not surprisingly, is “yes AND no”. The differences and similarities may surprise you.

To begin with, the “product” of a retail store is different from most product and service creating businesses in that it is not part of a discrete transaction conducted with the customer – that is, as a retailer, you do not get a separate payment from your customer for the value you produce. Instead, you always (or almost always) make money on payments from your customers for goods and/or services produced by others. Of course, there are exceptions – for example, if you do food preparation on your premises, you are getting paid directly for that value – but in most cases, retailers make their money on the markup on the goods and/or services they are selling.

To put a finer point on this distinction, as a retailer you get some compensation from customers – largely for the experience you generate around their purchase – and some compensation from suppliers – largely for the infrastructure you provide for their distribution. How much compensation comes from either source is a tangled topic we can address elsewhere, but the point is, you make your money as a retailer by providing infrastructure and experience.

And here is one place where strategic planning for retailers is just like strategy done for anyone else: as a rule, the more easily a service/product can be measured and duplicated, the harder it is to sell it as a specialty. In retail, the value of infrastructure is exactly that – something that is easily measured and duplicated. This is not always so – a huge distribution network like Wal-Mart’s is hard to duplicate, and so is a highly specialized semi-monopoly network like Duty Free America. Still, for most suppliers, access to customers through one infrastructure network is pretty much the same as the others. For customers, however, the differences can be notable and – in the eye of the customer – worth quite a bit.

If you run a retail business, where do your stores stand? Do you sell an experience or infrastructure? How does your strategic competency add to your uniqueness and the value you create for your customers?

Strategic Vision at Apple: Will it change under Tim Cook?

As Steve Jobs' health becomes a greater concern at Apple, attention has been focused on Apple's number two exec, Tim Cook. This transition raises some questions that are interesting strategic planning issues, and will be a fascinating case study in business strategy over the next three or four years.

First, many credit Jobs' vision for the success of Apple. In some ways, this is not far off the mark - Jobs, especially after his return to Apple in 1998, pushed Apple in some weird directions that clearly distinguished the tech company from its competitors. Probably the best part of this strategy was an emphasis on design and a willingness to take a shot at unusual new products before it was clear consumers wanted to buy them.

The first item - emphasis on design - could arguably be Apple's strategic competency. Every successful Apple product has had a design that notably distinguishes it from competitors, and in most cases, the Apple product has re-defined its market.

The second item - a willingness to take risks on new products - lies at the heart of entrepreneurial success in any industry, and is only notable at Apple because size tends to extinguish this vital recklessness. The Fortune 500 is littered with companies that used to have this gambling mentality - but no longer do. Apple still has it, and one could argue this is because of Jobs.

Enter Tim Cook - a perennial number two, according to some, Cook has been seen as an operations guy - and a brilliant one with a keen mind. Operations, unlike design and marketing, does not often reward entrepreneurial recklessness, though - so will Cook bring a vision that can sustain Apple's weird status in the future? On the one hand, people who know Cook say he is a great strategic thinker. On the other hand, operational responsibilities can infect your mind with a gray practicality that deadens the innovative spirit of an organization. It's truly too soon to tell, but don't bet on Apple going dead in the water immediately. Cook knows he has a lot of very keen people around him who have been part of Apple's success over the past ten years - and he is smart enough to know how to work with them. Let's hope he doesn't try to "re-make" Apple in his image just to satisfy his ego - any sign of that would be the kiss of death, as it has been for countless other successful companies in transition.

Why Wal-Mart is not invincible

After a couple of years of news stories trumpeting the success of Wal-Mart (again), sales at Wal-Mart stores showed a decline last year. Why? There are two very different reasons. The first is economic, the second is competitive. The economic reason is that all shoppers shift spending downward when they see themselves affected by an economic downturn. This means people who shop at higher-end stores when times are good may stay pinching pennies by making the same purchases at a commodity store like Wal-Mart when things get tight. The competitive reason is that some of Wal-Mart's closest competitors - notably the dollar stores like Family Dollar and Dollar Tree - have started to close the gap on some of the weaknesses that caused customers to shift away from them and towards Wal-Mart. The first shift isn't really big news - commodity players always fare better when the economy is doing badly, and worse when things brighten up. But the second shift should be worrying to the folks at Wal-Mart. The commodity game, unlike a specialty strategy, allows only one winner. Any change that reduces volume for the lead player makes it that much more likely that an upstart will be able to remove the commodity crown from the top dog. Wal-Mart has undertaken some big expenses in the past few years that their smaller competitors have not - notably advertising and opening/closing stores. These are both strategic moves, and properly done may lead to higher profit at Wal-Mart - BUT improperly done, these moves may just be another chink in Wal-Mart's armor.
While I'm not a big fan of commodity strategies in general, so much has been made of Wal-Mart's management approach that I will find future developments in this market space very interesting to watch.
Here is a question for you in your strategic planning: Are YOU staying on top of your game? Are you considering pursuit of strategic moves that may create chinks in your armor? And how are you preparing yourself for a better 2011 and beyond?