Start Up Strategy

What is Strategy?
Materials to Help You Create a Successful Start-Up

For strategy consulting contact Lisa
Hendrickson hendrickson.lisa@gmail.com

What is Strategy?
• Strategy is the direction and scope of an
organization over the long term which
achieves an advantage through its
configuration of resources within a
challenging environment to meet the needs of
markets and fulfill stakeholder expectations.


Why Being “The Best” Isn’t a Strategy
• Being “The Best” not quantifiable therefore,
not measureable.
• A business cannot compete in the
marketplace being “The Best.”
• There is no strategic advantage to the
customer to do business with a company that
claims to be “The Best.”
• Case Study: Hertz vs Avis

Why Assessing Your Market Through Key Differentiators
Will Have You Be a Market Maker

• Unique Attributes give a company an advantage to
offer targeted customers and deliver necessary
services to customer base.
• Case Study: Zip Car vs. Hertz


The Five Competitive Forces That
Shape Strategy
• Thank You Michael Porter for being so smart.
– This work is based on the seminal work developed
by Professor Michael Porter of the Harvard
Business School and known as the father of
Modern Business Strategy
• He has my props—Now let’s get to it


The Idea in Brief
• To sustain long-term profitability, companies must
respond strategically to competition
• You must keep tabs on established and up and coming
rivals
• By analyzing all five competitive forces you gain a
complete picture of what’s influencing profitability in
your industry.
– You identify game-changing trends early so you can exploit them.
– You work around constraints on profitability or even reshape the
forces in your favor.


The Five Forces
Threat of
New Entrants

Rivalry
Among
Bargaining Bargaining
Power of Power of
Existing
Suppliers Buyers

Competitors

Threat of
Substitute
products or
Services

Assumptions
• Although industries may be different as night and day, the
underlying drivers of profitability are the same.
• Industry structure drives competition and profitability not
whether an industry produces a product or service is
emerging or mature, high tech or low tech, regulated or
unregulated.
• While short term events (weather, business cycles) can affect
profitability, industry structure manifested in the five forces
sets profitability for the medium and long run.
• Understanding industry structure is essential to effective
strategic positioning.


More Assumptions
• The strongest competitive force(s) determine
the profitability of an industry and come the
most important to strategy formulation.
• Industry structure grows out of a set of
economic and technical characteristics that
determine the strength of each competitive
force.


The Five Forces


Threat of New Entrants
• The threat of entry in an industry depends on the height of
entry barriers that are present and on the reaction entrants
can expect form incumbents.
– If barriers to entry are low, and newcomers expect little retaliation
from the entrenched competitors, the threat of entry is high and
industry profitability is moderated.
• Threat of new entrants can put a cap on profit potential for an
industry
• When the threat is high, incumbents must hold down their
prices or boost investment to deter new competitors
– Starbucks: modernize menu & stores


Barriers to Entry
• Barriers to Entry are advantages that incumbents have relative to new
entrants.
1. Supply side economies of scale: firms produce larger volumes at
lower cost per unit because fixed costs are spread over more units,
command better terms from suppliers, or employ more efficient
technologies
2. Demand side benefits of scale (aka network effects): Amount buyer
is willing to pay increases with the number of buyers who patronize
the company
Apple iPod iPhone iBook
•
3. Customer switching costs: fixed costs that buyers face when they
change suppliers
ERP systems
•
Cellphones
•


Barriers to Entry (con’d)
entrants.
4. Capital Requirements: The larger the capital investment, the more it
deters the possibility of new entrants. However, the greater the potential
upside, the more investors are willing to fund new entrants
Airline industry
–
5. Incumbency Advantages Independent of Size: No matter what their size
incumbents have either a cost or quality advantage over new entrants.
Target vs Department Store Model
–
6. Unequal access to distribution channels: New entrant must secure
distribution of its product/service. Sometimes that’s so competitive new
entrants make their own distribution channels
Low cost airlines
–


Barriers to Entry (con’d)
entrants.
7. Restrictive Government Policy: Gov’t policy can hinder or aid new entry
directly, as well as amplify (or nullify) other barriers. Government directly
limits or even forecloses entry into industries through, for instance,
licensing requirements or restrictions on foreign investment. Regulated
industries like liquor, airlines and taxi services are examples
– Gov’t Policy can heighten other barriers to entry through expansive
patenting rules, environmental or safety regulations.
– Gov’t Policy can also make entry easier by funding R&D


Expected Retaliation
• How potential entrants believe incumbents may react will also influence
their decision to enter or stay out of an industry. If reaction is vigorous
and protracted enough, the profit potential of participating in the
industry can fall below the cost of capital.
– Newcomers are likely to fear expected retaliation if:
• Incumbents have previously responded vigorously to 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.
• Incumbents are likely to cut prices because they are committed to retaining the
market share at all costs or because the industry has high fixed costs which create a
strong motivation to drop prices to fill excess capacity.
• Industry growth is slow so newcomers can gain volume only from taking from
incumbents.


Assessing Barriers to Entry
• Entry barriers should be assessed relative to the capabilities
of potential entrants, which may be start ups, foreign firms, or
companies in related industries.


Are you an Incumbent or a Newcomer in your
industry? How might you plan for this?
• My business participates in the _____________________ industry

• The business is an _______________________ (incumbent or a
newcomer) to the industry and behaves accordingly.

• Our main barriers to entry are:


The Bargaining Power of Suppliers

Powerful suppliers capture more of the value for themselves by charging high
•
prices limited quality or services or shifting costs to industry participants.
Powerful suppliers including suppliers of labor, can squeeze out profitability out of an industry that is
–
unable to pass along cost increases in its own prices.
• Microsoft and PC makers
Companies depend on a wide range of supplier groups for input. A supplier group
•
is powerful if:
It is more concentrated than the industry it sells to (ie MS and computer makers)
–
Supplier group does not depend heavily on the industry for its revenues-multiple revenue streams
–
limits customer pressure on suppliers
– Industry participants face high switching costs to change suppliers (Bloomberg terminals)
– Suppliers offer products that are differentiated (Pharma)
– No substitute for what the supplier provides (Pilot’s Union)
– The supplier group can credibly threaten to integrate
forward into the industry (industry makes a lot of money, supplier might want to enter)


The Bargaining Power of Suppliers

• What or who are my suppliers?

• How might the bargaining power of suppliers affect my
company?

• What are the possible pitfalls Company might experience
because of suppliers?


The Bargaining Power of Buyers

Powerful customers can capture more value by forcing down prices, demanding
•
better quality or more service (thereby driving up costs) and generally playing
industry participants off against one another.
A customer group has negotiating leverage if:
•
There are few buyers or each one purchases in volumes that are large relative to the size of the
–
single vendor.
Industry products are standardized or undifferentiated
–
Buyers face few switching costs in changing vendors
–
Buyers can credibly threaten to integrate backward and produce the industry’s product themselves if
–
vendors are too profitable



Powerful customers can capture more value by forcing down prices, demanding
•
better quality or more service (thereby driving up costs) and generally playing
industry participants off against one another.
A buyer group is price sensitive if:
•
The product it purchases from the industry represents a significant fraction of its cost structure or
–
procurement budget. (Home Mortgage)
Buyer group earns low profits is strapped for cash or is otherwise under pressure to trim its
–
purchasing costs. Highly profitable or cash rich customers are generally less price sensitive.
Quality of buyer’s product or services is little affected by the industry’s product (movie cameras)
–
The industry’s product has little effect on the buyer’s other costs. (does not reduce COGS or improve
–
quality)
Most sources of buyer power apply equally to consumers or business to business
•
customers.
B2B has intermediate customers are more power to inluence downstream customers (Dupont
–
Stainmaster & Pharma)



• What or who are Company’s Buyers?

• How might the bargaining power of buyers affect Company?

• What are the possible pitfalls Company might experience
because of buyers?


The Threat of Substitutes
• A substitute performs the same or a similar function as an industry’s
product by a different means.
– Ex Email is a substitute for express mail, videoconferencing is a substitute for travel
• Substitutes are always present but easy to overlook because they may not
look exactly like what we’re used to.
– Software is a substitute for a travel agent
• When the threat of substitutes are high, industry profitability suffers.
Substitutes limit profits by placing a ceiling on prices.
– Landlines vs cell phones or VoIP for single number households
• The threat of substitute is high if;
– It offers an attractive price-performance trade off to the industry’s product.
Netflix vs. movie rental stores
•

– Buyer’s cost of switching to the substitute is low
Branded drugs vs generic
•


The Threat of Substitutes
• What are the threat of potential substitutes in relation to
Company?

• How might Company insulate itself from the threat of
substitutes?


Rivalry Among Existing Competitors
• Intensity of rivalry is greatest if:
Competitors are numerous or roughly equal in size or power
–
Industry growth is slow
–
Exit barriers are high
–
Rivals are highly committed to the business
–
Firm’s cannot read each other signals well
–
• The strength of rivalry is important because it reflects not only
the intensity of competition but also the basis of competition
• The dimension on which competition takes place has a major
influence on profitability


Rivalry Among Existing Competitors
• Who are my competitors?

• How might we differentiate itself from its competitors?


Competition on Price
• Rivalry is especially destructive to profitability if it
gravitates solely on price.
• Price competition is most likely to occur if
– Products or services of rivals are nearly identical and there are few
switching costs for buyers
– Fixed costs are high and marginal costs are low (aluminum, paper
etc..)
– Capacity must be expanded in large increments in order to be efficient
– The product is perishable


Competition Other Than Price
• Competition on product features, support services, delivery
time, or brand image is less likely to erode profitability
because it improves customer value and can support higher
prices.
• Rivalry focused on such dimensions can improve value relative
to substitutes or raise the barriers for new potential entrants
• Rivalry competing on different dimensions and serving
different customer bases may improve profitability as product
development for new product mixes and services for
customer segments but expand the market and invite new
customers


THEREFORE…..
• Industry structure, as manifested in the five forces
determines the industry’s long run profit potential because it
determines how the economic value created by the industry is
divided—how much is retained by companies in the industry
vs. bargained away by customers and suppliers, limited by
substitutes or constrained by potential new entrants.


Factors Not Forces
• Factors sometimes can appear as red herrings—they are
visible as trends but do not impact the underlying structure of
the industry
– Industry Growth Rate: it’s a common mistake to think a fast growing
industry is always attractive. Fast growth can give suppliers more
power and low barriers to entry can flood the arena with new
entrants. (Personal computers)
– Technology and Innovation: Advancements in technology are not
enough to make an industry structurally attractive
– Government: analyze how specific government influence affects
profitability.
– Complimentary products and services: (cars, gas stations, insurance)


Changes in Industry Structure
• Industry structure is relatively stable and industry profitability
differences are persistent over time. However, industry goes
through modest adjustments and occasionally changes
abruptly.
• Industry developments that are most likely to shift industry structure:
– Shifting threat of new entrants (mom & pop store vs Walmart)
– Changing supplier or buyer power (travel agents vs internet)
– Shifting threat of substitution (company network vs web based apps)
– New bases of rivalry(banks, globalization)


HENCE…..
• Understanding the forces that shape industry
competition is the starting point for
developing strategy.
– Every company should already know what the average profitability is
for its industry.
• The five forces reveal why industry profitability is
what it is.


Understanding Industry Structure
• An understanding of industry structure guides actions towards fruitful
possibilities for strategic action which may include the following:
– Positioning the company to better cope with the current competitive forces,
– Anticipating and exploiting shifts in the forces
– Shaping the balance of forces to create new industry structure that is more favorable to
the company.
• The best strategies exploit more than one of these possibilities.


Why Should We Care?
• Developing a new company in an industry in the midst of flux and growth
offers many opportunities and pitfalls. In using the five forces to develop
our strategy, we can take a firm stand in the marketplace while capitalizing
on the potential opportunities while rivals may not have a grasp of the
industry’s landscape.
• A Five Forces Strategy will allow us to appropriately position itself in the
marketplace to serve its constituency for the long run.


Typical Steps in Industry Analysis
• Define the relevant industry
– What products/services are in it?
– What is the geographic scope of the industry?
• Identify the participants and segment them into groups, if appropriate
The buyers & buyer groups
–
The suppliers & supplier groups
–
The competitors
–
The substitutes
–
The potential entrants
–
• Assess the underlying drivers of each competitive force to determine
which forces are strong and which are weak and why.


Typical Steps in Industry Analysis
• Determine overall industry structure and test the analysis for
consistency:
Why is the level of profitability what it is?
–
Which are the controlling forces for profitability?
–
Is the industry analysis consistent with actual long-run profitability?
–
Are more profitable players better positioned in relation to the five forces?
–
• Analyze recent and likely future changes in each force both
positive and negative
• Identify aspects of industry structure that might be influenced
by competitors, by new entrants or by your company


Common Pitfalls
• Avoid the following mistakes in conducting analysis
– Defining the industry too broadly or narrowly
– Making lists instead of engaging in rigorous analysis
– Paying equal attention to all of the forces rather than digging deeply
into the most important ones
– Confusing effect (price sensitivity) with cause (buyer economics)
– Using static analysis that ignores industry trends
– Confusing cyclical or transient changes with true structural changes
– Using the framework to declare an industry attractive or unattractive
rather than using it to guide strategic choices


Next Best Steps
• Company conducts industry analysis and determines its
positioning in its desired industry
• Company finds competitive intelligence to determine the
competitive landscape and where there is a “sweetspot” for
us
• Perform a SWOT analysis
• Formalize strategy
• Formalize its organization


Thank You!
If you found this presentation useful, please pass
it along to someone else who it might help.

If you’d like to contact me for consulting work,
please email me at hendrickson.lisa@gmail.com


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