As product managers “choose the value” within the market to offer a successful strategy
January 5, 2010 | Value positioning, choose the value, customer segmentation, market selection / focus / target
As product managers when we work on “choose the value” we must understand the market environment within which we operate in order to build an effective strategy for our products as “CEO” for our product lines. One of the most influential models to assist us in this task has been developed by Michael Porter, published in numerous books and most recently in an updated volume entitled “Competitive Strategy “ 2004
One of the models introduced in this research and developed with examples across industries is an analytical framework for industries, often referred to as Porter’s 5 forces model, because it described 5 forces that exist in an industry that have a structural impact upon any other player within the industry. Whether they are already a member or are considering joining the industry. An industry can be defined as the object of interest but a typical example would be woollen industry in the United Kingdom, or the Salmon industry in Scotland.
The five areas considered by the Porter model provide a structure for analysis and the outcome can be used for a variety of purposes including Strengths, Weaknesses, Opportunities and Threats (SWAT) analysis. The five Porter forces are listed as: entry of competitors, threat of substitutes, bargaining power of the suppliers, bargaining power of the buyers, rivalry among the existing players. Some discussions of the model have subsequently suggested a sixth force, that of the government who are able to initiate new policies and major structural change to the operating environment. Indeed – the extension may not be limited to governments as in some cases within the European Union – Europe wide policy has been implemented that has changed the way business is allowed to operate in member countries.
When completing a self analysis this simple template will allow a starting position to be developed , a more thorough analysis will also be required should time allow and Porter provides an Appendix that provides greater detail into how to research a specific industry.
- The Entry of Competitors.
- If a new company wishes to enter this market what would they need to do? To set up a new restaurant in the high street of a local town will require certain fundamental requirements to be satisfied such as availability of a suitable location with adequate customers, available of resources to run the restaurant and availability of fresh ingredients
- What knowledge, skills and attributes will a new entrant be required to have and how abundant are these
- How much capital will be required to enter the market and is there an ample supply of investors for this industry
- In working through this type of question one can build a picture of likely scenarios and then develop strategic responses. If there is a history of competitive entry then this needs to be added to the SWOT analysis as a Threat. If the barriers to entry are high and your business is already present in the market then this is clearly a Strength
- Threat of Substitutes.
- How well do you understand the cost and pricing model that is involved in your industry and how easy will it be for a new entrant to enter at a reduced and sustainable price. Some industries have fixed costs whose presence in the production process cannot be changed although their price may; such as Milk production, whereas other industries such as marketing; have had huge changes to the cost of information distribution through the development of the internet.
- What are the alternatives that can be purchased in your market that have equivalent or near equivalent value to the buyer? Rock Salt is used as a method of making roads safer to drive upon during bad winter snowy weather and in the UK at least, there is no viable alternative available.
- Bargaining Power of the Suppliers
- The strength of the suppliers will be determined by a number of competing factors including the number of suppliers in the market, the price elasticity of the goods or services provided and the possibility of substitutes. The desirability of the product outside of these elements may also have a strong influence in some markets where the product has a level of appeal or auro that creates greater supplier bargaining power. It is therefore very important to document and model the strength of sellers in the market for your product or service . One also needs to be aware of the possibility that a specific supplier may be able to develop a monopoly over the supply channel. Buying organisations do have some ability to impact this situation and with careful planning can avoid a single dominant supplier taking over the supply of a specific good or service
- Bargaining Power of the Buyers
- The strength of the buying organisations will vary based upon the goods and services, the culture and whether there is a homogenous industry group behind a sizable quantity of purchases or if they are distributed widely across industries.
- One of the important considerations as a buyer is the extent to which different organisations interested in common purchases can work together to develop improved supply of goods. In some situations such a group strategy is not allowed under procurement rules
- Rivalry Among the Existing Players
- What is the rivalry between existing suppliers and buyers within their respective groups and also between the groups. How can this be used to your advantage in gaining position within the market?
- There may be a single dominant organisation within the market based on size, turnover, length of service to the industry, unique selling point etc. Identify and track this unit.
Having understood the market environment what then? In order to develop competitive advantage one must consider how a business operates – both in general terms but also in specific terms to your own organisation obviously.
A general model has been developed also by Michael Porter that describes the key steps of activity that most organisations will have as major parts of their organisation in order to deliver value. It is through the “Value chain” of these activities identified by Porter that some organisations can increase their competitive advantage.
Inbound Logistics – input materials to the business. These may be physical goods or services in the form of human resource
Operations – what is done to the inbound materials in order to create a product that has some value. It may be that wood is turned into Paper in a paper mill. In a software company – human resources are the key incoming product and the key outgoing product is computer software and this is how the organisation create additional value for a profit
Outbound logistics – how is the finished product delivered to the customer? This can be physical delivery in a packaged form or it may be delivery in a virtual manner through software or the internet.
Marketing & Sales – include the traditional price, promotion, research to understand the market and get buyers to purchase the product
Service – sometimes also referred to as customer care or operations are those services that support the customers through the use of the product
The “value chain” is supporting by several enabling activities which are also found in most organisations and improvements in these areas can enable competitors in quite tightly groups industries to gain advantage over one another.
Procurement – the method of purchasing goods and services
Technology – automation is key to gaining competitive advantage in
Human Resources – in most organisations the people are the most expensive and key asset
Infrastructure – there are a series of group or HQ functions like finance, legal, that are key to the running of the organisation, they keep the flow of information and money running and keep the business legal
Sometimes these support functions are seen as a necessary evil or overhead to running a business but they can be turned to advantage
So What?
If we have completed our analysis of the market and our own organisation we will have several opportunities available to us for achieving competitive advantage.
While there are hundreds of strategies, the options really boil down to choosing one of three key strategies, then identifying how to adapt ones own organisations value chain activities and supporting activities in order to make the change happen and takes ones new position within the market and maintain and grow it
1 Cost Leadership
Cost leadership can often be achieved by economies of scale and very close attention to all cost elements in the value chain and supporting units. If several companies aim for cost leadership there can be disastrous price cutting scenarios with companies going out of business as they are unable to sustain excessive price cutting activities
2 Differentiation
A company can seek to makr itself out from others based on differentiation factors. These need to be identified carefully based on market demands and positioning. If an company places too much emphasis on a differentiator that others will follow then it will cease to be effective. For example at the current time in 2009/10 the green debate has become an important differentiator for many organisations including energy and product providers. It is gradually moving from a differentiator to a standard requirement. Also cost must still be attended to by organisations chasing differentiation
3 Focus
Be the best – a company may simply aim to be the best, ensure these are SMART objectives and that it is clear the company what best means. Specific, Measurable, Achievable, Realistic and Time based (SMART).
Typically when companies aim to be the best they will select a cost or differentiation focussed strategy to being the best.
