One of the memorable articles that I read prior to this session was on the Porters five forces model. The article was entitled “The Five Competitive Forces That Shape Strategy”, by Michael E. Porter (HBR, January 2008).
Porter’s five forces model was first introduced to the world in 1979 HBR article by a young associate professor, Michael Porter, through an article entitled “How Competitive Forces Shape Strategy”. In fact, this was Porter’s first HBR article. A great example of hitting the professional jackpot!
In the follow up article the author offers a deeper view on how the model should be used and it’s implications for strategy.
Porter argues that the goal of the strategist is to understand and cope with competition. When competition is considered it is important to look at direct competitors, but also contemplate broader competitive forces against which the company is fighting for profits.
Five forces that should be considered include rivalry among existing competitors, but also the threat of potential new entrants, the bargaining power of buyers and suppliers, and the threat of substitute products or services.
Porter’s five forces model assists in understanding underlining drivers of profitability in a specific industry. This framework further guides identification of trends that may cause significant changes in how profit is shared between the five forces in an industry.
The article presents a graph listing various industries by profitability, with the airline industry at the bottom of that list, as the least profitable industry known to men. The five forces model explains why the airline industry is the least profitable industry. Each of the five forces within that industry are very strong which squeezes the incumbents’ profits.
The airline industry has vicious rivalry among existing competitors. What is worse, incumbents mainly compete on price. The industry furthermore has powerful suppliers and buyers. The threat of new entrants is also present, despite low profitability of this industry. This is driven by the perceived “coolness” of the industry.
Lastly, the threat of substitutes adds additional pressure, since train or car rides are often an alternative to a more expensive air trip.
Porter’s five forces is a robust framework that is at the heart of what strategy is. A company’s strategy analysis must include a deep understanding of the structure of that particular industry and its competitive environment.
Analyzing the five forces should not give you a static picture of the industry. It is a tool that should allow one to understand the current industry’s dynamics and major trends facing the industry, and how the five forces within a particular industry are changing. This framework also allows analyzes of how changes in one competitive force causes shifts in other forces.
I remember during my MBA some classmates were questioning if this model is still relevant. I think it is. I think one key insight that I observed is that a cursory look at the framework, which is common for MBA grads, does not allow the reader to take full advantage of using this model.
The framework is often seen as something to use when completing an industry analysis. Taking a closer look, it becomes obvious that the model allows one to gain a deeper understanding on how profit is shared between the five forces in a specific industry. Hence, it allows one to get a better idea about which industry player(s) hold the most power and likely dictate the rules of the game.
Moreover, the framework allows one to obtain not only a snapshot of the industry at a point in time but a view of the dynamics within the industry and potential shifts in the future. Hence, it allows one to get an idea on which players are gaining power and which players are losing power.
“PREPARE” section. I found the new PREPARE section for each session in The Consulting Offer very useful. I have one comment related to French Pepsi Cola Consumption Per Annum estimation case. My equation for this estimation case included an additional step, which was percentage of Pepsi consumed in cans. Without this step the number of cans are inflated.
The Mind Of The Strategist, chapter 7. I continue reading “The mind of the Strategist”. Chapter 7 is entitled “The Secret of Strategic Vision”. Below are some key things to remember. The strategist needs to be aware of mental paralysis that may be caused by severe pressure from a rapidly deteriorating company’s position. Similar to deer on the highway, faced with a high-pressure situation, many people become mentally paralyzed and stop looking for alternatives that are still available. This may lead to business failure.
However, such business failure can be avoided if, in challenging times, the strategist shifts focus from winning to avoiding the worst-case scenario. I think this is something most businessmen forgot to do.
In other words when the “business ship” is sinking the focus should be on remaining solvent and not on winning. Focusing on avoidance of the worst-case scenario opens our mind up to see a range of potential alternatives that are still available to achieve competitive revival.
When one is facing a difficult situation and needs to determine a strategy, it is important not to start from listing everything that cannot be done and thereafter asking oneself what possibilities are left.
Instead, one should define limiting factors or constraints and ask oneself what alternatives are available if the limiting factors were removed. It is important to define what will be the ideal alternative. Strategic thinking can then be focused on removing constraints.
Moreover, it is important not to allow the search for the one “ideal” strategy to become a liability. With swiftly shifting competitive forces (refer to the discussion on Porter’s five forces above), businesses need to adjust in a timely manner. Even a slight edge over competitors gained quickly is better than ideal strategy executed too late. The only area where perfectionism is required is in identifying key success factors.
Key success factors are identified by asking, “what is the secret of success in this industry?” and other similar questions to get a list of realistic hypotheses. Next we have to determine which data we need to test the hypotheses and use the results of such an analysis to determine a list of key success factors.
For companies on the rise to success, the focus should be on setting the ideal goal and determining measures to achieve this goal. For companies on the downward spiral to destruction, the goal should be on imagining the worst and determining how to avoid it.
The art of strategic thinking should be a daily discipline. Strategist understands the range of alternatives, and costs and benefits of each one. As a result, a strategist is able to react flexibly when the business environment unexpectedly shifts.
Alternatives are considered via, “What if?” questions repeatedly asked to get to the core of the issue. “What if” questions should be taken very seriously.
Networking: This week I had my first interview with one of the non-target management-consulting firms. Firmsconsulting encouraged me to do this to get back into the interview mode and to build my self-confidence. I was asked a lot of questions about my current role and my previous educational and work experience, with a major focus on type of projects I was staffed on while working as a management consultant few years back.
Overall the interview went well and I was informed that someone would reach out to schedule the next interview within a few weeks. I find it surprising how long it takes to go through the process. This is how firms lose good candidates. Not everyone is willing to wait around for a few weeks between each step within the interview process, especially people between jobs.
ITEMS ACCOMPLISHED DURING THIS SESSION:
Felix’s case interview preparation, session 14, McKinsey competition session (The Consulting Offer, First Season)
Trend Case. The key here is to remember the technique taught by Firmsconsulting for such cases, and to use this technique. The trend that I identified was decreasing cable subscriptions and the shift to Internet and mobile platforms, such as Netflix. For this type of case, often there is no perfect answer. I think having confidence in your knowledge and your thinking, and being logical is what will make you stand out in answering this type of case.
Reality TV brainstorming. I still find it easier to do brainstorming cases on paper. It helps me concentrate and stay organized. I thought two major drivers at level one of the decision tree presented in the perfect solution made a lot of sense.
My drivers were less structured and were focused on the demand side only. I think this is an example of a situation where I had to “zoom out” to see both big buckets of the first level of the decision tree, instead of a lot of details related to one bucket. The concept of zooming in and zooming out was described in the 2011 HBR article “Zoom In, Zoom Out” by Rosabeth Moss Kanter.
Seeing things from the perspective of a worm’s eye, instead of bird’s eye, is something I always had tendency to do. Although my MBA allowed me to learn to pay significantly more attention to the big picture, I still tend to zoom in more often then zoom out. I therefore end up paying attention to selected details up close instead of looking at the big picture more often.
However, to be an effective leader I need to find a better balance between zooming in and zooming out. This is something I need to continue to work on.
Al Jazeera full case. This is, I think, the second time when we had to use a sequential type of the decision tree in solving the case. Because this type of the decision tree is used so rarely in The Consulting Offer, I actually had not even considered using it until I progressed to the part of the session when the decision tree was mapped out.
I had never considered decision tree branches could be sequential before.
This case offers a useful thought process for competition cases. As I mentioned before, in my opinion, one of the powerful tools to extract from The Consulting Offer are the various methods to analyze just about every type of problem you will face. I appreciate that I am not forced to learn frameworks but taught to develop my own. It is still nice to see those developed by Firmsconsulting.
If you pay close attention to this training you will extract structures for everything you can imagine a candidate could possibly face during the consulting interview.
Memorizing helps, but I think is a bad idea. Our job is to internalize them and use them as a base during the recruitment process. If you feel completely lost during the interview because the interviewer is hostile or the topic is something you are just not familiar with, you would have your structure as a security blanket.
The structure will assist you in making an impression of being an organized and deep thinker. Add to it some logic and some common sense, be humble but confident, and you should be able to navigate yourself out of the “decline” category.
I would like to clarify here that when I mention structures I am not referring to frameworks, such as 4 Ps or Porter’s five forces. Frameworks are derived from the objective function, which is different for each case.
Frameworks should not be memorized. Instead, a unique framework should be devised for each case. When I mention structures, I refer to the thinking-process you need to follow during a specific activity or analysis, such as when solving estimation or brainstorming cases etc.
Data Case. With multiple exhibits data cases it is important to remember to use information from the previous exhibits when analyzing and interpreting each exhibit. This data case was a great example of how important this is.
The information in the exhibit that showed the percentage of Internet users engaged in various activities, combined with information from previous exhibits, could be used to determine the time people spent watching videos or on other Internet based activities, in 2011.
This was a huge insight for me. Being able to keep the information from each exhibit in my head and then draw it all together.
Score out of 10: 8
Strengths: Strong general knowledge and good common sense. Most of the time I diligently follow steps that are recommended by Firmsconsulting for various analysis such as estimation cases, brainstorming or data cases.
Opportunities: My communication is stronger than Felix’s but distinctively weaker than the partner training her and I use the partner’s level of performance to score myself.