This is the second post of a two-part article.
If you wish to read Part 1 of this post, click here.
Continuing to Toast the Strategy …
I scheduled a study session earlier in the Spring semester just before the first exam. My former students know that I believe that Porter’s Five Forces (P5Fs) is a key concept in order to formulate and design a successful business strategy. The five forces defined quickly …
- Power of Suppliers, Power of Customers, Threat of Substitutes, Threat of New Entrants and Competitive Rivalry.
In a core course, I tend to focus on the first four because they are simple to explain, provide real-world examples and ultimately encourage student interaction and deep learning. Two examples of Threat of New Entrants:
- Airline Industry: High capital requirements, government and airport regulation, central reservation system (CRS), high industry expertise and knowledge. The last characteristic can relate directly to technology. From an operational perspective, an airline cannot operate without a CRS to process business activities associated with airline reservation tasks. Do you build it at the cost of millions of dollars and a year to design, develop and implement? Barrier to Entry: Very high.
- Social Media Influencer: Low capital requirements (e.g., laptop, internet connection, free account on various platforms), no government regulation, technology already developed (social media platform). Since the time, expense and knowledge required are minimal, it is easy to form this business. However, this type of business venture is also easy to be “knocked off”. Barrier to Entry: Very low.
The Question …
Shannon asked me to explain Porter’s Five Forces (P5Fs). I discussed two forces (customer and supplier power) as it relates to Walmart asking its supplier (P&G) to be responsible for the inventory and replenishment of product (the example of diapers).
Why would a supplier accept these business activities and incur the additional resources and costs to implement?
- Through research (yes, it is important 😊), Walmart found that its stores accounted for a significant percent of P&G sales for Pampers Diapers. While this information tends to be proprietary and confidential, I have seen numbers between 30 – 40% market share purchased in a Walmart.
- So, could Walmart require P&G to integrate their systems and ordering (replenishment) processes to maintain Walmart as a customer? Or risk the loss of a significant percentage of market share and potential sales?
- Therefore, in the P5Fs theory, the power shifts to the customer (Walmart). Walmart can use its significant market sales for baby diapers to its advantage. Sure, on pricing of cost from P&G. However, now for more of a partnership arrangement.
- I explained that the power of the customer and supplier tend to be defined in extreme opposites in a market situation (low vs. high). As Walmart’s power increases, P&Gs power (as the supplier) decreases. Explaining it like a seesaw.
Now to Shannon’s challenging question!
Dr. Sousa, are the powers of customer and supplier always opposite?
Oh my. First, I said, yes.
Then, I looked down. I have hundreds of examples of business and technology stored in my lecture brain database. Now, I was required to execute a database query of my brain!! Trying to consider an exploratory question that I did not have an immediate example to recall and discuss.
But then … BAMMM !!
I had a response. Using the Walmart / P&G / Pampers example …
- What would happen if P&G called Walmart’s bluff? If they severed their relationship, what would Walmart’s diaper product of choice to stock in their stores? Imagine if there was no other product to substitute on their shelves?
- What would happen if there the other alternatives for diapers that do not have the same quality or features as Pampers which are not well desired by the marketplace (parents).
In both cases, the two power seesaw categories (customer vs. supplier) would then re-balance to a more equilibrium point.
Phew … but then, I thanked Shannon for challenging me. Now, I have a new business strategy to add to my brain database to recall for lectures and consulting.
Importance of Concepts
I know that many students and business professionals are unimpressed (ok bored) with concepts. However, here is my point. Students and practitioners may not memorize various business concepts. I understand that. Compiling research and a dissertation creates the necessity to build and develop deep knowledge to support my vocation. Additionally, I am lucky enough to revisit these concepts each semester.
However, for those business professionals that do not have that luxury. Just to know that some of these important concepts exist is important. Then, Google the concept. Research some case studies available on the Internet. Use LinkedIn Learning and Ted Talks. Examples to translate and apply a concept or technique into business strategy and analysis.
Being equipped with this and other types of knowledge provides that confidence to succeed in business and leadership positions. A command of business. It works and Shannon proved that.
Returning to the Cell Phone
Strategy is About the Toaster, Not the ElectricityRemember the cell phone discussion at the beginning of this post? In the last class, I always ask about the first topic I discussed in the first class. They (thankfully) seem to remember that discussion. And (thankfully again) now understand that strategy is the real technology puzzle piece!
In this case, Porter carries the weight.
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