In American football, twenty-two players compete to dominate the playing field. On one side, eleven players, by default, control the ball and are called the offense. The offense’s goal is to get the ball into an endzone at the end of their one-way path across the field. Opposite the offense, the other eleven players make up the defense. The goal of the defense is to stop the offense from moving the ball into the end zone and scoring points.
During gameplay, offenses utilize elaborate schemes to move the ball forward – their end goal is to pile up more points than the offense of the opposite team. Teams develop complicated tactics to get the upper hand over their competition.
Meanwhile, over thousands of games, the players in every position on the field have evolved towards asymptotically perfect physical and mental prowess. Players, and their bodies, hyper-specialize into functions that average size people are unable to accomplish. However, the hyper-specialized, extremophile athletes achieve victory only in concert with each other and with the support of a dizzying logistical operation behind the scenes.
The product of each match-up is years of effort by thousands of individuals represented by both teams scrimmaging each other in a timed circus for sixty minutes every Sunday. Surprisingly, even after all the scheming, effort, planning, and strategy, 60.7% of professional football games are decided by one score or less (8 or fewer points).[i]
One might conclude that because so many games get decided by less than one score, the tendency would trend away from individual team exceptionalism over long periods. After all, how can a team create space for itself to excel when it’s only ever one score from a loss on any given week?
Fans of American football, we know that, to our incredible frustration, some organizations manage to leverage all the variables above and defy the trend toward mediocrity. Somehow in a dark deal with an unmentionable deity, some teams consistently deploy winning teams year after year after year. Something about these dynastic organizations enables them to rise above a whole league of teams and $billions spent to beat them.
It’s not luck or random chance that enables some organizations to win in even the most competitive markets. It’s strategy.
Recall that both teams on a given field represent the organizations that pursue training, play design, personnel, player management, contracting, budgeting, culture, travel, and a thousand other variables.
Your business is like a professional football team. You have hyper-specialized talent. Many, perhaps most, of the activities that bring income into your business require elaborate dances between that talent. How, absent constant supervision and redirection, do they stay on target? What established culture, rituals, and standards do you have that subtly and, if needed, overtly communicate your way of doing things? Does your team know WHY you do something that way? Is what you’re doing making a difference? How do you know your way of doing things is better?
In this chapter, I will provide you with analytical frameworks to figure out which strategy you use. Moreover, you will develop a deeper understanding of environmental factors influencing your industry’s present and future state. Perhaps most importantly, you will also see a framework for comparing against your peers or yourself and competing on the points that matter.
Activity: Measuring Your Points
This exercise will help you determine how your top-level expense budgets break out. As you think critically about these points, you’ll see ways to compare your business against a future version of itself or your competition.
First, imagine every dollar coming into your business. Each of those dollars has some amount of cost-allocation associated with it. Use the table below as a guide to lay out those costs.
The goal is to attribute, best as you can tell, how each dollar gets apportioned. Your final apportionment might look something like this.
You might get tempted to say the data tells all the story, but you should try to tell a brief story with each item in the notes section. Even assumptions will be valuable as we further explore your business’s strategic positioning.
For many, this next step is very challenging. Your task is to identify one or two common significant measurable components of business between yourself and your competition.
To kickstart your imagination, potential examples for law firms and retail are below:
Now you need to take note of your annual revenue.
Finally, the last step is normalizing your first table for your key measurable component and revenue. This step requires a little bit of math. I share my method with you in the table below.
Once you have normalized everything, you should have an efficient method for consistently comparing data across organizations or time. This value chain analysis tool will also help you uncover comparative competitive differences between yourself and your goal or yourself and your competitor(s).
Note: I can’t emphasize enough, take notes of the differences, and use the analysis space liberally.
Now let’s see a practical application of this tool.
Staying on Target, the Room for More than One Successful Strategy in Your Market
By 2013, Aldi had staked out a niche in the discount grocer segment; its US market penetration included 1,188 stores throughout thirty-two states and plans to open an additional 650 stores over the following five years.
Aldi’s principal sustainable strategy was its devotion to innovating in controlling costs, above all else, in ways their competition could not or would not follow. Their main competitors, Walmart, Kroger, and traditional grocers, typically focused on long-developed logistics expertise and targeted sales/marketing to sell groceries. In contrast, Aldi’s core strategic advantage was an extreme focus on minimizing costs and combining activities throughout the value chain.
During this same period, Walmart and other competitors didn’t sit still. Big and small grocers alike sought to use their key competitive advantages to redefine and modify their approach to low-cost, no-frills groceries.
Let’s look closer at one of Aldi’s primary competitors, Walmart. One advantage a supercenter like Walmart had was the co-location of shopping opportunities. Other advantages of Walmart and others were highly optimized logistics operations. And, of course, a reputation for value.
Whereas Aldi had a significant operations advantage over nearly everyone in the market, a competitor like Walmart could quickly pivot to new ways of doing business due to a world-class logistics acumen.
At Walmart, even when groceries were not what a consumer was shopping for, they still often recognized the convenience of doing a small grocery shop while at the store. Walmart knew this and focused considerable effort on pivoting towards discount grocery.
The result of Walmart’s expansion into discount groceries, by 2012, groceries made up 55% of Walmart’s $264billion in US revenues. Moreover, in addition to selling groceries from their highly profitable supercenters, Walmart was also opening neighborhood markets and stores similar to Aldi’s signature grocery stores.
This dynamic is a perfect opportunity to demonstrate the power of the value chain analysis we just learned.
While low-cost was both companies’ benchmark, Walmart & Aldi achieved their goals using different approaches. Regarding the final cost for consumers, Aldi beat Walmart’s prices, shaving an additional 10-15% for the consumer. Moreover, besides lease/rental costs and purchasing power, Aldi’s operations were typically more cost-efficient than Walmart’s. And despite lesser capabilities in logistics and technology, Aldi consistently delivered certain goods to the grocery consumer for less than Walmart could.
Fundamentally, both firms sought to deliver the best value to the consumer for the least cost. However, they approached value production in wholly different ways.
As of 2013, Aldi faced a more significant threat from Walmart than Walmart did from Aldi. To overcome the Walmartification of discount grocery, Aldi needed to scale quickly.
In 2022, Aldi is the fastest-growing grocery chain in the United States. [ii]
Where are You? Where are You Going?
What do you think about Aldi vs. Walmart? Throughout the book, I pepper examples of businesses implementing strategy in various ways. Subtly referenced in one of the diagrams is the Blue Ocean strategy. If you haven’t yet sought to understand Red Oceans vs. Blue Oceans, I highly recommend you read Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by Chan Kim and Renée Mauborgne.
In this next activity, you’ll learn about Porter’s Five Forces model. If you’re unfamiliar with this strategic framework, you should read The Five Competitive Forces that Shape Strategy.
Activity: Predicting the Future of Your Industry
You’ll need to create three boxes on a scratch piece of paper. One labeled “My industry,” one labeled “Classification” or “Threat Assessment,” and one labeled “Threats of New Entrants.”
Note: You’ll be repeating this five times. Each paper will have a different threat analysis. If this is confusing, don’t worry; here’s an example of how to lay out your first model.
For your industry, you want to make sure you aren’t talking about your business. You might, for instance, sell motorcycles, but your industry would more appropriately be automobile sales. This exercise/activity helps you map threats to your industry – which we’ll then give you insight into where your Blue Ocean opportunities may lie.
In your Threat of New Entrants analysis, your task is to consider your industry’s resilience against new companies entering the market. Think about the barriers those entrants face:
- Do existing firms in your industry have cost advantages vs. a new competitor entering?
- Are there regulatory frameworks that create a high bar for entry?
- Does it cost a lot for new businesses to enter the industry?
- Are there brand names that dominate the industry?
- Do consumers in your industry pay a high or low (personal, financial, time) price to switch firms?
- Would new entrants find it difficult to secure a supply chain?
Your answers to this section and the following four sections will help you visualize the profit potential of your industry. You should also start to bring into focus your industry’s unique threats and potential opportunities.
Next, we repeat the process but change the analysis to Supplier Power. Your task is to look upstream at your suppliers’ power over your industry. You want to be aware of their ability to impact your industry’s profitability – and their ability to integrate forward and eliminate the need for distinct firms in your market.
Things to think about in this analysis:
- Are suppliers concentrated, or is your supplier chain diversified/diversifiable?
- Is there a high or low cost to switching suppliers? Why?
- Is there a credible way the suppliers can threaten your industry?
- Is the supplier market competitive, is there a lot of cooperation in their market, or is it commoditized?
- Are there substitutes for what suppliers provide? (Porter gives the example of pilots’ unions being able to exercise substantial power over the airline industry because there are no substitutes for trained pilots).
Here’s an example of a Supplier Power analysis for legal services/law firms.
Your task in the following analysis is to think about your customers’ ability to influence profit within your industry. Supplier power is looking backward in the value chain; Buyer Power is peering forward. If your buyer isn’t the end consumer, you’ll also want to think about the threats your buyers may face from their buyers (hint, this will be relevant later in this chapter).
Things to think about for your Buyer Power analysis:
- Are the buyers fragmented, or can they coordinate?
- Are end consumers familiar with the product? Can they demand product specifications from intermediate buyers?
- Are buyers segmented or differentiated by some method (geography, income)?
- Are buyers able to integrate backward?
- Is the buyer group price sensitive?
- Do producers (your industry) have access to alternative buyers?
Here’s an example of a Buyer Power analysis for legal services/law firms.
Your next task is to look at the Threat of Industry Substitutes. Are there other industries, or external firms, that can produce the same fundamental product but by a different method/means? Porter again gives good examples: Email as a substitute for express mail is one example. Another example, also doubling as a great demonstration of integration forward, is the trend of airlines offering online booking & trip planning instead of the traditional travel agent.
Things to think about for your Threat of Substitutes analysis:
- Do consumers pay high or low switching costs to leave your services? Low = high threat, high cost = low threat.
- Are cheaper substitute products available?
- Are substitutes able to achieve similar product quality?
Here’s an example of a Threat of Substitutes analysis for legal services/law firms.
And now, the last of your analysis is the Degree of Rivalry within your industry. You will want to look at how your competitors compete: price, discouraging, advertising, service, product differentiation, staff, and other factors.
Things to think about for your Degree of Rivalry:
- Are there standout differentiators in the market – capable of shifting market/industry culture?
- Are there a lot of competitors or a few? Are they different in size or the same? How does this influence your industry and the profit they can derive?
- Are exit barriers high or low? Do firms stay in the market, even at negative returns? Why?
- How intense is the rivalry? Intense rivalry can be destructive to profitability if the rivalry focuses on cost-centric competition.
Here’s an example of a Threat of Substitutes analysis for legal services/law firms.
Congratulations, you just finished the bones of an excellent strategic framework for your business. This structured analysis helps me focus on an industry as a whole and how the five different forces affect a given firm’s profitability potential.
Here is an example of what you’d see after this exercise. Note, Porter warns against misusing this analysis. You shouldn’t use this framework to declare whole industries worth avoiding. The five forces tool should help you derive strategy and strategic opportunities and guide you on where to focus deeper. In every case, a business/industry has one or two of these five forces that draw your attention. Explore those friction-causing forces with vigor.
Now that you know your industry’s dynamics let’s create magic. You’ll see in the next section that bridging this exercise with the Blue Ocean method pulls surprising realizations about strategy that aren’t immediately obvious to all parties.
Let’s redirect back to looking again at Aldi vs. Walmart; both companies had strategies. Arguably, both companies succeeded in the pursuit of those strategies. But what about other factors; New market entrants, a strategy no one has thought of, a black swan event for retail? How about the entry of mass-market grocery delivery via Safeway/Albertson & Amazon in the late 2010s? Or the emergence of subscription meal plans? Or backward integrations, where companies own the value chain of their products closer to distribution and production?
Focusing only on a given company’s strategy can sometimes blind us to the industry-wide reason why that strategy succeeds or fails. Crafting a strategy and accompanying strategic plan for your company should be based on an insightful understanding of your industry and where it will be tomorrow.
Having worked through the last activity, let’s talk about how Netflix’s strategic approach to tomorrow redefined an entire industry in less than ten years.
Netflix in 2011, Strategically Redefining the Home Video Entertainment Industry
By 2011, Netflix had positioned its core products well to maintain a sustained strategic advantage in the home video entertainment industry. They had done this using a dramatically different business model than their de-facto competition, Blockbuster. Their efforts to eliminate late fees, curate rental queues, and develop a video-on-demand service with original features saw explosive growth and eminent market dominance.
In understanding the story of Netflix, Blockbuster, and the home entertainment industry, it’s essential to recognize that Netflix and Blockbuster existed in a market as intermediary brokers. Their business model didn’t produce or consume the film entertainment; it was the middle person between producer and consumer.
Blockbuster, the industry behemoth in home rental from the mid-1990s to the mid-2000s, operated thousands of physical storefronts, where consumers could impulse rent new releases and select stock films.
In contrast to Blockbuster’s store-based operations, Netflix enabled consumers to obtain movies quickly via one-day US mail delivery. Additionally, consumers could stream Netflix’s growing library via their TV, set-top box, phone, computer, and other internet-connected devices.
As you might imagine, the logistics of managing Blockbuster’s movie inventory, storefronts, and advertising were substantial. For comparison’s sake, by the time Netflix’s gross revenue approached the scale of Blockbuster’s (Netflix in 2010 vs. Blockbuster in 1996), Netflix’s SGA costs were comparatively ¼ that of Blockbuster’s.
As a technology company delivering entertainment, Netflix operationalized emerging technology faster and better than Blockbuster. In addition to reducing physical overhead, Netflix was an early user of innovative algorithms and interactive queue building. Recall that for Blockbuster to implement a marginal change; they would have to roll the change out to thousands of storefronts and tens of thousands of associates. Netflix, in contrast, could release a new version of itself daily, weekly, or at any interval they wished; the app stores would automatically update the software.
One of the most intriguing differences between the two models was that Netflix never charged late fees. In contrast, Blockbuster had come to rely on late fees for a significant portion of its operating income ($600m + annually). Being founded because of an obscene late fee, Netflix bet that consumers would be willing to spend a certain monthly amount to eliminate a frustrating and expensive aspect of Blockbuster’s business model. A risk considering that consumers were already willing to pay some amount of late fees; forgoing late fees altogether was tantamount to turning cash away.
Late fees or not, by 2010, Netflix had won the physical format rental war. Blockbuster’s core competencies left them at best at parity with imitation DVD on-demand services. They even waived late fees in the end, which only accelerated their precipitous decline.
In the end, the differentiation was in the delivery methodology to the consumer. The consumer probably didn’t pay much attention, especially as Blockbuster started to imitate DVD by mail and streaming, but behind the scenes, these were two fundamentally different operations, which made all the difference. However, both Blockbuster and Netflix had a more significant challenge on the horizon.
The same technology that enabled Netflix to redefine home entertainment and corner Blockbuster’s market was now allowing a scenario that elevated supplier power dramatically. As average consumer internet bandwidth increased, streaming video on demand became practical and affordable across more devices. Netflix was the first mover to broker entertainment from production studios using streaming at scale. However, one must always be wary if suppliers need brokers after a sea change in their industry.
From the beginning, Netflix recognized the eventual pancaking of production, supply, and entertainment delivery. Netflix’s strategic positioning (See the Blue Ocean analysis) and the gap Netflix’s strategy was seeking to fill (See Gap analysis below) was not home video rentals or brokering entertainment via streaming. They needed to get into production because suppliers would sell directly to consumers at some point.
The sad part of this tale is that while Blockbuster contorted itself in every possible way to imitate Netflix, they never realized the purpose or intent of Netflix’s strategy or the power of the forces shaping the redefinition of their mutual industry.
Ultimately, Netflix’s video-on-demand model would shift the market from inventory-intensive operations to technology-based operations. At the same time, suppliers’ barriers to directly selling to consumers were disappearing. Respective of this threat, in 2011, Netflix invested heavily in self-produced entertainment. House of Cards and Arrested Development: Season 4, for example, were the first of a large inventory of future Netflix-produced content.
Netflix was shifting to the version of the company we know today; a supplier-distributor in a market full of similar participants.
The home video entertainment industry is fascinating and complex, still. Today there is a robust market of producer-distributors. The result of this evolution is a wide selection of production studio subscription options for new and original content. However, Peacock, the NBC version of direct-to-consumer streaming services, recently posted multiple quarters of zero subscriber growth. Netflix is laying off employees and seeing stagnation, and Disney streaming is innovating release scheduling and premiere showings.
Suppose you look at the strategy of the firms in this industry and apply these tools again. Given the environment today, what will you be able to estimate about the future trends in home video entertainment?
- Can you determine why the average length of episodes in a season has reduced?
- Can you make an educated guess as to why seasons are irregular, some new seasons of shows available within months, others after years?
- Can you explain why some platforms push towards dual release (in theater and in-home)?
- Will the industry conglomerate or disintegrate?
- Which force(s) is/are acting strongest in the market presently?
- What are the Blue Oceans in the entertainment industry?