Hi and welcome to Be The Flagship with our podcast host, Jeff Parsons.
This is where we tackle the day-to-day talent management challenges you face.
And now over to our host.
Take it away, Jeff.
Hello and welcome back to Be The Flagship.
I am your podcast host, Jeff Parsons.
And in this episode, episode three of our series, Finance and Operations, we continue
our discussion with finance expert and I call him my financial guru, Jeff Smith.
Jeff is the founder of Dynamic Strategy LLC.
And his contact information is jeff.smith at dynamicstrategyllc.com.
And that's jeff, G-E-O-F-F dot Smith at dynamicstrategyllc.com.
I'll give you this information near the end of our podcast today.
But again, welcome, Jeff.
And we continue our discussion.
Last week we left off in talking about some of the components of strategy and why it's
important for operations leaders to focus on strategy more than just a day a month.
Right?
And so be back in just a minute with Jeff Smith.
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Talent who will perform to your expectations, talent who will stay and grow with your organization.
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Okay, we're back again with guest speaker Jeff Smith.
Jeff, thanks for joining us again today.
Glad to be back.
So Jeff, if we go back in time to last week, we left our discussion off in talking about
the importance of operations doing internal assessments, assessments of their effectiveness
and how finance assists in that process.
So we left off in discussing internal tools for assessment.
So we're going to get into that subject today.
So you mentioned tools for assessment, internal assessment, in terms of where are we good,
where are we not so good, where do we need some help, you know, and that sort of thing.
And so you mentioned two specific tools, the SWOT analysis and GAP analysis.
So sort of briefly talking through those two tools.
Yeah, yeah.
So there's as many tools as you can imagine, right?
You go online and you Google tools for internal assessment.
You're going to get like acronyms coming out your ears.
SWOT stands for strengths, weaknesses, opportunities and threats.
And the reason why I included that is not because it's better than any other tool, it's
because everybody knows about it, right?
And so it's easy to talk about.
Strengths refer to what are the, how it's an internal focus.
It's what are the things that my company does well, right?
And if you look at it like from an individual like sports sort of analogy is, you know,
I enjoy running.
What do I do well?
I'm not a sprinter.
I'm a long distance runner.
So I run slowly very well.
The weaknesses are kind of like the opposite of your strengths, right?
Sprinting, I'm not a good sprinter, right?
And so your strengths and weaknesses should be very internally focused.
It's got to do with capabilities, right?
Your opportunities and your threats have to do with the environment that you operate in.
And so opportunities might be environmental opportunities, business opportunities.
It might be a changing technology situation or something like that.
Whereas threats are, again, more externally focused, they tend to be like, you know, maybe
regulations might be changing.
It could be that there's a threat of somebody else coming into the market with this disruptive
technology or a disruptive sort of business pattern.
So getting a lay of how things are and your strengths, weaknesses, opportunities and threats
helps you to assess you and your business.
Whereas a gap analysis is more of a, here's where I am now.
That's the baseline.
And then here's where I want to be.
And so there's usually a gap between where I am now and where I want to be.
And then we assess our people, our processes and our technology to see how we can get to
our future state.
Okay.
All right.
So it's very future oriented, but you have to understand where you are today and what's
getting in the way of getting you to where you want to be.
Yeah.
Gotcha.
And then addressing those gaps.
Okay.
So those tools are used for internal assessment.
What about the external environment?
So again, you can use as many tools as you want, you know.
Okay.
I am a big fan of Quarters Five Forces because it takes this structured approach to looking
at the environment.
And it's Quarters Five Forces that shape competitive strategy is what it's really called.
Okay.
Quarters Five Forces.
Okay.
But it really looks at five different aspects of the competitive environment.
The first one being the rivalry of competitors.
How do your competitors act in your environment and what influences do they have over your
activities?
Okay.
The potential of new market entrance.
How does that influence your plans for the future?
Supplier strengths.
What impact do your suppliers have on your business?
How much power do they have over your pricing, your availability, the quality of your product?
Right?
How much customer strengths?
Do customers need to do business with you or do they choose to do business with you?
How much power or do they influence have over the price that you can offer in the marketplace?
Interesting.
Okay.
And then you've got a threat of substitutes.
Is my product completely unique or can somebody go in and find something that's similar?
Right.
And they spend their money on something different that will satisfy the same need.
Okay.
And the comments you made around customer strength is really interesting.
Do they feel that they must do business with you?
Do they see that value there or that they can do business with you or they can do business
with someone else?
Yeah.
If you think about filling up your car, the various oil and gas companies, they try to
differentiate.
We put Tecron in our gas or put Sanitiv in our gas.
Right.
But really, it's gas, right?
Yeah.
So you go and you fill up with, I don't know, 87 or 92 or whatever it is and you pay whatever
the rate is at the pump.
Right.
On one hand, you have no choice.
You have to put gas in your car.
But on the other hand, you don't have to buy it from Shell.
That's right.
You can buy it from anybody and have the same little come.
So while there's a stickiness to the product itself, there's not a stickiness to the actual
company that's offering the product.
That's a great example.
So going back to the Porter's Five Forces, the first thing you have there is rivalry
of competitors.
So what do you take into consideration when you're analyzing competitive rivalry?
Yeah.
So the first question is how many competitors?
The number of competitors that you have in the marketplace is going to impact the forces
that impact strategy, the amount of growth within the industry.
I'll give you an example as my wife owns a business in the senior services industry.
There's something called the Silver Tsunami, which is a nice way of saying that all the
baby boomers are getting older.
Right?
And so there's this large expected growth in the marketplace, which means that there's
a lot of new competitors and new industries being created in the market.
And so there's a lot of industry growth based on the expected aging of the baby boomers.
Got it.
Pricing structure is what is the pricing structure amongst your competitors?
Right?
So you have things like first mover advantage.
We talked about gas.
If you've got four corners of an intersection, a gas station on each corner, they all decide
that they're going to charge $5 a gallon for gas.
Right?
They're not going to talk about it.
Just one will put up a sign that says $5.
Everybody else then within a couple of hours will put up their sign that says $5.
Right?
Mm-hmm.
So it doesn't make any difference who you go to.
Now what happens is that somebody decides that they're going to charge $4.85.
Right.
$0.15 a gallon.
And the funny thing is, my car takes 10 gallons of gas.
So $0.15 a gallon is $1.50.
Right.
It doesn't make any sense for me to even cross the street for that.
But we're wired to do so.
It's the outtake, right?
Exactly.
And so that first mover advantage is the guy that offers the gas at $4.85 now gets people
coming into his gas station.
Right.
So what's going to happen is everybody else is going to follow suit.
That's right.
Right?
And then you have similarity amongst products.
Right?
So where there's a high differentiation among products, there's more control that the provider
can exercise.
Where there's little differentiation between products, there's little control that the
provider can influence.
And then there's barriers to exit.
Right?
Do I have a large amount of capital invested in this business?
Is it going to cost me more to exit the business than to just discount my prices?
And so you think about airlines.
They've got billions and billions of dollars invested in airport deals, in their planes,
for people, all the infrastructure to move luggage around and fuel planes and all that
sort of stuff.
It'll cost them more to shelve their business than it would be to operate an empty aircraft.
And you saw that in the pandemic where there were airlines that were operating empty aircraft
just to maintain their positions at an airport.
No, that's right.
Yeah.
Very interesting.
And again, going back to Porter's model, it references, it's important to understand
your potential market entrance.
Those new competitors, I guess, entering the marketplace.
Right?
And so how do you analyze that?
What does that analysis look like?
So if there's a new entrant, that can impact your strategy.
It can impact how you bring things to market.
And so when you're assessing the risk of new entrants entering the market, you look at
things like economies of scale.
Right?
Right.
And so economies of scale are the most important thing in the automotive industry.
And so you know that in order to be profitable, an auto manufacturer has to be able to manufacture
a lot of vehicles.
Right.
So economies of scale presents a large difficulty for companies that enter a market.
For Tesla to become profitable or even efficient at manufacturing vehicles.
And so that path to profitability reduces the number and the threat of new entrants.
So you've gotten, you know, right now the electric vehicle market is kind of in turmoil
because they're not able to make enough vehicles to really be efficient at it and to offer
them at a price that the customer is willing to pay.
Right.
You got product differentiation.
You know, the more patents you can put on a product, the more secure it is.
Right?
So we talked about gasoline.
Gasoline is, there's no product differentiation even though they try to introduce it.
Right.
Whereas, say an iPhone, an iPhone has product differentiation.
It's patented.
It's got proprietary software.
It's got proprietary design features.
And so there's not going to be another Apple like product that's going to completely fit
that model.
Right?
There's other smartphones.
Right.
But it's not going to be an Apple and it's not going to operate within the Apple environment.
Right.
You got capital.
There's capital requirements.
How much does it cost to actually set up a business?
Right?
And so there's some businesses where all you need is four wheels in a trunk, like a trapling
salesman.
Right.
Barriers to entry.
So anybody can do it.
Then there's regulations.
You know, how many regulatory requirements do you have to jump through in order to get
into that business?
You know, as an accountant, there's a lot of regulations.
I have to be certified.
I have to, you know, there's a whole bunch of things that I need to do in order to call
myself an accountant.
Right.
So in industries where there's a lot of regulation, it increases the barrier to entry.
Okay.
How much does it cost to switch for the customer to switch from one thing to another?
A lot of what's going on right now in the marketplaces, NVIDIA, is having a great run
of it because they were a market leader in developing the AI integrative technology.
Right.
And their chips are embedded in a lot of different companies.
And the cost of switching is huge.
So the threat of new entrants into the marketplace is fairly low because the customers are going
to be like, I can't switch.
It's going to cost me too much to retool my factory.
Great points, Jeff.
Tell you what, Jeff, let's take a final break and then we'll be back to wrap up our discussion
in this episode of Be the Flagship.
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To learn more, contact Jeff Parsons by email at jeff at flagshiptalent.com or by phone
at 1-800-530-4189, extension 101.
Okay, Jeff.
Going back to Porter's model.
The model references supplier strengths and understanding the strengths of the suppliers.
So again, talk us through the analysis of how you get that better understanding.
What types of things do you look for?
Yeah.
So it's really answering the question of how much influence does my supplier have over
the availability of product, the price of the product.
Okay.
And so number one is how many suppliers are in the marketplace, right?
So if I'm talking about screws, nuts, fasteners, those sort of things, there's a ton of different
suppliers in the marketplace.
Things sell at market price, right?
Whatever the competitive price is, you can get it.
Okay.
Whereas if there's a very few number of suppliers in the marketplace, and we'll go back to computer
chips for example, there's probably I think less than half a dozen chip manufacturers
in the entire marketplace.
Okay.
So you've got very few options of where to go.
You've got the availability of substitutes, right?
Do I have to have this proprietary fastener to hold my two pieces together?
Or can I buy an off the shelf part?
Right?
And so when you're designing a product and you think about how much influence I'm giving
to my supplier by requiring a special sort of fastener or a special sort of part of some
sort, then there's the cost of switching.
Before you go there, going back to the availability of substitutes, that's also dependent upon
your customer requirements, depending on the industry at least based on your customer requirements,
right?
Because they have certain specs if you're delivering them to them.
And if you change a supplier, it may look like a substitute out there, but is it going
to create an issue between you and the customer in terms of their specs and meeting their
specifications?
Yeah.
So a good example of that.
So I worked for a machine tool manufacturer at one point in my career.
And so we had motors that were American made motors.
And then we had motors that were cheaper, but they came from offshore, right?
When we sold into the deep South, they wanted those American made motors because they wanted
to know that their machine that they were doing their machining on was made in America,
right?
Even if the other motors were just as good and cheaper, we could not substitute out those
parts.
Gotcha.
Okay.
Sorry to interrupt you, Jeff.
No worries.
It's a good rabbit hole to jump down.
So switching costs, you were talking about there.
Yeah.
The cost of switching, right?
So sometimes you've got a vendor that's embedded in your company, right?
So it might be that there's a lot of tooling that needs to be switched out.
Again, when I was working for that machine tool manufacturer and we had to switch foundries,
that meant that we had to switch all of our molding to a new foundry.
And that was a very, very expensive and time consuming endeavor.
The reason why we had to switch was because the foundry that we were using was going out
of business.
And so we had no choice, but we had to do it in a real structured format because it's
so critical to make sure you get the quality and the timing right.
Forward integration.
And that's just the fancy way of saying is, can my supplier make my product, right?
Okay.
Oh yeah.
Right.
So what is the risk of my supplier going, why am I selling these parts to these guys
when I could just make the whole thing on my own?
Right.
And so when you're looking at forward integration, you're looking at, am I outsourcing my proprietary
or my competitive advantage?
Because that increases the risk of forward integration.
Am I giving too much of my product, sourcing too much of my product from one supplier,
which would then give them the opportunity to become a competitor?
Gotcha.
Right?
Okay.
The other one is industry importance.
How important is this supplier to the industry as a whole?
And so if they've got a high level of importance, then they're going to have a lot of influence
over the price and availability of the product.
Great discussion, Jeff.
We've talked about suppliers.
Now let's transition, shift our focus to the customers, but let's do that next week.
This is a great stopping point for our discussion for this episode, but next week we'll pick
up our discussion.
We'll begin with Jeff Smith and we'll begin our discussion and focusing on customer requirements
and how finance can assist operations in meeting the needs of their customers.
Before we go, let me give you Jeff Smith's contact information again.
It is jeff.smith and it is G-E-O-F-F, Canadian spelling, jeff.smith at dynamicstrategylc.com.
If you need to reach out with questions regarding this episode or previous episodes, feel free
to contact him via email, jeff.smith at dynamicstrategylc.com.
It's been another great episode, Jeff.
Can't wait to pick up the discussion again next week and we'll talk about our customers.
To our listeners, don't forget, work hard, strive hard to become the flagship within
your industry.
For now, goodbye.
Thank you for listening to this episode of Be the Flagship with Jeff Parsons.
We hope you enjoyed it.
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Until next time, take the step to become the flagship in your marketplace.