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Scrum and Porter's Five Forces

How Scrum leverages business

24 August 2016

Daniel Castro
Azul Seguros


When we study the origin of Scrum, we learn that it goes back to the 1990s, when Jeff Sutherland and Ken Schwaber developed ideas that were along the lines of the Toyota Production System, which advocates the reduction of waste and a continuous flow of activities. When we look deeper for more administration theories or lines of thought, we will eventually read about Harvard Business School's Michael E. Porter and his Five Forces model. It is impressive how this model is clearly about what Scrum aims to minimize with its defense of a key concept: agility.

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How do these forces interrelate? The model states that in an industry niche or segment, there is a market to be explored and/or developed. This is the role assigned to the competitors; but to properly explore the market, you need to invest money to have your assets enabled. It also conceivable that if you invest in something, you will need to measure the return on that investment.
 

Threat of new entrants

This force is influenced by factors, such as barriers to entry, economies of scale, and benefits of a longer presence in the market.

What are the ways to reduce your entry barriers? One of the most obvious is to cut down your waste. But how? Are we talking about an automated business process? Or increasing efficiency in a broader way? Now consider that you need to reduce waste and the cost to enter. This is materialized in the present case with the cost to develop a product, release it to the market, and plant your flag. What happens if we take too long to release or our cost grows too much? We lose space in our segment.

Scrum addresses this case with practices that focus on what is most valuable in a product and ways to develop it faster, enabling its release sooner than the traditional Waterfall way of doing things. When you reduce your waste by prioritizing what delivers value and discarding what is too expensive compared with the expected returned value, you eliminate your entry barrier to the market. As an immediate consequence, you will reduce the money to be invested, which leads to an increase in your ROI.

Another interesting point about Scrum that is linked with this force is that Scrum is empirical. The threat of a new market entrant implies that some experience will be required to perform well. Scrum is empirical and focused on value delivery, which has a potential consequence that may almost be considered a luxury: to invest less. If you invest less and you speed your delivery, your cost to learn from your mistakes — they will happen — will be smaller, and it will be an empirical lesson, believable and extremely valued. In other words, when you release whatever you wish to release, you will learn, you will see in practice how it works and how the market responds. You will do things incorrectly and you will learn, but you will be able to act quickly, respond quickly, and correct quickly. Scrum is Agile, but by going a little bit further, it leverages your capacity to adapt faster.
 

Bargaining power of customers

Those who consume a product, service, or experience also have a determinant role in the market. The strength of its influence depends on:
  • How concentrated the consumers are (e.g., if there are a few of them with lots of buying power)
  • Whether they have a cartel organization behind them (although it is illegal, it still happens)
  • If they place large orders, whether your product has a significant differentiator from your competitors' (this is understood by the market as substitute goods)
Imagine the classical scene of explorers doing their thing in the African savannas. After some work, they find themselves in peril — a lion with a hungry gaze is approaching. Everyone sensing the danger runs away, trying to save their skin, and since everyone has a different speed, it is natural that a line of crazy, fearful runners will form. In most cases, it is more than enough not to be the last in line.

When you deliver your product sooner than the competition, you will also need to adapt fast, or at least faster than some of them. Launching a product quickly may result in an error that will require an even faster correction. Adaptability will answer that by addressing, in another dimension, how you are different from the others. Factors such as concentration of consumers and the characteristics of orders each consumer can place may also demand adaptability, but in a dimension of scalability.

Although scalability is not a concern of Scrum, it is an enabler for a faster adaptation of your product if you have it as an empirical emergent need. Note that if your hypothesis of scalability is previously validated by your product owner, then it is not an empirical emergent need.
 

Threat of a substitute product or service

This force has a strong synergy with the product differentiation factor described above, especially if you have an open economy with low entry barriers. In such a situation, others may come with a product that could replace yours. How do you react? Again, it's about adaptability. Agile methods focus on your capacity to deliver value faster, but this is not enough. It is meaningless to uphold a value delivery without a vision for your product that is backed by a strategic goal. The goal is to differentiate in a way that is emergent by observing consumer behavior. If you have observed a trend on consummation or use of your product that is somehow dangerous for your business, then you must act fast. Even considering that such product redefinition would require certain marketing activities, you must test your hypothesis soon and correct your course even faster. In other words, you must be Agile.
 

Bargaining power of suppliers

This force is not always sensible for products in IT, even though Scrum is not IT-specific. Factors such as the concentration of suppliers, whether the supplier understands that not supplying to you could benefit him by any hypothetical reason (e.g., substitute or replace you) or whether you think that it is possible to replace the supplier, can have an impact on your product and your strategy. Everything described here can be projected/perceived, but only empiricism reveals the real thing. As the FBI character Agent Scully says to Agent Mulder in the series X-Files, "The truth is out there, Mulder."

Assume that you've analyzed a trend about your suppliers that could threaten you. If you act fast in an Agile way, prioritizing value delivery with a vision and strategy behind it, your odds of minimizing or nullifying this trend could increase. You might make mistakes, but if you react quickly, the impact of the mistakes can be reduced.

We are talking about odds in a comparative way with a non-Agile method, not stating explicitly magical numbers of probability or providing certainty about a thing.
 

Competitive rivalry

It is understandable that if you do not differentiate yourself from the crowd, if you have a low number of loyal consumers/users, if the cost to change from your product to your competitor's is negligible (commodity product, again no differentiation), or if you have a significant number of competitors, you are in danger.

We saw what happened in the social network universe. Orkut was launched in 2004 and became popular in 2005, competing in audience/users with MySpace and Facebook, which have been on a trajectory. Then Orkut users started to decline while the Internet users grew. From 2009 to 2011, it tried to innovate; they had some audience spikes but nothing consistent until it integrated with Google in 2012. But it was not enough to retain its users, and the decline phase was officially underway. The end occurred in February 2014.

What happened? Well, they reacted and tried to innovate and compete in the market but failed. They were empirical but failed to notice what their users wanted as an experience, and they failed to investigate the reason for the behavior behind the migration from Orkut to Facebook. In other words, they acted fast but without a vision/strategy that could be backed by the emergent behavior of the consumer. I am not stating that a product can last forever but rather that it could live longer and adapt to satisfy new needs, similar to a brand repositioning.

Agile and Scrum are much more than what we learn in our training for the ScrumMaster certification, and the more subtle ideas lie deeper. Those ideas and concepts are only achievable when you look outside for the reverberations and echoes of agility in administration, strategy, marketing, and other fields of human knowledge.

I like to refer to Senator Gracchus' quote from the movie Gladiator:
"I think he knows what Rome is. Rome is the mob. Conjure magic for them and they'll be distracted. Take away their freedom and still they'll roar. The beating heart of Rome is not the marble of the Senate. It's the sand of the Coliseum. He'll bring them death — and they will love him for it."
The message is that if you want to survive and thrive, listen to your consumer and adapt!
 

Opinions represent those of the author and not of Scrum Alliance. The sharing of member-contributed content on this site does not imply endorsement of specific Scrum methods or practices beyond those taught by Scrum Alliance Certified Trainers and Coaches.



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