Further Topics in Industry and Competitive Analysis Further Topics in Industry and Competitive Analysis

Extending 5-forces analysiso Does industry matter?o Complementso Dynamic competition

Game Theory

Competitor Analysis

Segmentation

Strategic Groups

OUTLINE

Does Industry Matter? Does Industry Matter?

  Percentage of variance in firms’ return on assets explained by:

  Industry effects

Firm-specific effects

Unexplained variance

Schmalensee (1985)

19.6% 0.6% 80.4%

Rumelt (1991) 4.0% 44.2% 44.8%

McGahan & Porter 1997)

18.7% 31.7% 48.4%

Hawawini et al (2003)

8.1% 35.8% 52.0%

The Value Net The Value Net

COMPANY

CUSTOMERS

SUPPLIERS

COMPLEMENTORSCOMPETITORS

SUPPLIERS

POTENTIALENTRANTS

SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrantsThreat of

substitutes

COMPLEMENTS

The suppliers of complements create value for the industry

and can exercise bargaining power

Five Forces or Six? —Introducing ComplementsFive Forces or Six? —Introducing Complements

Dynamic CompetitionDynamic Competition

Porter framework assumes:(a) industry structure drives competitive behavior(b) Industry structure is (fairly) stable.

But, competition also changes industry structure:

• Schumpeterian Competition: A “perennial gale of creative destruction” where firm strategies continually transforms industry structure innovation overthrows established market leaders

• Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsolescing or neutralizing opponents’ competitive advantages

Implication: Under dynamic competition, 5-forces framework isless useful—Competitive behavior and industry structure jointly

determined by underlying conditions of technology, demand & costs

The Contribution of Game Theory to Competitive Analysis

The Contribution of Game Theory to Competitive Analysis

Main value:1. Framing strategic decisions as interactions between competitors2. Predicting outcomes of competitive situations involving a few,

evenly-matched players

Some key concepts:1. Competition and Cooperation—Game theory can show conditions

where cooperation more advantageous than competition2. Deterrence—changing the payoffs in the game in order to deter

a competitor from certain actions3. Commitment—irrevocable deployments of resources that

give creditability to threats4. Signaling—communication to influence a competitor's decision

Problems of game theory:Useful in explaining past competitive behavior—weak in predicting future competitive behavior.What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions

PREDICTIONS

• What strategy changes will the competitor initiate?

• How will the competitor respond to our strategic initiatives?

OBJECTIVESWhat are competitor’s current goals?Is performance meeting there goals?How are its goals likely to change?

STRATEGYHow is the firm competing?

ASSUMPTIONSWhat assumptions does the competitorhold about the industry and itself?

RESOURCES & CAPABILITIESWhat are the competitors’ key strengths and weaknesses?

A Framework for Competitor Analysis A Framework for Competitor Analysis

Segmentation Analysis: The Principal Stages Segmentation Analysis: The Principal Stages

1. Identify key variables

and categories.

2. Construct a segmentation matrix

3. Analyze segment attractiveness

4. Identify KSFs in each segment

5. Analyze benefits of broad vs. narrow scope.

Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable

Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus

Opportunities forDifferentiation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Buyers

Characteristics of the Product

Characteristics of the Product

Industrial buyersIndustrial buyers

Household buyersHousehold buyers

Distribution channelDistribution channel

Geographicallocation

Geographicallocation

•Size•Technical sophistication•OEM/replacement

•Size•Technical sophistication•OEM/replacement

•Demographics•Lifestyle•Purchase occasion

•Demographics•Lifestyle•Purchase occasion

•Size•Distributor/broker•Exclusive/ nonexclusive•General/special list

•Size•Distributor/broker•Exclusive/ nonexclusive•General/special list

•Physical size•Price level•Product features•Technology design•Inputs used (e.g. raw materials)•Performance characteristics•Pre-sales & post-sales services

•Physical size•Price level•Product features•Technology design•Inputs used (e.g. raw materials)•Performance characteristics•Pre-sales & post-sales services

The Basis for Segmentation: Customer and Product Characteristics

Opportunities forDifferentiation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Buyers

Characteristics of the Product

Characteristics of the Product

Industrial buyersIndustrial buyers

Household buyersHousehold buyers

Distribution channelDistribution channel

Geographicallocation

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

Segmenting the European Metal Can IndustrySegmenting the European Metal Can Industry

Food Fruit Juice Pet food Soft drink Beer Oil

Steel 3-piece

Steel 2-piece

Aluminum 2-piece

General cans

Composite cans

Aerosol cans

Segmenting the World Automobile MarketSegmenting the World Automobile Market

US& Canada W.Europe E.Europe Asia Lat America Australia Africa

Luxury cars

Full-size cars

Mid-size cars

Small cars

Station wagons

Passenger vans

Sports cars

Sport-utility

Pick-up trucks

0

5

0

10

15

20

25%

100%Share of industry revenue

Auto loans

Leasing

Warranty

Gasoline

Auto insurance

Aftermarket parts

Auto rentalO

per

atin

g m

arg

in

Auto manufacturing

New car dealers

Used car dealers

Service & repair

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

SEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost efficiency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Segmentation and Key Success Factors in the U.S. Bicycle Industry Segmentation and Key Success Factors in the U.S. Bicycle Industry

Strategic Group AnalysisStrategic Group Analysis

A strategic group is a group of firms in an industry

that follow the same or similar strategies

Identifying strategic groups:

• Identify principal strategic variables which distinguish firms.

• Position each firm in relation to these variables.

• Identify clusters.

Broad

PRODUCTRANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

NATIONALLY FOCUSED, INTERMEDIATE LINE

PRODUCERS

e.g. Tofas, Proton, Maruti

First Auto Works (China)

REGIONALLY-FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault, Kia,

PERFORMANCE CAR PRODUCERS

e.g., Porsche, Ferrari (owned by

Fiat) Maserati, Lotus

LUXURY CAR MANUFACTURERS

e.g., Aston Martin, BMW, Rolls Royce (owned by VW)

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Subaru, Isuzu, Suzuki,

Saab, Hyundai, Daihatsu

GLOBAL, BROAD-LINEPRODUCERS

e.g., GM, Ford, Toyota, Nissan, Honda, VW,

DaimlerChrysler

Strategic Groups in the World Automobile Industry Strategic Groups in the World Automobile Industry

Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

NATIONALPRODUCTION COMPANIES

THE SUPER MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Royal DutchShell

Exxon-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Sunoco

BP

Chevron

Phillips

Pemex

Indian Oil

ENI

INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM

IranNOC

Neste

Ashland

Conoco PhillipsENI

Elf-Fina-TotalRepsol YPF INTERNATIONAL

DOWNSTREAM OIL COMPANIES

INTERNATIONALUPSTREAMCOMPANIES

Adanarko

PremierOil

PetroChinaLukoil

Apache

Valero

Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry