Further Topics in Industry and Competitive Analysis

OUTLINE
 Extending 5-forces analysis
o Does industry matter? o Complements o Dynamic competition

 Game Theory  Competitor Analysis  Segmentation  Strategic Groups

Does Industry Matter?

Percentage of variance in firms return on assets explained by: Industry Firm-specific Unexplained effects effects variance 19.6% 0.6% 80.4% 4.0% 18.7% 8.1% 44.2% 31.7% 35.8% 44.8% 48.4% 52.0%

Schmalensee (1985) Rumelt (1991) McGahan & Porter 1997) Hawawini et al (2003)

The Value Net

CUSTOMERS

COMPETITORS

COMPANY

COMPLEMENTORS

SUPPLIERS

Five Forces or Six? Introducing Complements

The suppliers of complements create value for the industry and can exercise bargaining power

SUPPLIERS
Bargaining power of suppliers

INDUSTRY COMPETITORS POTENTIAL ENTRANTS

Threat of new entrants Threat of

COMPLEMENTS

Rivalry among existing firms

SUBSTITUTES
substitutes

Bargaining power of buyers

BUYERS

Dynamic 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 is less usefulCompetitive behavior and industry structure jointly determined by underlying conditions of technology, demand & costs

The Contribution of Game Theory to Competitive Analysis

Main value:
1. 2. Framing strategic decisions as interactions between competitors Predicting outcomes of competitive situations involving a few, evenly-matched players

Some key concepts:

1. 2. 3. 4. Competition and CooperationGame theory can show conditions where cooperation more advantageous than competition Deterrencechanging the payoffs in the game in order to deter a competitor from certain actions Commitmentirrevocable deployments of resources that give creditability to threats Signalingcommunication to influence a competitor's decision

Problems of game theory:

Useful in explaining past competitive behaviorweak in predicting future competitive behavior. Whats the problem? Multitude of models, outcomes highly sensitive to small changes in assumptions

A Framework for Competitor Analysis

OBJECTIVES What are competitors current goals? Is performance meeting there goals? How are its goals likely to change? STRATEGY How is the firm competing? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself?

PREDICTIONS What strategy changes will the competitor initiate? How will the competitor respond to our strategic initiatives?

RESOURCES & CAPABILITIES What are the competitors key strengths and weaknesses?

Segmentation Analysis: The Principal Stages

Identify key variables and categories. Construct a segmentation matrix Analyze segment attractiveness Identify KSFs in each segment Analyze benefits of broad vs. narrow scope. Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus Identify segmentation variables Reduce to 2 or 3 variables Identify discrete categories for each variable

The Basis for Segmentation: Customer and Product Characteristics

Industrial buyers

Size Technical sophistication OEM/replacement Demographics Lifestyle Purchase occasion Size Distributor/broker Exclusive/ nonexclusive General/special list

Characteristics of the Buyers

Household buyers

Distribution channel Opportunities for Differentiation Geographical location

Characteristics of the Product

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

Industrial buyers

*Size *Technical sophistication *OEM/replacement *Demographics *Lifestyle *Purchase occasion *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list

Characteristics of the Buyers

Household buyers

Distribution channel Opportunities for Differentiation Geographical location

Characteristics of the Product

*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 Industry

F ood

F ru it Juice

P et f ood

S oft dr ink

B ee r

Oil

F r an

ce

an y Ge r m o rt . n/ P Sp ai
It a ly

S te el 3-piec e

S te el 2-piec e

Alum inum 2-pie ce

Ge nera l c ans

C omposite ca n s Ae rosol c ans

Segmenting the World Automobile Market

REGION
US& Canada Luxury Cars Full-size sedans Mid-size sedans Small sedans Station wagons Passenger minivans Sports cars Sport-utility Pick-up trucks W.Europe E.Europe Asia Lat America Australia Africa

Vertical Segmentation & Industry Profit Pools The US Auto Industry

25 % 20 Leasing 15 Warranty 10 Auto manufacturing New car dealers Auto insurance Aftermarket parts Auto rental Service & repair

Auto loans Used car dealers

Gasoline Share of industry revenue

100%

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

SEGMENT
Low price bicycles sold primarily through department and discount stores, mainly under the retailers own 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 manufacturers brand name and distributed mainly through specialist 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

High-priced bicycles for enthusiasts.

*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.

Childrens bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Similar to low-price bicycle segment.

Strategic Group Analysis

A strategic group is a group of firms in an industry following the same or similar strategy. Identifying strategic groups: Identify principal strategic variables which distinguish firms. Position each firm in relation to these variables. Identify clusters.

Strategic Groups in the World Automobile Industry

Broad
REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, Kia, NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Proton, Maruti First Auto Works (China)

GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, DaimlerChrysler

PRODUCT RANGE

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

LUXURY CAR MANUFACTURERS NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) e.g., Aston Martin, BMW, Rolls Royce (owned by VW)

Narrow National

PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (owned by Fiat) Maserati, Lotus

GEOGRAPHICAL SCOPE

Global

Strategic Groups Within the World Petroleum Industry

INTERNATIONAL Apache UPSTREAM Premier COMPANIES Oil Dana Petroleum Kuwait Petroleum PDVSA NATIONAL Iran PRODUCTION COMPANIES NOC Statoil INTEGRATED DOMESTIC OIL COMPANIES

Vertical Balance

1.5

INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM

2.0

0.5

Exxon -Mobil Chevron Peme Petronas INTEGRATED Royal Dutch Texaco Lukoil x PetroChina INTERNATIONAL -Shell Gp. Conoco Phillips Indian Oil Phillips MAJORS Petrobras ENI Nippon Valero Sunoco Elf-Fina-Total ENI Repsol YPF Repsol Neste Ashland INTERNATIONAL DOWNSTREAM OIL COMPANIES

1.0

BP-Amoco

10

20

30

40

50

60

70

80

NATIONALLY-FOCUSED DOWNSTREAM COMPANIES

Geographical Scope