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
Schmalensee 19.6% 0.6% 80.4%
(1985)
Rumelt (1991) 4.0% 44.2% 44.8%
McGahan & 18.7% 31.7% 48.4%
Porter 1997)
Hawawini et al 8.1% 35.8% 52.0%
(2003)
 The Value Net

CUSTOMERS

COMPETITORS COMPANY COMPLEMENTORS

SUPPLIERS
Five Forces or Six? —Introducing Complements
The suppliers of
complements create
value for the industry
SUPPLIERS and can exercise
bargaining power
Bargaining power of suppliers

INDUSTRY
COMPETITORS COMPLEMENTS

POTENTIAL Threat of
ENTRANTS Threat of
new entrants SUBSTITUTES
Rivalry among
existing firms substitutes

Bargaining power of buyers

BUYERS
 Dynamic Competition

Porter framework assumes:

(b) industry structure drives competitive behavior
(c) 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 useful—Competitive behavior and industry structure jointly
determined by underlying conditions of technology, demand &
costs
 The Contribution of Game Theory
to Competitive Analysis
Main value:
2. Framing strategic decisions as interactions between competitors
3. Predicting outcomes of competitive situations involving a few,
evenly-matched players

Some key concepts:

2. Competition and Cooperation—Game theory can show conditions
where cooperation more advantageous than competition
4. Deterrence—changing the payoffs in the game in order to deter
a competitor from certain actions
6. Commitment—irrevocable deployments of resources that
give creditability to threats
8. 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
 A Framework for Competitor Analysis

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

STRATEGY PREDICTIONS
How is the firm competing?
• What strategy changes
ASSUMPTIONS will the competitor
What assumptions does the competitor initiate?
hold about the industry and itself?
• How will the competitor
respond to our strategic
RESOURCES & CAPABILITIES
What are the competitors’ key
initiatives?
strengths and weaknesses?
 Segmentation Analysis: The Principal Stages

Identify segmentation variables

2. Identify key variables Reduce to 2 or 3 variables
and categories. Identify discrete categories for
each variable
5. Construct a segmentation matrix

7. Analyze segment attractiveness

9. Identify KSFs in each segment Potential for economies

of scope across segments
11. Analyze benefits of Similarity of KSFs
broad vs. narrow scope. Product differentiation benefits
of segment focus
 The Basis for Segmentation: Customer
and Product Characteristics •Size
•Technical
Industrial buyers sophistication
•OEM/replacement

•Demographics
Characteristics Household buyers •Lifestyle
of the Buyers •Purchase occasion

•Size
Distribution channel •Distributor/broker
•Exclusive/
Opportunities for nonexclusive
Differentiation Geographical •General/special
location list

•Physical size
•Price level
•Product features
Characteristics •Technology design
of the Product •Inputs used (e.g. raw materials)
•Performance characteristics
•Pre-sales & post-sales services
 *Size
*Technical
Industrial buyers sophistication
*OEM/replacement

*Demographics
Characteristics Household buyers *Lifestyle
of the Buyers
*Purchase occasion

*Size
Distribution channel *Distributor/broker
*Exclusive/
Opportunities for nonexclusive
Differentiation Geographical *General/special
location list
*Physical size
*Price level
*Product features
Characteristics *Technology design
of the Product *Inputs used (e.g. raw materials)
*Performance characteristics
*Pre-sales & post-sales services
Segmenting the European Metal Can Industry

nc e
F ra ny
F ood F ruit Juice P et f ood S oft dr ink B ee r Oil rm a
Ge o rt .
p a in/P
S
S te el 3-piec e ly
It a

S te el 2-piec e

Alum inum 2-pie ce

Ge nera l c ans

C omposite ca ns

Ae rosol c ans
 Segmenting 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
 Vertical Segmentation & Industry Profit Pools
—The US Auto Industry

25
%
20
Operating margin

Leasing Service & repair

15

Warranty Aftermarket
Auto parts
10 Auto
manufacturing
Auto Auto rental
New car insurance
dealers loans
5 Used car dealers

0 Gasoline
0 100%
Share of industry revenue
 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 retailer’s
own brand (e.g. Sears’ “Free Spirit”);
Medium-priced bicycles sold
primarily under manufacturer’s brand
name and distributed mainly through
specialist bicycles stores;
High-priced bicycles for enthusiasts.
Children’s bicycles (and tricycles) sold
primarily through toy retailers (discount
toy stores, department stores, and
specialist toy stores).
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
*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.
 Strategic 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.
 Strategic Groups in the World Automobile Industry

GLOBAL, BROAD-LINE
Broad PRODUCERS
e.g., GM, Ford, Toyota,
REGIONALLY-FOCUSED Nissan, Honda, VW,
BROAD-LINE DaimlerChrysler
PRODUCERS
e.g. Fiat, PSA, Renault,
Kia, GLOBAL SUPPLIERS OF
NARROW MODEL RANGE
NATIONALLY FOCUSED,
e.g., Subaru, Isuzu, Suzuki,
INTERMEDIATE LINE
Saab, Hyundai, Daihatsu
PRODUCERS
PRODUCT
e.g. Tofas, Proton, Maruti
RANGE First Auto Works (China)
LUXURY CAR
MANUFACTURERS
e.g., Aston Martin, BMW,
NATIONALLY- FOCUSED, Rolls Royce (owned by VW)
SMALL, SPECIALIST
PRODUCERS e.g., Bristol
(U.K.), Classic Roadsters
PERFORMANCE
(U.S.), Morgan (U.K.)
CAR PRODUCERS
e.g., Porsche,
Ferrari (owned by
Narrow Fiat) Maserati, Lotus

National GEOGRAPHICAL SCOPE Global

 Strategic Groups Within the World Petroleum Industry

INTERNATIONAL
UPSTREAM Premier INTEGRATED OIL
Apache
COMPANIES Oil MAJORS
2.0

INTERNATIONAL
Adanarko
Kuwait Petroleum UPSTREAM,
REGIONALLY
PDVSA FOCUSED
INTEGRATED
1.5

NATIONAL
DOMESTIC DOWNSTREAM
Vertical Balance

Iran PRODUCTION OIL COMPANIES

NOC COMPANIES

Statoil BP Exxon
1.0

Chevron -Mobil
Peme Petronas THE Royal Dutch
Lukoil x
PetroChina SUPER
Indian Oil Conoco Phillips
Phillips Shell
Petrobras ENI MAJORS
0.5

Elf-Fina-Total
ENI
Nippon Repsol YPF INTERNATIONAL
Repsol
Valero Neste DOWNSTREAM
Sunoco Ashland OIL COMPANIES
0

0 10 20 30 40 50 60 70 80
NATIONALLY-FOCUSED
Geographical Scope
DOWNSTREAM COMPANIES