ANALYZING THE BUSINESS LANDSCAPE

1
ANALYZING THE BUSINESS LANDSCAPE

• Determining Industry Attractiveness and
  Identifying Strategic Opportunities

2
Distribution of Industry Returns
Average Return on Equity in US Industries,
1982-1993
100
11.7
13.8
16.5
90
80
First Quartile Average 22.2
Fourth Quartile Average 9.3
70
60
Number of Industries
50
40
Average 14.7 Median 13.8
30
20
10
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
Return on Equity (Percent)
Source Jan W. Rivkins Analysis Based on Dun
and Bradstreet Data
Note Return on Equity Net Income / Year End
Shareholders Equity Analysis based on sample of
593 industries
3
Profitability Differences Across Selected
Industries
Pharmaceuticals
Prepackaged software
Semiconductors
Women's clothing stores
Dental equipment
Eating places
Drug stores
Petroleum / natural gas
Race track operations
Trucking except local
Engineering services
Computer system design
Cable TV service
Motor vehicles
Scheduled airlines
0
5
10
15
20
25
Source Jan W. Rivkin based on Compustat
Operating Income / Assets, 1988-95 ()
4
Critical Steps in Business Landscape Analyses

• Step 1 Analyze shocks and trends in the
  macro-environment
• Step 2 Analyze the nature of market demand and
  consumer behavior
• Step 3 Analyze business landscape (industry)
• - Five competitive forces Framework
• - Coopetition and Value Net Framework
• Step 4 Identify critical success factors
• Step 5 Analyze the intra-industry(strategic
  group) structure of the industry and identify
  critical differences between groups
• Step 6 Evaluate the competitive sustainability/
  vulnerability of strategic positions of rivals

5
Components Of The Macro Environment
Demographic
Economic
Industry Environment
Political/Legal
Global
Competitive Environment
Technological
Sociocultural
6
Analyzing Market Demand And Consumer Behavior

• Identify market segments and the bases for
  inherent differences among customers
• buyer characteristics and preferences
• price sensitivity and cross-price elasticities
• patterns of use
• receptivity to marketing
• etc.
• Analyze aggregate and market segment growth
  rates, saturation levels, replacement-purchase
  rates, etc.
• Estimate/forecast the shape of the demand curve
  for the industry and each segment, keeping in
  mind that there is, ex ante, no such thing as an
  industry life cycle.
• Distinguish the nature of the products/services.
  i.e. observable goods, experience goods,
  communication effect goods

7
Industry Analysis

• Analyzing the Competitive Structure and Behavior
  of Industries

8
Porters Five Forces Analysis
Threat of New Entry

• Economies of scale
• Proprietary product differences
• Brand identity
• Switching costs

• Capital requirements
• Access to distribution
• Absolute cost advantages
• Government policy
• Expected retaliation

Bargaining Power of Customers
Bargaining Power of Suppliers

• Differentiation of inputs
• Switching costs
• Presence of substitute inputs
• Supplier concentration
• Importance of volume to supplier
• Cost relative to total purchases
• Impact of inputs on cost or differentiation
• Threat of forward integration

• Buyer concentration
• Buyer volume
• Buyer switching costs
• Buyer information
• Ability to integrate backward
• Substitute products
• Price / total purchases
• Product differences
• Brand identity
• Impact of quality / performance
• Buyer profits

Rivalry Among Existing Competitors

• Industry growth
• Fixed costs / value added
• Overcapacity
• Product differences
• Brand identity

• Switching costs
• Concentration and balance
• Informational complexity
• Diversity of competitors
• Corporate stakes
• Exit barriers

Threat of Substitutes

• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute

Source Michael E. Porter, Competitive Advantage
(New York Free Press, 1985)
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DRUG INDUSTRY (ROE28)
SUPPLIER POWER LOW

• THREAT OF ENTRY
• LOW
• economies of scale
• capital requirements for RD and clinical
  trials
• product differentiation
• control of distribution channels
• patent protection

• INDUSTRY COMPETITIVENESS
• LOW
• high concentration
• product differentiation
• patent protection
• steady demand growth
• no cyclical fluctuations of demand

THREAT OF SUBSTITUTES LOW No substitutes. (Changi
ng as managed care encourages generics.)
BUYER POWER LOW
Physician as buyer Not price sensitive No
bargaining power. (Changing with managed care.)
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Airline Industry (ROE-1)

• SUPPLIER POWER
• HIGH
• strong labor unions
• concentrated aircraft makers

• THREAT OF ENTRY
• HIGH
• entrants have cost advantages
• low capital requirements
• little product differentiation
• deregulation of governmental barriers

• INDUSTRY COMPETITIVENESS
• HIGH
• many companies
• little product differentiation
• excess capacity
• high fixed/variable costs
• cyclical fluctuations of demand

• THREAT OF SUBSTITUTES
• MEDIUM
• autos for short distance travel

BUYER POWER MEDIUM/HIGH
Buyers extremely price sensitive Good access to
information Low switching costs
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Coopetition and the Value Net
A player is your complementor with respect to
customers if customers value your product more
when they have the other players product as well
A player is your competitor with respect to
customers if customers value your product less
when they have the other players product as well
Customers Firm Suppliers
Competitors
Complementors
A player is your complementor with respect to
suppliers if it is more attractive for a supplier
to provide resources to you when it is also
supplying the other player
A player is your competitor with respect to
suppliers if it is less attractive for a supplier
to provide resources to you when it is also
supplying the other player
Source Adam Brandenburger and Barry Nalebuff,
Co-operation (New York Currency Doubleday, 1996)
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Neutralizing The Five Competitive Forces

• Force
• Entry
• Rivalry
• Substitutes
• Buyers
• Suppliers

• Method for Neutralizing Force
• Erecting barriers (isolating mechanisms) create
  exploit economies of scale, aggressive
  deterrence, design in switching costs, etc.
• Compete on nonprice dimensions cost leadership,
  differentiation, cooperation, etc.
• Improve attractiveness compared to substitutes
  better service, more features, etc..
• Reduce buyer uniqueness forward integrate,
  differentiate product, new customers, etc..
• Reduce supplier uniqueness backward integrate,
  obtain minority position, second source, etc..

13
Analyzing Intra-industry Heterogeneity

• Market Segmentation, Strategic Group and
  Competitor Analysis

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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. For example, single product Vs
  product family, private labeling Vs branded
  products, push Vs pull marketing, etc.
• Choose variables that produces the greatest
  contrast between firms, usually the CSFs. Do not
  use correlated variable.
• Sometimes it is useful to being grouping firms
  before selecting strategic variables
• Position each firm in relation to these variables
• Analyzing the attractiveness of each group by
  performing a five force on each group
• Identify the mobility barriers that inhibit
  movement of firms between strategic groups

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Key Strategic Variables

• Key strategic dimensions
• specialization
• brand identification
• channel selection
• product quality
• technological leadership
• vertical integration
• cost position
• service
• price policy
• financial leverage
• relationship to parent company, if any
• Outcome variables (like price and market share)
  should not be used to distinguish competitive
  groups
• Firms cluster into groups based on their
  commonality in strategic approach

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Strategic Groups and Mobility Barriers

• The height of entry barriers depends on the
  particular strategic group that the entrant seeks
  to join
• Mobility barriers are group-specific entry
  barriers that restrict shifting strategic
  position from one strategic group to another
• Mobility barriers prevent quick imitation of
  successful strategies
• The most important aspect of any strategic group
  analysis is identifying the mobility barriers
  that impede movement between groups
• There is no exhaustive list of mobility barriers

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Strategic Maps of the United States Airline
Industry
The Late 1970s
The Early 1990s
International
Pan Am
International
Laker
World
North west
Braniff
Eastern
Geographic Scope
National
National
Continental
South- west
Western
Republic
Ozark
USAir
Piedmont
America West
AirCal
Kiwi
Frontier
South- west
Others
PSA
RenoAir
Texas Intl
Regional
Regional
No Frills
No Frills
Full Service
Full Service
Quality of Service
Quality of Service
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Lessons

• Industries or landscapes are neither created
  equal nor stay equal
• The concept of extended competition provides a
  comprehensive framework for assessing structural
  attractiveness
• A firms strategy can increase or decrease its
  exposure to competitive forces
• Other things being equal, a firm should seek to
  trigger actions that improve structural
  attractiveness
• But it isnt enough to look at just structural
  attractiveness competitive position must also be
  considered