Chapter 2 Exhibits

1
Chapter 2 Exhibits
from Strategy and the Business Landscape
2
Average Economic Profits of U.S. Industry Groups,
1978-1996
Value Line Industry Groups
Source Compustat, Value Line, Marakon Associates
Analysis
3
Distribution of Industry Returns
Average Return on Equity in US Industries,
1982-1993
11.7
13.8
16.5
First Quartile Average 22.2
Fourth Quartile Average 9.3
Number of Industries
Average 14.7 Median 13.8
Return on Equity (Percent)
Note Return on Equity Net Income / Year End
Shareholders Equity Analysis based on sample of
593 industries
Source Jan W. Rivkins Analysis Based on Dun
and Bradstreet Data
4
Profitability Differences Across Selected
Industries
Computer system design
Source Jan W. Rivkin based on Compustat
5
The Managerial Problem

• To craft an effective strategy, you must take
  account of the external environment (the
  landscape)
• To decide whether to put your firm in an
  environment (entry)
• To decide whether to extricate your firm from an
  environment (exit)
• To position your firm to succeed in a given
  environment
• To assess the effect of a major change (e.g.,
  deregulation)
• To shape the environment
• But the environment is enormously complex

• You need structured ways of thinking about the
  environment
• that capture the richness of the real business
  world
• but separate signal from noise

6
Some (Complementary) Solutions

• Supply / demand diagrams
• Industry structure analysis (Five Forces)
• Value net
• Ecological metaphors

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Supply-Demand Analysis
8
Supply Curve for Boston Hospitals
Case mix adjusted expense per adjusted day ()
Beds ( of total market 8,270 beds)
Source Partners HealthCare System, Inc. (A),
Case 696-062
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From Supply / Demand to the Five Forces

• What determines the long-run supply / demand
  balance?
• Entry barriers and intensity of rivalry affect
  whether firms will add capacity in response to
  excess demand
• Exit barriers affect whether firms will retire
  capacity in response to excess supply
• What determines the effect of a supply / demand
  imbalance on profitability?
• In industries with intense rivalry or powerful
  buyers, small amounts of excess capacity tend to
  lead to big price wars
• In industries with powerful suppliers, the
  benefits of excess demand may accrue to the
  suppliers

• Supply / demand analyses say little about what
  determines the position and shape of the two
  curves

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The Five Forces Framework for Industry Analysis
Suppliers Sources of Bargaining
Power Switching costs Differentiation of
inputs Supplier concentration Presence of
substitute inputs Importance of volume to
suppliers Impact of inputs on cost or
differentiation Threat of forward/backward
integration Cost relative to total purchases in
industry
New Entrants Entry Barriers Economies of
scale Brand identity Capital requirements Propriet
ary product differences Switching costs Access to
distribution Proprietary learning curve Access to
necessary inputs Low-cost product
design Government policy Expected retaliation
Industry Competitors Factors Affecting
Rivalry Industry growth Concentration and
balance Fixed costs/value added Intermittent
overcapacity Product differences Brand
identity Switching costs Informational
complexity Diversity of competitors Corporate
stakes Exit barriers
Substitutes Threat Determined by Relative
price performance of substitutes Switching
costs Buyer propensity to substitute
Buyers Bargaining Power of Buyers Buyer
concentration Buyer volume Switching costs Buyer
information Buyer profits Substitute
products Pull-through Price sensitivity Price/tot
al purchases Product differences Brand
identity Ability to backward integrate Impact on
quality/performance Decision makers incentives
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Entry Barriers

• Economies of scale
• Product differences
• Brand identity
• Switching costs
• Capital requirements
• Access to distribution

• Absolute cost advantages
• Learning curve
• Access to necessary inputs
• Low cost product design
• Government policy
• Expected retaliation

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Power of Buyers

• Intrinsic Strength
• Buyer concentration
• Buyer volume
• Switching costs
• Buyer information
• Ability to backward integrate
• Substitute products
• Pull through

• Price Sensitivity
• Price/Total purchase
• Product differences
• Brand identity
• Impact on quality/performance
• Buyer profits
• Decision makers incentives

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Power of Suppliers

• Supplier concentration
• Substitute suppliers
• Supplier volume
• Product differences
• Brand identity
• Switching costs
• Low buyer information
• Threat of forward integration
• Pull through

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Threat of Substitution

• Product function not form
• Entire value added chain
• Thread depends on
• Relative price/performance
• Switching costs
• Often an S-curve process

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Degree of Rivalry

• Concentration and balance
• Industry growth
• Fixed (or storage costs)/Value added
• Product differences
• Brand identity
• Switching costs
• Intermittent cover-capacity
• Diverse stakes
• Exit barriers

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Issues with the Five-Forces Framework

• Industry definition
• Completeness (e.g., import competition)
• Consistency (e.g., import strategic variety)
• Duplication (e.g., switching costs)
• Symmetry (e.g., buyer substitution vs. supplier
  substitution, complements)
• The role of informational conditions
• The need for macroenvironmental analysis
• Long-run focus vs. change
• shocks
• cycles
• trends
• Product rather than resource focus

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Landscapes

• Landscape is broader than industry
• Landscape includes firms, institutions, and other
  players which often are not viewed as part of an
  industry
• Landscape includes networks of firms (from
  different industries) whose profits may be
  interdependent (e.g. Microsoft-Intel)

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Typical Uses of Industry Analysis

• Understand current profitability levels
• Identify forces that must be countered in order
  to achieve superior profitability
• Test decision to enter an industry
• Test decision to exit an industry
• Assess effect of a major change (e.g.,
  deregulation)
• Identify ways to alter industry structure

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Other Users

• Entrepreneurs
• Investment bankers
• Financial analysts
• Venture capitalists
• Consultants
• Anyone making a career choice

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The Value Net
Customers
Company
Competitors
Complementors
Suppliers
Source Adam Brandenburger and Barry Nalebuff,
Co-opetition (New York Currency Doubleday,
1996), p. 17
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What the Value Net Adds

• Complementors
• Symmetry

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Expanded Industry Analysis
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The Power of Complementors

• Relative concentration
• Relative buyer or supplier switching costs
• Ease of unbundling
• Differences in pull-through
• Asymmetric integration threats
• Rate of growth of the pie

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The Value Net
Customers Firm Suppliers
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
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-opetition (New York Currency Doubleday,
1996)
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Steps in Landscape Analysis

• Define the landscape what is in, what is out
• Identify the players
• e.g., who are the customers, really? Who are the
  competitors?
• Assess the relationships among players
• See Porter (1979, 1980) for some factors to
  consider
• Sniff-test
• Is assessment in line with actual profitability?
• Are more profitable players better positioned
  vis-a-vis competitive forces?
• Assess recent and future changes

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Steps in Landscape Analysis (cont.)
Purpose
Common steps

• Identify forces that must be countered in order
  to achieve superior profitability
• Test decision to enter
• Test decision to exit
• Assess effects of a major change
• Identify ways to alter structure

• Pinpoint most threatening force and seek ways to
  counter (e.g., build switching costs, find new
  sources of supply)
• Consider effect of entry on structure choose
  relative position select entry vehicle compare
  costs of entry to benefits
• Identify options for improving structure or
  relative position select exit vehicle compare
  costs of exit to benefits
• Consider how change will affect each force
• Assess consolidation, backward integration,
  forward integration, investments that raise entry
  costs, entry into substitute market, etc.

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Some Common Long-Run Dynamics

• Threat of Substitutes
• Emergence of new substitute
• Improvement or decline in relative price
  performance of substitute
• Increase in buyer comfort with substitute
• Change in barriers to entry in substitute market

Source Jan W. Rivkin
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Common Pitfalls in Landscape Analysis

• Failing to define the landscape clearly
• A clear definition is more important that the
  right definition
• Confusing transient effects with structural
  forces
• Ignoring changes in structural forces
• Assuming that competitive forces cannot be
  altered
• Confusing evidence of a force with its underlying
  cause
• e.g., blaming customer power on customer price
  sensitivity rather than exploring root causes of
  price sensitivity
• Ignoring the full range of substitutes
• Paying equal attention to all the forces

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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

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Conclusion

• Envisioning the business landscape
• Adapting to the business landscape
• Shaping the business landscape

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Public Sources of Information about the Business
Landscape

• Industry studies
• Books
• Investment analysts
• Market research
• Business school cases
• Trade associations
• Business press
• General publications (e.g., Wall Street Journal,
  Fortune)
• Specialized industry trade journals
• Local newspapers
• Online services (e.g., Bloomberg, OneSource,
  Compustat)

• Government sources
• Antitrust, legal, or tax documents
• Census or IRS data
• Regulatory bodies
• Industry and company directories
• Thomas Register
• Dun Bradstreet
• Company sources
• Annual reports
• SEC filings
• Public relations/promotional material
• Internet sites
• Company histories

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• The End