ANALYZING

ANALYZING THE
THE BUSINESS
BUSINESS
LANDSCAPE
LANDSCAPE
Determining Industry Attractiveness and
Identifying Strategic Opportunities
 Distribution
Distribution of
of Industry
Industry Returns
Returns
Average Return on Equity in US Industries, 1982-1993
100

11.7%

13.8%

16.5%
90

80 First Quartile
Fourth Quartile
Average
70 Average
22.2%
9.3%
Number 60
of 50
Industries
40
Average = 14.7%
30 Median = 13.8%

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. Rivkin’s Analysis Note: Return on Equity = Net Income / Year End Shareholders’
Based on Dun and Bradstreet Data Equity; Analysis based on sample of 593 industries
 Profitability
Profitability Differences
Differences Across
Across
Selected
Selected Industries
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 (%)
 Critical
Critical Steps
Steps in
in
Business
Business Landscape
Landscape Analyses
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
Components
Components Of
Of The
The Macro
Macro Environment
Environment

Demographic Economic

Industry
Environment
Political/
Global Legal
Competitive
Environment

Technological Sociocultural
 Analyzing
Analyzing Market
Market Demand
Demand And
And
Consumer
Consumer Behavior
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
Industry
Industry Analysis
Analysis
Analyzing the Competitive
Structure and Behavior of
Industries
 Porter’s
Porter’s Five
Five Forces
Forces Analysis
Analysis
Threat of New Entry
• Economies of scale • Capital requirements
• Proprietary product • Access to distribution
differences • Absolute cost advantages
• Brand identity • Government policy
• Switching costs • Expected retaliation
Bargaining Power Bargaining Power
of Suppliers of Customers
• Differentiation of inputs • Buyer concentration
• Switching costs Rivalry Among • Buyer volume
• Presence of substitute Existing Competitors • Buyer switching costs
inputs • Industry growth • Switching costs • Buyer information
• Supplier concentration • Fixed costs / value • Concentration and balance • Ability to integrate
• Importance of volume to added • Informational complexity backward
supplier • Overcapacity • Diversity of competitors • Substitute products
• Cost relative to total • Product differences • Corporate stakes • Price / total purchases
purchases • Brand identity • Exit barriers • Product differences
• Impact of inputs on cost or • Brand identity
differentiation • Impact of quality /
• Threat of forward performance
integration • Buyer profits
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)
 SUPPLIER POWER
LOW
DRUG
INDUSTRY
(ROE=28%)
THREAT OF ENTRY
LOW INDUSTRY
COMPETITIVENESS
•economies of scale LOW THREAT OF
•capital requirements SUBSTITUTES
for R&D and clinical •high concentration LOW
trials •product differentiation
•product differentiation •patent protection No substitutes.
•control of distribution •steady demand growth (Changing as managed care
channels •no cyclical fluctuations encourages generics.)
•patent protection of demand

BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
 SUPPLIER POWER
HIGH
Airline
•strong labor unions Industry
(ROE=-1%)
•concentrated aircraft makers

THREAT OF ENTRY
HIGH INDUSTRY
COMPETITIVENESS
•entrants have cost HIGH THREAT OF
advantages •many companies SUBSTITUTES
•low capital requirements •little product MEDIUM
•little product differentiation
differentiation •excess capacity •autos for short distance
•deregulation of •high fixed/variable costs travel
governmental barriers •cyclical fluctuations of
demand

BUYER POWER
MEDIUM/HIGH
Buyers extremely price sensitive
Good access to information
Low switching costs
 Coopetition
Coopetition and
and the
the Value
Value Net
Net
A player is your competitor with A player is your complementor
respect to customers if customers Customers with respect to customers if
value your product less when they customers value your product more
have the other player’s product as when they have the other player’s
well product as well

Competitors Firm Complementors

A player is your competitor with A player is your complementor

respect to suppliers if it is less with respect to suppliers if it is
attractive for a supplier to provide more attractive for a supplier to
resources to you when it is also Suppliers provide resources to you when it
supplying the other player is also supplying the other player

Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996)
 Neutralizing
Neutralizing The
The Five
Five
Competitive
Competitive Forces
Forces
Force Method for Neutralizing Force
Entry Erecting barriers (isolating
mechanisms) create exploit economies of scale,
aggressive deterrence, design in switching costs, etc.
Rivalry Compete on nonprice dimensions:
cost leadership, differentiation, cooperation, etc.
Substitutes Improve attractiveness compared to
substitutes: better service, more features, etc..
Buyers Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..
Suppliers Reduce supplier uniqueness: backward
integrate, obtain minority position, second source, etc..
Analyzing
Analyzing Intra-industry
Intra-industry
Heterogeneity
Heterogeneity
Market Segmentation,
Strategic Group and
Competitor Analysis
 Strategic
Strategic Group
Group Analysis
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
 Key
Key Strategic
Strategic Variables
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
 Strategic
Strategic Groups
Groups and
and Mobility
Mobility Barriers
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
 Strategic Maps of the United States Airline Industry
The Late 1970s The Early 1990s
Pan International
International Laker
TWA Am

World
United
North American
Braniff
west

Conti- Northwest
nental Delta
Eastern
TWA
United

USAir
Geographic

Delta
National National
American
Scope

Continental

South-
Western
RepublicOzark west

USAir Piedmont
America
AirCal West
South- Frontier Kiwi
west
PSA Reno Others
Texas Int’l
Regional Regional Air

No Frills Full Service No Frills Full Service

Quality of Service Quality of Service
 Lessons
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 firm’s 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 isn’t enough to look at just structural attractiveness:
competitive position must also be considered