Business Strategy
What is a Business Strategy?
Where do we compete?
What unique value do we bring?
What resources and capabilities do we have?
How do we sustain our unique value?
How is the business environment structured?
What is the source of a competitive advantage?
○​ Cost vs Differentiation? Is it sustainable? How can it be sustained?
●​ How would you expand the firm?
●​ What are the challenges of growth and change?
●​ What are the models of growth?
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There are two perspectives on business strategy:
1.​ Economics: The firm is the agent making choices. These choices determine
how the firm achieves a competitive advantage
2.​ Sociology: The process by which firms better fit in their environment, so
the environment is the one predicting firm choices
Case 1: Taylor Swift & Strategy
An important thing here is that it is impressive how good Taylor Swift is at
both creating value for her fans but also at capturing back this value, resulting in
very high revenues and success.
1.​ What are the main changes affecting the music industry?
When you are asked to analyse the changes in an industry or the structure
of an industry, it is always good to try to link the industry structure to performance
- try to see the implications. It is not about just explaining how the industry
changes over time, but it is about “going ahead”, and trying to explain the
implications of the changes. Always try to see how a change may affect the
behaviour of companies, the performance of the actors of the industry, etc
a.​ Industry environment: Streaming and SM
Key elements:
●​ The digital environment allows direct relationships and community to be
built
●​ Watchdogs such as radio stations, critics and media stations are becoming
less important. As the text points out, this insulates stars such as Taylor
Swift from the negative sides of media coverage and allows her to tailor
her output as fan service (“You can talk only with the people that like your
music”)
●​ the music industry has become a digital environment so streaming is
winning over the sales of physical music, implying that it is easier to create
direct relationships with fans (the digital environment allows for direct
relationships and for the possibility of building a community of fans)
Big changes in culture
●​ Death of monoculture - everyone is a “cult” star
○​ Monoculture refers to a time when mainstream media (TV, radio,
movies, magazines) dictated what was popular, and most people
consumed the same content. In the past, everyone watched the
same TV shows, listened to the same musicians and followed the
same trends. Now, that shared cultural experience has fractured due
to the internet, social media, and streaming services offering endless
choices
○​ Instead of a few dominant celebrities, there are now thousands of
micro-celebrities or “cult figures” with loyal fan bases. Platforms like
TikTok, YouTube and Instagram allow anyone to become famous
within their niche. People no longer rely on a single authority for
entertainment, they engage with specific subcultures tailored to
their interests
●​ Fan service and fan community are more central than ever
●​ TikTok is also changing how people consume music
Is it easier or harder to enter the music industry right now? How these
changing elements can affect the structure of the industry?
1.​ The barriers to producing and distributing music are much lower. it is
now easier to produce and distribute music as you can record a video on
TikTok and try to get famous.
2.​ You can attract fans more easily but it is more difficult than in the past to
catch the attention of people. There are two opposing forces - it is easy to
get on TikTok and Instagram, and it is very easy to promote the music, but
on the other side there is a wave of content - everybody is competing
against everybody to catch fans. it is a more competitive environment
precisely because it is very easy to enter, it is not expensive, so everyone can
try to become a musician, but it is more competitive when you are in.
a.​ Opposing forces: easy to get on TikTok and Instagram - this kind of
promotion was much more difficult in the past
b.​ versus the “Wave of Content”: any new thing is competing for
attention against so much!
3.​ The barriers to becoming a superstar are probably higher, since, ironically,
the weakness of mainstream media and “gatekeepers” may make it more
difficult to dominate people’s attention. Becoming a superstar has become
more difficult because before there was the help of radio stations, etc, while
now the whole burden is completely on the star - creating your community,
and leveraging social networks.
Economic Implications
Revenues
Profits
Revived revenue after years of decline
due to piracy and falling physical sales.
The industry was able to revive its
revenue after a period of decline.
Concentrated
among
streaming
platforms and record labels. The artists
unless superstars, are not making a lot
of money.
Recurring revenue stream from a
subscription-based
model.
The
industry has changed the revenue
stream, so the revenues are more
stable than they were in the past.
Limited profits for individual artists,
unless they diversify their income
streams
(concerts,
merchandise,
licensing).
2. How can we explain Taylor Swift’s success in this industry?
​
She is indeed very good at adapting to evolving trends and this implies
potential for lasting success, trends should also be considered - even if you are
very successful in a specific moment, you are always facing threats and risks. It is
good if you also try to identify the threats when evaluating if success is going to
last. What are the abilities she has aiding her success?
a.​ she adapts and evolves → She is very good at changing styles and
genres, reinventing herself, and trying to adapt accordingly to the
evolution of the industry.
b.​ she started building a community early on, well before other stars
did, so she could see the opportunity for the community and fans.
She built a brand that listers feel emotionally connected with,
creating very strong engagement. She is also very good at
influencing and leveraging public and fan opinion. All this is related
to creating value when selling music and experience - she is selling
something that others are not.
c.​ She is also good at capturing back this value created because she
controls the catalogue and distribution, she is financially
independent and she started controlling the intellectual property of
her art long before other artists did.
d.​ She is good at managing her business empire - she thinks
strategically, like a CEO. She wants to control all the details relating
to her stage performance. Control allows her to capture back the
value created. After her catalogue was taken, she decided to rerecord
all her music, allowing her to have new music to sell every few
months. Her show performance is very demanding - changing
outfits, every show is different from the other. It is crucial how she is
managing the empire with family members, very close people,
enduring unified and coherent decisom making.
​
There are few common elements in a successful strategy - you have to have
a clear and consistent long-term goal (TS knew very clearly where she wanted to
go, she ahd a very clear objective and she behaved accordingly; all her decisions
are guided through the goals), you have to understand very well the competitive
environment (TS is doing it and adapting well to a changing environment; she has
also been able to create the competences needed in order to compete in the
evolving environemnt), you are good in implemnetaition (TS is great because she
is planning and controlling everything), you have to be good in the marketing
activity (TS hides messages in songs, supreises concert audience with
announcements, creating a “wow” effect that keeps the attention of fans very
high).
Great implementation
●​ Meticulous planning and execution of different initiatives (tours, albums,
brand expansion, …)
●​ Innovative marketing (hidden messages, surprise announcements)
●​ Re-recording back masters: 9 albums in 5 years!
●​ Demanding performance style with seamless execution, even through
multiple costume changes over long shows
●​ Strategic implementation with a small team of family members (close-knit
inner circle), to ensure unified and coherent decision-making
3. Will she be successful in the long term?
1.​ What is the future value of her resources and capabilities?
2.​ What is the stability of the environment - what changes may occur and will
she be able to adapt?
3.​ Will the fit remain between her resources and the music world?
●​ She has a lot of pieces necessary for ongoing success:
○​ a demonstrated ability to adapt and evolve (will this weaken as she
ages?)
○​ A very valuable direct relationships with her fans and fan community
○​ Talent in songwriting and storytelling
○​ Higher barriesrs to entry for new artists - there are much less
incentives for music companies to introduce new artists
Based on what we know right now, we can say probably her success will
last - she is very good at adapting and evolving. However, will this weaken when
she ages? Will she be able to connect to her fans also in the future? She has a very
direct community relationship with fans and this is very important because it is an
intangible asset that can be leveraged. Of course, she also has talent. There is also
an element from the external environment helping her - now it is not easy to
become a successful superstar, even though it is easy to enter the busienss,
because there are no need for music companies to introduce new artists, they try
to exploit the xisting ones.
Threats?
●​ Overexposure could lead to fan fatigue, reducing excitement for future
projects. Fans could be tired of her marketing strategies over time
●​ Strugling to evolve while maintaining authenticity could weaken her
connection with fans. It is hard to remian connected with fans while you
are creating an empire.
●​ Politicization of her brand can alienate parts of her audience (eg US
elections)
●​ Her businesslike approach could weaken the emotional connection that
has been a key driver for her fans’ loyalty
○​ At the 2024 Grammys, one critic sarcastically wrote: “Taylor Swift
seemed to think she was at a shareholders’ meeting to announce
her second-quarter profit projections, or, as she called it, her new
album.”
Understanding Industry Structure through Porter’s Five Forces
Strategy is about trying to become more profitable than competitors.
Strategy is about the quest for superior performance. It is about competing to
reach higher economic performance with respect to competitors. What affects
firm performance?
●​ average profitability of the industry - If you are competing in a profitable
industry, or an industry that has a favourable structure, of course, it is easier
to be profitable.
●​ firm strategy - But it is not only about the profitability of the industry but
also about the strategy.
●​ Which of the two factors has a greater impact? According to Warren Buffet,
the impact of the industry is prevailing - if you are working in an industry
that is performing poorly, it is difficult also for an excellent manager to
make a company profitable
Both of the factors
affect performance,
but
a
huge
percentage remains
unexplained,
according to all the
research conducted.
The least-performing industries are the more capital-intensive ones. One of
the important elements in analysing the average profitability of an industry is the
cost structure of the industry - if you have a lot of fixed costs. if you are a very
capital-intensive industry, why your profitability is lower than that of a less
capital-intensive industry? from a mathematical point of view, the return on
investment is EBIT divided by capital invested, so the greater the amount of
capital invested, the more it lowers the value for return on investment, and
therefore on profitability. On the other side, if you have to invest a lot of money
since the fixed costs are very high and the industry has a very rigid cost structure,
you need to exploit a very big capacity. So if you want to sell more, you may need
to lower prices, potentially starting a price war - a price war is bad for the whole
industry since it reduces the profitability of the whole industry.
Also, there is an interesting observation for connected industries. Consider
airlines and aeroplane producers - the aircraft producers are very profitable while
the companies using the aircraft to manage their business operations are not so
profitable. In an industry analysis, you have to also consider the different players in
the different stages of the value chain of the industry. They can have different
profitability levels based on the relative bargaining power each of them has and
can exert. Same case in the food industry - the ones producing food are more
profitable than the ones retailing food. Due to the relative bargaining power,
some companies in one position in the value chain are more or less profitable
than players positioned at another stage.
But there could be a variation in firm profitability within a specific industry.
Consider the pharmaceutical industry - it is characterised by a high average
profitability, but there is a higher variation between the most profitable and the
least profitable player in the industry. The steel industry, on the other hand, is
characterised by a lower average profitability, but also a lower variance is
observed. in the pharma industry the standard deviation is very high, while in the
steel industry probability levels are more similar to one another (pharma is riskier
than steel industry). What does the variance say? The variance in industry
profitability signals the riskiness and the homogeneity - the higher the variance,
the higher the risk from a financial point of view. If the variance of profitability is
low, it means the industry is homogeneous. In financial analysis, risk is measured
based on the standard deviation of firm performance.
Of course, the profitability of an industry can change over the years.
Industry is also changing and factors are evolving. What are industries that have
changed dramatically? Industries can evolve and become unprofitable for the
main players because of industry-specific tools.
●​ cable TV and cinema have been very disrupted by online streaming
platforms
●​ Airbnb changed the industry dramatically
In summary, there is a wide variation in:
1.​ Average profitability across different industries
2.​ Firm profitability within the same industry
3.​ Industry and firm profitability over time
To explain this, we need to analyse the industry structure, strategic groups and
a firm’s competitive advantage. Today, we will focus on external drivers of
profitability → industry-level factors.
Why is the pharmaceutical industry so profitable? Customers are very price
insensitive, and very high entry barriers, demand is quite inelastic for medicine so
they can charge high markups for products that are cheap to produce, the
industry is very concentrated with few big players competing / colluding,
competition is not very fierce, slight market division. Bargaining powerr of
customer is low, they are very price insensitive. There are high entry barriers for
new entrants (many legal requirements to enter the industry). The profitability of
the industry can be explained by analysing the structure of the industry.
​
The basis of the 5 forces is the 10 economics. Michael Porter used economic
logic to identify what in the industry helps firms be profitable.
●​ If we should observe perfect competition, why do not we see it?
●​ Which factors are creating heterogeneity in firm outcome?
●​ What are the implications for incumbents versus new entarnts?
​
When the profitability of an industry is being analysed, it can be done both
from the poistio of an incumbent and of a new entrant (if the industry is profitable
enough to enter, how are the entry and exit barriers, etc). The 5 forces is the
kmkost profitable tool to analyse a profitability of an industry. Porter straed form
the industrial organsiation economics, he studeid the heterogenity of firms
outcome, trying to understand ho the structure of an industry was affecting the
profitability of a specific firm. According to the industry structure analysis, you can
have 4 different industry structures - perfect competition, oligopoly, duoploly or
monopoly, and in those 4 different structures you can expect differences in the
average firm profitability because of the characteristics of the industry structure.
This is due to the fact that there are differences in the degree of competition and
rivalry. There is also a difference in the industry due to exit and entry barriers.
Product diversification also causes variety in profitability - in perfect competition,
all the companies are producing the same product, while in all the other
structures you have differences in the products produced by the players. There is
also a difference in terms of access to information- in perfect competition, there is
perfect availability of information and complete transparency, while there is
imperfect availability of information in all the other structures. What is the most
profitable situation? The monopoly si probably the best one in terms of average
profitability. The average profitability of an industry with perfect competition is 0
since companies porfuce profit to just cover the weighted average cost of capital.
In conclusion, we can see how the structure of an industry really affects the
profitability of the industry.
According to Porter’s model, 5
forces
shape
the
average
profitability for the industry and
the forces are exerted by 5
different categories of players.
When you apply this model, you
do not list buyers, supplies, etc
but you have to focus on the force
this kind of player can exert in the
industry. You have to think about
how each force is structured and
how it affects the average
profitability.
The model has been developed
to try to understand what is the
average
profitability
of
an
industry. It is about analysing
how the forces can affect
profitability. According to Porter,
the 5 forces can influence the
prices, the unit cost, the quantity,
and the capital employed in the
industry, all this trying to
understand
the
relationship
between the forces and the
prices, costs and quantities.
●​ If the rivalry among competitors is very strong, prices are affected, but also
potentially unit cost (due to higher spending needed in advertising, etc),
and the capital employed (to compete better, you may need new facilities
or equipment)
●​ if buyers are powerful, they can try to draw down the price, they may force
investment in innovation or advertising, they may also decide to stop
buying, affecting quantity
●​ new entrants also matter, since they can enter with a very aggressive
pricing policy, they can start a price war in industry, or they may enter with
a very innovative product, forcing incumbents to invest in research and
innovation
1.​ Competition
What are the industries in which competition is very intense? Industries in which
companies are competing on price, where products are not differentiated
(airlines - flight is a commodity).
What are the determinants of rivalry in an industry?
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a.​ Concentration
If you have few players in an industry, probably they will
be willing to collude passively (not admitedly), trying to not compete too
agressively. If there is a high concentration in an industry, the effect on
return on capital is positive. If an industry is very fragmented, we expect less
return on capital
b.​ Diversity of competitors
If competitors are diverse in terms of goals,
cost structure (rigid versus flexible), probably it will be harder for them to
collude and they will prefer to compete. If competitors are similar, they
share the same goals, they share teh same cost structure, it is easier to
come in an agreement with the others for a less fierce competition. They
will probably set common rules for the game, trying to reach common
goals.
c.​ Product differentiation
Some companies are targeting the mass
market, while other are more selective and target only exclusive customers.
If one product is very exclusive and expensive, while another product of the
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same type is cheap and easily accessible, then they are not competing
fiercey for the same segment of the market.
d.​ Market growth rate
If the market is growing, companies do not hve to
compete for their existing market share. Excess capacity is bad, cause in
order to get it, companies may start competing on prices, reducing the
overall profitability of the industry.
e.​ Exit barriers
If it is difficult to exit the industry, because it is expensive
due to high fixed costs, a player actually wanting to exit may start a price
war, since they have “nothing to lose”.
f.​ Cost conditions
i.​ Variable It is good if you have a flexible cost structure, this is good,
cause the volume you sell is not vital for your profitability
ii.​ Fixed If you have high fixed costs, this is negative, cause you have to
reduce price to attract customers and sell more
Not just the intensity of competition matters, but alsi on what you compete
matters.
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How to measure concentration?
1.​ Concentration Index: CX = sum of market share of x largest firms; C3 =
market share of 3 largest firms
2.​ Herfindahl Index (HHI): sum of squares of all market
shares
a.​ HHI < 0.15 - uncorrelated industry
b.​ 0.15 < HHI < 0.25 - moderate concentration
c.​ HHI < 0.25 - high concentration
Herfindahl is better when they are many large firms: HHI
gives more weight to the larger firms since
concentration is a very important factor; used by US
Justice Department
2.​ Barries to Entry
What are the assets and capabilities firms must posses in order to enter a
specific industry?
●​ Auto industry: capital for manufacturing, design, distribution, brand /
reputation, etc
●​ Software Industry: programmers, technology, infrastructure, network
effects of installed base
●​ Fashion industry: designers, brand relationship with $$$ buyers
●​ Banking: governmental permits
●​ Fast food: real estate
Ex ante barriers: what you need in order
Ex-post barriers: what you need to
fullfil to be able to stay and compete
in a specific industry
Exogenous (structural) barriers
●​ Capital requirements (aircarft)
●​ Legal restrictions (pharma, banking)
●​ Incumbents behaviour in
responding to new entrants,
retaliation - price war (eg,
airline)
●​ Ongoing costs: relationships
with doctors and health
professioanls, regulators
(FDA&EMA), advertising
expenses
●​ IMPACT ON ROCE
to enter an industry
Endogenous barriers = strategic / created
by incumbents; absolute cost advantage
making new entrants weaker in competing
with costs and prices
●​ Economies of scale (high R&D)
●​ Economies of learning (solar panel,
semiconductor)
●​ Absolute cost advantage (access to
resources)
●​ Access to distribution (packaged
food)
●​ Buyer loyalty and differentiation
(luxury goods)
The higher the entrance barriers, the
lower the threat of new entrants, and
tehe greater the return on capital for
incumbents.
3.​ Buyer Power
Buyer power refers to the ability of customers (buyers) to influence
pricing, product quality, and terms of dale within an industry. It determines
how much leverage customers have over firms and how much pressure they can
exert to drive prices down or demand better services.
Buyer power is high when:
●​ the buyer is large, concentrated and purchase in high volumes
(supermarket chain)
●​ industry products are standard and undifferenriated (agricultural
products - wheat, corn, sugar)
●​ There are no switching costs (some basic customer goods)
The buyer power can be summarised in two aspects: price sensitivity on
one side and bargaining power of the buyer on the other. Examples of price
sensitivity: luxury cars - consumers are not price-sensitive, they prioritize brand
and prestige; pharma - patients needing a life-saving drug are not price sensitive
because they have no alternative; smartphones - are a commodity so consumers
are price sensitive.
High Relative Bargaining Power
Low Relative Bargaining Power
●​ supermarkets deciding which
brand of beer to stock
●​ Government buyers for military
equipment and public
healthcare
●​ individual consumers buying
luxury goods
●​ consumers buying coffee
capsules
●​ small bars buying soft drinks
Price sensitivity depends on:
a.​ Product uniqueness
If you are buying something unique that is not
available elsewhere, you are nmot price sensitive, you buy the product
whatever the price is
b.​ Alternatives
If you have many options, you choose based on the price
since all the offersing are similar
c.​ Cost of product
relative to total cost examples include buying a house or
a car than when buying toothpaste
Relative bargaining power depends on:
a.​ Relative concentration
How big are you as a customer compared to the
company you are selling to?
b.​ Ability to backward integrate
Are you able to do what sellers and
suppliers are doing, substituting them with in-home production?
c.​ Switching costs
If it is costly and time-consuming for customers to
switch to a competitor? Switching costs refer to the financial time-related,
psychological, or effort-based costs that a customer incurs when changing
from one product, service or provider to another. They deped on product
uniqueness / differentiation (specialised graphic design software),
network effects = increase of the utility of a product when more people are
using it (video games, social networks)
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4.​ Supplier Power
​
Supplier power refers to the ability of suppliers to influence the prices,
availability, and quality of inputs that businesses need to operate. It depends
on:
a.​ Price sensitivity
b.​ The relative bargaining power of supplier
The supplier power is high when:
●​ The supplying industry is more concentrated than the industry it
sels to (AMD and Intel vs PC makers)
●​ Suppliers offer differentiated / unique products, industry
participants face switching costs (Boeing and Airbus vs airlines)
●​ There are few or no substitutes (DeBeers diamonds)
●​ Suppliers serve other industries, they are not dependent on the
industry (Glass bottle manufacturers for the beer industry)
5.​ Substitutes
​
Substitutes are products from other industries thgat offer similar
benefits (to consumers) as products produced within the industry. Threat of
substitutes depends on:
a.​ Buyer propensity to substitute
What is the likelihood that buyers
switch to substitutes? High propensity in the packaged food industry
b.​ The relative price and performance ratio
high-speed trains offer a good
performance-to-price ratio in the short distance routes
c.​ Switching costs / Network effect
the adoption of electric vehicles as a
substitute for gasoline cars face high switching costs due to charging
infrastructure, range anxiety, and high initial investment
➖
➕
➖
Applying the 5 Forces Analysis
●​ Forecasting industry profitability
○​ Past profitability is not necessarily a predictor of future profitability
○​ If we can anticipate changes in industry structure, we can predict
changes in competition and profitability
●​ Strategies to improve profitability
○​ Once we know which structural feature of the industry support / will
support profitability, we can choose favorable positions
○​ Which of the structural variables are depressing profitability? Can
they be changed by individual or collective strategies?
What are the 5 forces?
●​ 3 horizontal: new entrants, competitors, substitutes
●​ 2 vertical: buyers, suppliers
1.​ Competition / Rivalry: intensity of competition among firms (based on
price or non-price factors)
2.​ Threat of new entrants: barriers to entry: ex ante - exogenous and
endogenous), ex post (retalitation)
3.​ Buyer Power: price sensitivity and relative bargaining power of buyer
4.​ Supplier power: price sensitivity and bargaining power of supplier
5.​ Thret of substitutes: products from other industries that can be used
instead of the focal product
Is the industry attractive for incumbents / new entrants?
The semiconductor industry is a hard to define one. There are many
competitors in it competing in very different ways. We should analyse the industry
overall, not from the perspective of a single player (e.g. Intel). Also, at the end of
the analysis, it should be statd if the industry is profitable or not, if it is attractive or
not for new entrants, etc.
Case 2: Intel
●​ Conduct 5 forces analysis
●​ Come up with a general analysis of profitability in the industry
●​ Identifying the importance of each of the 5 forces on competitive
dynamics in the industry
●​ Analysing changes in the 5 forces and the implication for companies
Errors to be fixed
●​ Industry analysis is about the industry not Intel or any other firm
●​ Must state whether the industry is attractive and for whom
●​ Substitutes are products from other industries
●​ Differentiate between different types of suppliers (suppliers of
equipment or of raw matterisals, and the analysis should be differentiated
since they may have different market and bargaining power)
●​ Adress risks and possible mitigation actions
1.​ Perform a 5 forces analysis on the historic (1990s) semiconductor
industry. Was it profitable?
The industry was pretty profitable - low competition, low threats of new
entry, moderate supplier power, moderate / low buyer power, low threat of
substitutes
a.​ Rivalry: The industry was very concentrated, with few big players.
The market was growing, especially due to the growth in demand.
There was a high product differentiation, especially for the CPU,
while on the other hand the memory market was commoditised.
Companies were competing on innovative solutions they were able
to provide. What was not favourable was the super rigid cost
structure of the industry, which has the expectation of players
competing on price for a market share. In this case, being a big
company is very beneficial, because it gives the advantage of
economies of scale.
i.​ high concentration
ii.​ high processor market growth, driven by the increasing
demand for PCs
iii.​ high product differentiation (especially for CPUs, while the
memory market is commoditized)
iv.​ high fixed costs due to vertical integration - importance of
scale
Overall low rivalry, especially for differentiated CPUs producers
b.​ Threats of new entries: barriers to entry the industr
i.​ exogenous barriers are high (related to the product
characteristics): the capital required to build a fab
construction, technical expertise
ii.​ endogenous barriers are high (created by incumbents):
investment in R&D, economies of scales, economies of
learning, ecosystem lock-in (high switching costs for
customers), partnerships (Windows & Intel)
Buyers to enter are high, so low threat of new entrants
c.​ Buyer power: the buyers are the PC producers (IBM, HP, Dell, ..)
i.​ Large companies, but
ii.​ Smaller than semiconductor producers
iii.​ High switching costs (hardware compatibility and software
optimisation)
iv.​ High impact of processors on quality / performance of
computers (processor performance largely determines
computer performance)
Overall, moderate / low power of buyers
d.​ Supplier power
i.​ differentiate between the different types of suppliers
ii.​ Equipment manufacturers: 2 large specialised players:
Applied materials and ASML (critical supplier of lithography
machines) → high power
iii.​ Raw materials: relatively common → low power
iv.​
​
​
Human capital: specialised scientists and engineers for R&D →
moderate power
Overall, moderate supplier power
e.​ Substitutes
Low threat of substitutes
Overall, the semicondustor industry is profitable in 1990s because of:
●​ high barriers to entry
●​ low substitutes
●​ rivalry focused on innovation rather than price
●​ high switching costs for customers
●​ low attractiveness for new entrants, due to the high barriers
Intel was well positioned in the industry due to its:
●​ leadership in CPU technology
●​ large scale (it was the market leader) - economies of scale and learning,
allowing to cut costs
●​ ability to create a dominant standard
●​ ability to leverage strategic partnership - Wintel
●​ strong brand awareness - “Intel inside” campaign
2.​ What has changed in the industry today, and why?
1.Threat of new entrants ↑: to enter in the production is very expensive, but if you
want to just design processors, it is not so difficult (potential outsourcing of
production to other players)
2.Rivalry: competition has increased - concentration is reduced (many companies
could enter the industry by just designing processors), competition is higher for
standard chips, but still the competition for specialised chips is not on price but
on innovation (data centers, AI). Strong market growth is being observed,
especially in some segments
3.Buyer power ↑: some customers such as Apple have decided to integrate
backwardly by designing their own chips. Still, buyers are very dependent on the
processors for the quality of their products. Powers are clashing, but there is still
an increase in the power of buyers
Reduced overall profitability, except in highly specialised segments like AI
a.​ How does it affect the profitability of the industry?
●​ specialisation in the value chain: design and fabrication mostly separate companies focus just on the design or just on the production, so there are
two different focus strategies for competing in the industry
○​ design: NVIDIA, AMD, Apple all design leading chips withou
manufacturing them
○​ foundries (production): TSMC now totally dominates leading edge
production
●​ rise of new segments: there have been many new uses of the same
processors in different industries - AI and data centers, mobile phones,
automotive, industrial electronics
○​ high demand for high performance power efficient chips in many
different market segments
b.​ How has it affected Intel?
○​ loss of leadership in CPUs due to the entry of new players
○​ struggling as a foundry due to TSMSC’s dominance
○​ failure to capitalise on mobile phones an AI opportunities (fabless
competitors dominate design) - Intel is more generalised on design
while competitors are much more specialised
○​ investment needs: intel faces senourmous costs to catch up on 3nm,
2nm and future nodes
3.​ What strategic steps could you recommend to Intel? Which
would you actually recommend and why? Please address the
risks of these steps and how to manage them
When the company is like Intel, experiencing financial difficulties, you
should focus on stretegie tht bring growth strategic shift.
a.​ Switch to the fabless model
Possible initiatives:
●​ Accelerate chip development by streamlining the product portfolio
○​ Nvidia won in GPUs by doubling the development cycle from one
new chip a year to one new chip every six months – it created
parallel teams working on development for each cycle
●​ Manufacturing spin-off
Risks
●​ high R&D
●​ dominance of NVIDIA and
CUDA ecosystem
Mitigation Actions
●​ acquire niche startups
●​ establish partnerships with AI,
gaming, and HPC firms for
pre-launch optimisation
●​ specialise in a selected few
market segments
b.​ Focus on chip manufacturing
Advantages:
●​ With rising geopolitical tensions (US vs China) and the need for
domestic semiconductor production, Intel Foundry Services could
position itself as the leading Western alternative
●​ By focusing solely on foundry operations, Intel could avoid competing
with its own customers and gain more external business
Risks
Mitigation Actions
●​ high capital expenditure
●​ strong competition from TSMC
and Samsung
●​ need for organisational
restructuring, cultural shift and
operational excellence
●​ leverage US and European
government support
●​ Become a key supplier for
national security applications
(US defense, aerospace,
government AI projects)
c.​ Strengthen the hybrid strategy and continue operating as an
“Integrated Design Manufacturer”
It is very hard to compete with a business that is trying to be specialised in
both the production and the design, while competitors are highly specialised.
Advantages
●​ Supply chain stability reducing risks related to supply chain disruptions
and capacity constraints
●​ Faster time-to-market?
●​ Better margin control?
●​ End-to-end control: greater quality control and optimisation?
Risks
Mitigation Actions
●​ massive capital investmemt,
especially for lithograhy
expansion
●​ fierce competition from TSMC
and Samsung in the foundry
business and NVIDIA in the
design
●​ establish strategic partnerships
to share R&D costs (ARM
Qualcomm, Synopsys)
●​ Focus on high-margin,
cutting-edge segment instead
of competing on mature
segments
Common Mistakes in Industry Analysis
In conducting the analysis, avoid the following common mistakes:
●​ defining the industry too broadly or too narrowly (always define what
you are consider the industry to be in your analysis)
●​ making lists instead of engaging in rigorous analysis
●​ paying equal attention to all of the forces rather than digging deeply
into the most important ones
●​ confusing effects (price sensitivity) with cause (buyer economics)
●​ using statistic analysis that ignores industry trends
●​ confusing cyclical or transient changes with true structural changes
●​ using the framework to declare an industry attractive or unattrcative
rather than using it to guide strategic choices
Beyond Porter’s 5 Forces Framework
1.​ Industry structure is mostly out of the hands of business leaders
(“exogenous”). That is, industry structure is hard to shape (legally)
2.​ It is focused on capturing value, but it is no help with the many things
businesses can do to increase value creation - cooperation, innovation
3.​ It is largely static. It misses that industries evolve through some common
stages
4.​ It is too broad and misses important differences between strategic
groups in the industry
There are three extensions
1.​ Complements = product / services that enhance the value of the focal
product (phones + apps, playstation + games - if you have them together,
the value is greater than the two of them on their own). The quality of
relations with complements can determine the degree to which a new
product succeeds or fails. Relationships between producers of
complements are very important.
a.​ Part of NVIDIA’s success in semiconductors comes from having
developed its CUDA software platform allowing third-party
developers and customers to write programs for the system and
share the programs with other developers
b.​ EV manufacturers and charging infrastructure companies are
signing partnership to expand charging networks and accelerate EV
adoption
c.​ Streaming content providers and teleco operators are forming
partnerships to drive higher data usage and attract millions of new
users
2.​ Strategic groups = groups of firms in an industry following similar strategy
along some strategic dimensions; they are equally affected by the main
competitive forces of the industry, resulting in similar performance
variations. Strategic groups are
Within an industry, there can be significant variations in firm profitability,
and certain industry trends may place some companies in a better position.
Strategic group analysis attempts to clasify firms within an industry according to
different strategies. Companies in one strategic group do not need to be similar in
what they do or the product they offer but they are similar in the way they face
the five competitive forces, they are equally affected by the forces of the industry.
Strategic groups are very different from market segments. Market segments are
groups of customers showing the same needs and characteristics, while strategic
groups are groups of companies that are competing pretty much in the same
way and they are equally affected by the main competitive forces.
Within an industry, there may be significant differences between the
profitability of companies. It can be due to the strategic advantage of a company.
However, they might be a group of companies showing the same level of
profitability, and they are called strategic groups. Strategic grouos refer to group
of companies that are competing in a vey similar way and in general they have
the same level of profitability.
To create a strategic group, you need to choose two different variables to
position on the two axes and you try to identify the companies competing in the
industry in groups that are similar in terms of strategy. If you do it well, the
companies in each group should show similar levels of profitability. You have to
classify the strategic decisions the companies are making - who are the
consumers they are targeting, who are the suppliers they are buying from, what
are the key success factors on which they are competing.
How to identify strategic groups? Are all firms in an industry comparable?
●​
●​
●​
●​
●​
Who are their main consumers?
Do all consumers have a similar willingness to pay?
Who are the main suppliers? Look at the value chain
Overall strategy: cost or differentiation based?
Are all segments within an industry growing at similar rates?
Strategic Group Map
1.​ Identify important variables that define firm strategy and could
influence the way in which companies are affected by the main forces
in the industry. You have to define two variable switches which illustrate
the way the companies are affected by the competing forces. Criteria
variable should be:
a.​ uncorrelated
b.​ measurable (average price, advertising or R&D investments)
c.​ result of decisions, not performance (ROCE or market share are not
variable)
d.​ able to create differences in how the company is exposed to
relevant competitive forces
2.​ Position each firm in relation to these variables.
Strategic dimensions- What are the strategic choices a company can make?:
-​ Product range (low-end or high-end product)
-​ Choice of distribution channels
-​ Product quality
-​ Degree of vertical integration
-​ Price positioning
-​ Technological leadership
-​ Level of internationalisation
-​ Brand identification
-​ Independent versus part of a group
Maybe (Blue Ocean Strategy)
Can you build sustained, defensible advantage
here?
But…
-​ It could correspond to an irrelevant
strategy (eg fashion retail: low design focus and
narrow product range)
-​ Maybe you did not pick the right
dimensions! If all the firms end up in the same
quadrant or half of your map, you have likely
picked the wrong dimension(s)
-​ It is also no clear strategic groups in the
industry
Again, strategic groups are different from market segments!
Segmentation is based on consumer characteristics while strategic groups
focus on corporate strategic choices / dimensions). There could be multiple
different maps, all solutions being correct. The best maps:
●​ allow to group firms that exhibit similar strategy / profitability variance
●​ identify groups between which movement is difficult
○​ mobility barriers are factors that deter the movement from one
strategic group to another (the investments needed to move from
a strategic group to another one)
■​ advertising investments, R&D investments, investments in
commercial branch in foreign markets, capacity investments
3.​ Industry Evolution and Life Cycles
​
The industry dynamics are continuous changes and forces that shape
the structure, competition and profitabilòity of an industry over time. Factors
driving the dynamics are:
●​ entry and exit of competitors
●​ demand growth
●​ creation and diffusion of knowledge
Industries are constantly changing and evolving
because of some players being introduced or an old
product is substituted with an old one. There are many
different dynamics that affect the evolution of an industry.
The industry life cycle has the idea of explaining the
industry dynamics by comparing it to the lyfecycle of
human life.
1.​ Introduction
a.​ Demand: Limited to early adopters: high income, avant garde;
demand is not high because the product is risky, expensive and not
established
b.​ Technology: Competing technologies, rapid product innovation, very
expensive cause due to lack of volume there is no scale in
production, affecting costs and price
c.​ Products: poor quality, wide variety of features and technologies,
frequent design changes
d.​ Manufacturing and Distribution: short production runs, high-skilled
labour content, specialised distribution channels
e.​ Trade: there is lack of distribution channels, only producers and
consumers in advanced countries
f.​ Competition: few companies
g.​ Key success factors: Product innovation, establishing credible
image of firm and product
Examples: quantum computing, lab-grown meat, space toursim
2.​ Growth
a.​ Demand: Rapidly increasing market penetration: demand is at a
double-digit pace
b.​ Technology: Standardisation around dominant technology, rapid
process innovation, less product innovation and more process
innovation - more competitive in terms of costs
c.​ Products: design and quality improve, emergence of dominant
design, establishment of competitive advantage
d.​ Manufacturing and Distribution: capacity shortages, mass
production, competition for distribution
e.​ Trade: exports from advanced countries to rest of the world
f.​ Competition: entry, mergers, exits
g.​ Key success factors: design for manufacture, access to distribution,
brand building, fast product development, process innovation
Examples: electric vehicles, renewable energy, biotech & personalised medicine
Strategies:
●​ Process innovation
●​ Strategic positioning
○​ Competitive scope
○​ Competitive advantage
3.​ Maturity
a.​ Demand: Market is still growing but at a slower pace: replacement /
repeat buying; customers are knowledgeable and price sensitive is at
a double-digit pace, the degree of concentration in the market is
increasing (exits and acquires in previous stages), market is much
more competitive because the growth of the demand is lower - you
really hav eto comepet aggreassively to attract new customers
b.​ Technology: well-diffused technical know-how: quest for
technological improvement
c.​ Products: trend to commoditisation, attempts to differentiate by
branding, quality and bundling
d.​ Manufacturing and Distribution: emergence of overcapacity,
deskilling of production, long production runs, distributors carry
fewer lines
e.​ Trade: production shifts to newly industrialising to then developing
countries
f.​ Competition: shakeout, price competition increases
g.​ Key success factors: design for manufacture, access to distribution,
brand building, fast product development, process innovation
Examples: smartphones, soft-drinks, passenger airlines, …
Strategies:
●​ cost reduction - since the market is slowing down its growth, to keep your
market share, you have to become more efficient
○​ economies of scale / learning
○​ manufacturing offshoring
○​ business reengineering
●​ product differentiation
○​ focus on market niches that are growing
○​ product innovation
○​ differentiate product quality (eg raw materials)
○​ add services
4.​ Decline
a.​ Demand: demand is decreasing, people do not want anymore the
product cause it has been replaced by a newer technology
b.​ Technology: little product or process innovation
c.​ Products: limited scope for differentiation
d.​ Manufacturing
and
Distribution:
chronic
overcapacity,
reemergence of specialty channels
e.​ Trade: exports from countries with lowest labour costs
f.​ Competition: price wars - the main competition is on price to attract
the few customers still in the industry, exits
g.​ Key success factors: low overheads, buyer selection, signaling
commitment, rationalising capacity
Examples: newspapers, CD / DVD, traditional cable TV, …
Is the Industry Life Cycle a general pattern?
●​ duration varies tremendously across industries
●​ there can be geographical differences (luxury fashion dirven by demand
in China and taxes in the US)
●​ heterogeneity within the industry (growth of electric vehicles, while the
other ones are in maturity)
●​ patterns / shapes also differ:
○​ in some industries, decline is unlikely obsolences does not make
sense (residential construction, food processing, clothing)
○​ in others, the ILC can be rejuvenated - after a stage of decline, the
industry goes back to growing (beer, music)
multiple
generation
of
technologythe introduction of a
new technology within an industry
concentration - if there are few
players, they will be willing to
collude, not to compete (trying not
to compete too aggressively in
order not to drive average industry
profitability down); higher concentration implies higher ROCE
diversity of competitors - if competitors are diverse in terms of goals, cost
structures (negative) - if competitors are similar, they share the same goals and
structure, so it is easier to collude, “setting common rules of the game”; the less
similar they are, the more they are differentiating how they gain market share, the
more difficult is to (in terms of goals, overall objectives)
market growth rate - if the market is growing,we do not need to compete to have
the same markets share we are having now
excess capacity if you have excess capacity, you need to lower prices with the
potential of starting a price war
exit barriers - if exit barriers are high, you may start competing on process cause
you have nothing to lose
cost conditions - high fixed costs are a negative factor - you are more rigid, you
need to reduce costs to be able to sell more
How to measure concentration?
count the number of firms
try to determine concentration index: Cx = sum of market share of the x largest
companies
best ine is Herfindahl index
-​ if HHI
barriers to entry?
ex ante: what you need in order to enter
-​ exogenous (structural)
-​ capital requirement (airlines)
-​ legal restrictions (pharma, banking)
-​ endogenous (strategic, created by incumbents)
-​ economies of scale
-​ economies of learning
-​ absolute cost advantage
-​ access to distribution
-​ buyer loyalty
ex post: what you need to do to stay there
-​ incumbents behaviour ins responding to new entrants, retaliation, - price
war
monopoly is probably the best industry in terms of average profitability
the average profitability in terms of perfect competition is 0 - the profit produced
just covers the costs of the company
buyer power depends on
1.​ price sensitivity
2.​ relative bargaining power
elements on which buyer power depends
-​ uniqueness - if the product is unique, you are not price sensitive
-​ alternatives - of they are many alternatives, you are more sensitive
-​ cost of product relative to total cost? - buying a car vs buying pasta
relative bargaining power depends on relative concentration, ability to backward
to integrate (apple decided to start producing its processors at home, switching
costs - depend on product uniqueness and network effect)
supplier power
-​ the supplier industry is more concentrated than the industry it sells to
-​ suppliers offer differentiated / unique products, switching costs, there are
few or no substitutes, suppliers serve other industries
substitutes . company offering a product with similar benefits from other
industries
-​ buyer propensity to substitute
-​ relative price and performance
-​ switching costs / network effects
buyer power is high when customers are purchasing in large volumes; also when
products are standard and undifferentiated,
intel: analyse the overall semiconductor industry
Intel Case
industry analysis is about analysing the overall industry
and the end of the analysis, it should be stated if the industry is considered
profitable or not (and based on this analysis, I believe this industry is…); “industry is
profitable for the incumbent but not so profitable for new entrants because of
entry barriers”
substitutes are product from another industry
when analysing supplier’s power, you should differentiate between different types
of suppliers and each of them can have different bargaining power
the industry in the 90s was pretty profitable: low competition, low threats of new
entries and substitutes, moderate power for suppliers and buyers
-​ it was a highly concentrated industry, only few players used to compete
-​ there was a high product differentiation
-​ competition was put on innovation rather than price
-​ however, there were high fixed costs due to vertical integration
industry with high concenrtartion and high degree of innovation, but evry rigid
cost structure
rivalry was low, especially for the CPU
threats of new entrants
-​ exogenous barriers: high
-​ endogenous barriers: barriers created by incumbent: high
-​ investment in RD
-​ economies of scale
-​ economies of learning
-​ ecosystem lock-in = high switching costs for PC producers
-​ Wintel partnership was the standard in the industry
barriers to enter are high, so there are low
buyer power
-​ key buyers are PC producers: IBM; HP; Dell
power
-​ large companies, but
-​ smaller than semiconductor producers
-​ high switching costs
-​ the performance of the computer highly depends on the processor
overall, the buyer power is moderate since companies are large but they are
weakened cause the product is very important to them and
supplier power
-​ equipment manufacturer
Q1 - industry structure in 1990s
Overall, the semiconductor industry is profitable in the 1990s because of
-​ high barriers to entry
intel was positioned well i th
reductio in the barriers to entry - it is easier to enter now
there is a higher competition, reduced concentration
there is overall a higher competition compared to the 90s
buyer power now
some customers (such as apple) decided to start designing own chips, which
increases the power of the buyer
however, GPUs are very important in the industry so buyers are dependent
mixed forces, but overall increase in buyer power
the industry is still profitable but less profitable than before, with exception of very
specialised chips like AI
Q2
-​ As Intel produces its own chips, it is threatened by companies by tsw that is
Taiwan company, super efficient in cutting its cost
Q3 - strategic alternatives
-​ focusing on specific initiatives (improve rd, quicker in developing chips)
-​ focus on growthstartegic fit
-​ switch to fabeless model - become more competitive in the chip
development
-​ aquire startups
-​ specialise in developing segments
-​ focus on manufacturing to become an american alternative of TSMC
-​ useful due to geopolitical tension
-​ risk: TSMC is very strong, need to regain
competitiveness in cost control
-​ leverate US support (public financing willing to invest in
an american company, leverage the relationship with
the governemnt)
-​ hybrid strategy
-​ risk: you are competing against specialised producers,
massive investments are required
-​ establish strategic partnerships to share RD costs
Strategic
1.​ Variable identification - list all the possible strategic dimension
a.​ if you are trying to segment the customers, how do we divide them
i.​ strategic dimensions - gender, education, income
b.​ for a company - a low-end or a high-end product (pricing policy), the
degree of vertical integration, distribution channels used
we try to group companies based on strategic choices, not on markets
best maps group firms that show a similar level of profitability
also, it is good to have groups between which it is difficult to move - mobility
barriers, since to move you need to invest money
semiconductor industry
if you need to choose 2 strategic dimensions in which companies are exposed to
the five forces
main differences among competitors in the strategic choices
-​ to be a designer or not - degree of vertical location - a designer needs to be
very innovative
intel lost a lot of money cause it was overrelying on the pc industry and lost
opportunities in AI, mobile phones and etc - competitors that are better at serving
growing segments are more profitable and positioned in a better way (Intel
invested too late in AI, they also did not seize the opportunity for smartphones)
Industry Evolution and Lifecycle
industries are changing because new competitors enter or some competitors exit,
demand can grow or decrease, there can be a new product introduced or an old
one is replaced by a new one. there are 4 different stages in the lifecycle of a
product/technology / industry
-​ introduction - a product/company/ industry is born (medical equipment for
distant operations, quantum computing, )
-​ demand is low, not many people are familiar with this product, it is
new and risky, also it is probably very expensive
-​ demand is limited to early adopters
-​ technology is completely new and very expensive
-​ the product is of poor quality, not completely defined
-​ lack of distribution channels
-​ only few competitors in the industry
-​ growth - very rapid growth in demand and sales
-​ growth is two-digit
-​ increase in the market penetration because companies are
innovating in the process, new ways to produce products efficiently
and effectively (electric vehicles are in this stage)
-​ strategies are mainly 2: process innovation (introduce a new process
to reduce costs/price, increase customer base) and strategic
positioning (choose competitive advantage and position in the
market, it is not enough to sell a new product)
-​ maturity
-​ sales are still growing but at a lower pace
-​ market is mature
-​ there is an increase in the concentration of the market
-​ growth of demand is lower so the market is much more competitive
(you need to compete aggressively to attract customers)
-​ strategies:
cost
reduction
(economies
of
scale/learning,
manufacturing offshoring, business reengineering, differentiation),
-​ decline
-​ demand is decreasing, products have been replaced and people do
not want/need them anymore
-​ main competition on price to attract the customers that are still in
the industry
Is Industry Lifecycle a general pattern?
not all the industries respect the lifecycle (for example, music industry is violating
it)
S-curves in technology