Marketing-Industry Analysis
MKT 731 Fall 2005
Instructor: Armand Gervais
Ryerson University
Email: agervais@ryerson.ca preferred
Web: www.ryerson.ca/~agervais
Blackboard: https://my.ryerson.ca/webapps/login
Office: Bus 308
Phone: 416-979-5000 Ext 4215
Lecture 1 Agenda
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Introductions
Overview of Course
Project Overview
Break
Competition and Business Strategy in
Historical Perspective
 Porters Framework
 To Do’s for next weeks class
 Questions and Answers
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Introduction
Armand Gervais
Education:
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B. Comm. University of Toronto-Major Economics
MBA York University
Business Experience:
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6 years retail management. Wendy's, Major Video
4 years with Air Miles
– Business/Database Analyst
– Project Manager Database Development
ID-ONE Inc. Residential Interior Design
– Partner and Operations Manager
Industry Experience:
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Retail-Confectionaries, clothing, travel, books and electronics.
Hospitality- restaurants and resorts
Telecommunications Industry
Loyalty programs
Teaching Experience:
 3 years at Ryerson
 MKT 731 (Industry Analysis), BUS 800 (Strategic Management) CMKT 200
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Class –your turn
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Your Name
School Major or specialization
Work or life experience
Expectations for the class
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What are your objectives?
What has to happen for this to be a success for you?
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Course Outline
Project Outline
Competition and Business
Strategy in Historical
Perspective
Harvard Business School
9-798-010
Dec. 11, 1997
Pankaj Ghemawat & Peter
Botticelli
Historical Background
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Article focuses on the evolution of explaining sustained differences in
performance of companies.
First Industrial revolution mid 1700’s-mid 1800s witnessed intense
competition among industrial firms
Individual companies did not have the potential to affect competition or
the competitive environment
Second Industrial revolution 1850+
Development of railroads which created mass markets along with
improved access to capital allowed for large scale production
Strategy emerged as a way to shape competitive environment
Adam’s Smith Invisible hand tamed by visible hand of managers
Strategy first articulated by Alfred Sloan
M-form of corporation-large investments in manufacturing and marketing
and in management to coordinate these functions
General Motors 1923-46 Alfred Sloan devised strategy based on
strengths and weaknesses
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Historical Background
 Challenges of WWII vital stimulus to
strategic thinking
 Learning curves became increasingly
important tool for planning
 Discovered by military aircraft industry
1920’s-1930’s
 Direct labour costs decreased by a
constant % as cumulative # of aircraft
produced doubled.
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Academic Underpinnings
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Wharton 1881, Harvard 1908
1950’s Smith and Christensen taught students to question
whether a firm’s strategy matched its competitive environment
How is the whole industry doing? How to compete with others?
What things does the firm have to be especially competent in
order to compete?
By 1960’s SWOT was used in case studies
Although SWOT was used by many firms including Wal-Mart in
the 90’s it did not define firm’s distinctive competence
Firms aspects that were enduring & unchanging vs. responsive
Theodore Levitt in article “Market Myopia” was critical of firms
delivering the wrong product based on distinctive competence
He argued when companies fail it means the products offered
failed to adapt to consumer needs.
Music industry and it current distribution model
Fax machine and advent of email
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Igor Ansoff
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Igor Ansoff argued that Levitt was asking companies to take unnecessary
risks
Companies should ask if a product have a common thread with existing
products
Sony photo optics cameras video cameras digital cameras
Customers are sometimes identified as the common thread
Issue is that customers will frequently have a range of unrelated product
missions or needs Must leverage a companies core competencies.
McDonalds-Pizza, Wraps, salads etc.
Ansoff suggested the following categories for defining the common
thread in its business/corporate strategy see next slide
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Ansoff’s Product/Mission Matrix
Present Product
Present Mission
New Mission
New Product
Market
Penetration
Product
Development
Market
Development
Diversification
This is where
many companies
get into trouble!
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Boston Consulting Group
 1960’s brought diversification and
technological changes increasing the
complexity of strategic situations companies
faced
 Henderson believed strategy should be
based on logic not intuition
 BCG wanted to explain why one competitor
outperforms another assuming comparable
management skills and resources.
 BCG’s claim for the experience curve was
for each cumulative doubling of experience,
total costs decline by 20-30% due to
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BCG’s Growth Share Matix
High Share
High Growth
Slow Growth
Low Share
“Star”
“Question Mark”
“Cash Cow”
“Dog”
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BCG and McKinsey
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BCG’s Strategy recommendation was to maintain a balance between
“Cash cows” and “Stars” while allocating some resources to “Question
Marks”
“Dogs” were to be sold off.
Since the producer with the largest stable market share eventually has
the lowest costs and greatest profits it is vital to dominant market share
McKinsey argued that the firm should be organized on more strategic
lines with greater concern for external conditions and more future
oriented
1971 GE asked McKinsey to examine their SBU’s
Not convinced that BCG’s Growth Matrix was sufficient McKinsey
developed: Industry Attractiveness Business Strength Matrix
PIMS (Profit Impact of Market Strategies) used data from 620 SBUs from
57 diversified corporations.
Determined ROI by regressing historical returns on variables like market
share, product quality, marketing, R&D and several others
Regression analysis established benchmarks for potential performance
of SBU’s with particular characteristics against actual performance
By 1970’s virtually every consulting firm used some type of portfolio
analysis to generate strategy recommendations
All these applications forced deaveraging of cost and performance numbers
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Industry Attractiveness Business Strength
Matrix
Industry Attractiveness
High
Business Strength
High
Medium
Low
Investment
and
Growth
Selective
Growth
Selectivity
Selective
Growth
Selectivity
Harvest/Divest
Selectivity
Harvest/Divest
Harvest/Divest
Medium
Low
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Theories under attack
Experience Curve
 High inflation and excess capacity due oil shocks of 1973 disrupted historical
experience curves in many industries
 Another problem pursuing a cost curve minimization strategy was that it reduced
the firms ability to make innovative changes or respond to changes made by
competitors
 Ford’s focus on costs left him venerable to Sloan’s (GM’s) strategy of innovation.
 Another issue is that experience curves assume experience can be kept
proprietary. Managers and employees and suppliers are shared
Portfolio Analysis under attack
 Strategic recommendations were sensitive to specific portfolio analytic
techniques employed. Depending on what technique was used you got a different
answer!
 Using these techniques resulted in nothing more than fine tuning current strategy
 They ignored unexpected thrust from companies not considered competitors
 Displacing technologies Airplanes vs. transoceanic liners
 Largest criticism came from Hayes and Abernathy analysis promoted analytic
detachment rather than insight and short term cost reduction rather than long
term development of technological competitiveness.
 These and other criticisms gradually diminished the popularity of portfolio
analysis
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Unbundling Industry Attractiveness
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This all led to a new focus on Industry attractiveness and competitive
position
 U.S. industry competitive forces increase dramatically due to import
competition, antitrust actions and deregulation
 In 1958 56% of U.S. economy subject to competition by 1980 77%
 Harvard School argued that the structure of many industries may permit
incumbent firms to earn positive economic profits over long periods of time
 Economists believed perfect competition that is large equally able competitors
drive industry’s aggregate economic profits down to zero
 Joe Bain of Harvard Economics uncovered relationships between structure and
performance
 First study found that profitability of manufacturing industries in which the
largest 8 competitors accounted for more than 70% of sales was nearly twice
that of industries with 8 firms concentration less than 70%
 Second study explained how certain industries raise prices without attracting
competitors
3 Barriers
1. Cost advantages such as a patent Pharmaceuticals
2. Product differentiation 3M
3. Economies of scale Auto production Microchips
 These studies reinforced the idea that some industries are inherently much
more profitable than others
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Differences in Profitability of
Industries
Scheduled air transport
Motor vehicles
Cable television service
Com puter system design
Engineering services
Trucking except local
Race track operations
Petroleum / natural gas
Drug stores
Eating places
Dental equipm ent
Wom en's clothing stores
Sem iconductors
Prepackaged softw are
Pharm aceuticals
0%
5%
10%
15%
20%
25%
30%
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Problems with analysis
1.Economists focused on issues of public
policy rather than business policy
2.Bain and his successors used a limited
list of structural variables to explain
industry profitability thereby
shortchanging the richness of modern
industrial competition
Both these problems were address by
Michael Porter in 1974
Porter prepared a note that focused on
the business policy objective of profit 19
Porter 5 Forces Framework
New Entrants
Threat of New Entrants
Industry
Competitors
Buying Power
of Buyers
Bargaining Power
of Suppliers
Suppliers
Intensity of
Rivalry
Buyers
Threat of Substitutes
Substitutes
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Porter 5 Forces Framework
Entry Barriers
Economies of Scale
Proprietary Product Differences
Brand Identity
Switching Costs
Capital Requirements
Access to Distribution
Absolute Cost Advantages
- Proprietary learning curve
- Access to necessary inputs
- Proprietary low-cost product
design
Government Policy
Expected Retaliation
Rivalry Determinants
New Entrants
Threat of New Entrants
Industry
Competitors
Buying Power
of Buyers
Bargaining Power
of Suppliers
Suppliers
Intensity of
Rivalry
Determinants of Supplier Power
Differentiation of Inputs
Switching Costs of Suppliers and
Firms in the Industry
Presence of Substitute Inputs
Supplier Concentration
Importance of Volume to Supplier
Cost Relative to Total Purchases in
the Industry
Impact of Inputs on Cost or
Differentiation
Threat of Forward Integration Relative to
the Competition
Threat of Backward Integration by
Firms in the Industry
Industry Growth
Fixed (or Storage) Costs/Value
Added
Intermittent Over-Capacity
Product Differences
Brand Identity
Switching Costs
Concentration and Balance
Informational Complexity
Diversity of Competitors
Corporate Stakes
Exit Barriers
Buyers
Determinants of Buyer
Power Leverage
Bargaining
Price Sensitivity
Threat of Substitutes
Substitutes
Determinants of Substitutes
Relative Price Performance of
Substitutes
Switching Costs
Buyer Propensity to Substitute
Buyer Concentration
vs. Firm
Concentration
Buyer Volume
Buyer Switching Costs
Relative to Firm
Switching Costs
Buyer Information
Ability to Backward
Integrate
Substitute Products
Pull-Through
Price/Total
Purchases
Product
Differences
Brand Identity
Impact on
Quality/
Performance
Buyer Profits
Decision Makers’
Incentives
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Tradeoffs using Porters Model
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Framework encompasses many variables and seeks to capture much of
the complexity of actual competition
* Porters Framework identifies relevant variables and the questions that
users must answer in order to develop conclusions tailored to a
particular industry and company*
The drawback of the framework is it often ranges beyond the empirical
evidence available
Survey of empirical literature in the late 80’s revealed that only a few
points were strongly supported by empirical literature generated by the
IO field. These appear in red on the previous slide
One of the breakthroughs built into Porter’s framework was that it
emphasized ‘extended competition’ for value rather than just competition
among existing rivals
The biggest conceptual advance was proposed in the mid 90’s by two
strategist concerned with game theory
Brandenburger and Nalebuff argued that the process of creating value in
the marketplace involved “four types of players-customers, suppliers,
competitors, and complementors.”
Complementors are other firms from which customers buy
complementary products and services . Software or Peripherals for
computers
Or which suppliers sell complementary resources
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Crucial assumptions built into
Porter’s Model
McKinsey argues that Porter framework
made three critical assumptions:
1.Industry consists of unrelated buyers,
sellers, substitutes and competitors that
interact at arm’s length
2.Wealth will accrue to players that are
able to erect barriers against competitors
and potential entrants: in other words,
that the source of value is structural
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advantage
Unbundling Competitive Position
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Intra-industry differences in profitability may be larger than differences
across industries
Industry-level effects account for 10-20% of variation of profitability while
stable within-industry effects account for 30-45% see next 3 slides
Differences in profitability within industries can be even larger
Toyota vs. Ford $2000 vs. $200 profit/vehicle to manufacturer
One might argue that most businesses in most industry environments
are better placed to try to alter their own competitive positions rather
than the overall attractiveness of the industry in which they operate IE
Southwest vs. American
For this reason competitive positioning is interesting to strategists
Hunt believed that competitors within particular industries can be
grouped by competitive strategies.
Appliance industry broad line vs. narrow line
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Differences in Profitability of
Industries
Scheduled air transport
Motor vehicles
Cable television service
Com puter system design
Engineering services
Trucking except local
Race track operations
Petroleum / natural gas
Drug stores
Eating places
Dental equipm ent
Wom en's clothing stores
Sem iconductors
Prepackaged softw are
Pharm aceuticals
0%
5%
10%
15%
20%
25%
30%
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Differences in Profitability Within the
Airline Industry
TWA
Continental
US Airw ays
Delta
United
Am erican
Southw est
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
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Differences in Profitability Within the
Pharmaceutical Industry
Genentech
Nova-Nordisk
Rhone-Poulenc
Allergan
Scherer
Bausch & Lom b
Abbott
Carter-Wallace
Boc
Pfizer
Merck
Sm ithkline Beecham
Am erican Hom e Prod
Scherin-Plough
Johnson & Johnson
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
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Competitive Cost Analysis
 Several academic views have emerged
about the sources of performance
differences with industries
 Competitive cost analysis survived the
declining popularity of the experience curve
in the 1970’s but was reshaped in two
important ways:
1.More attention was paid to disaggregating
businesses into their component activities or
processes and how costs of activities might
be shared across businesses
2.Strategists greatly enriched their menu of
cost drivers to include more than just
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Customer Analysis
 Increased sophistication in analyzing
relative costs was accompanied by increase
attention to customers in the process of
analyzing competitive position
 This lead to the reconsideration of the idea
that attaining low costs and offering
customers low prices was always the best
way to compete.
 More attention came to be paid to
differentiated ways of competing that might
let a business command a price premium by
improving customers’ performance or
reducing their other costs
 Both Hall and Porter argued that successful29
Porter’s Value Chain
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Porters Value chain resembled McKinsey’s business system
He focused on the links within the value chain as well as connecting the
value chain to the determinants of competitive position.
Not just how you do things but what you do that determines profitability
Porter asserted that competitive advantage cannot be understood by
looking at a firm as a whole but It stems from the many discrete activities
it performs
Putting customer analysis and cost analysis together exposed situations
in which 20% of a businesses customers accounted for more than 80% or
even 100% of its profits The Famous 80/20 Rule
Porters Value Chain
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Sales &
Marketing
Service
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Dynamics of Competition
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Most ideas and tools for competitive positioning thus far were static in the sense
they did not explicitly address the dynamics of the competitive process
How long can competitive advantage be sustained on the assets in place and what
are the profitable reinvestment opportunities afforded by strategy
In the 1980’s analysis showed that profitability and growth could not automatically
be sustained
Analysis of 700 businesses indicated that nine-tenths of the profitability
differential between the below and above average businesses vanished over a 10
year horizon
The Red Queen effect is at work when a predator learns to run faster; its prey
responds by acquiring better camouflage; the predator then develops a better
sense of smell; the prey starts to climb trees; and so on.
A study of the performance of more than 400 companies over 30 years reveals that
firms find it difficult to maintain higher performance levels than do their
competitors for more than about five years at a time
How can businesses create and sustain competitive advantage?
Stalk argues that leading edge of competition is the combination of fast response
and increasing variety
Companies without these advantages are slipping into commodity-like
competition, where customers compete mainly on price
Japanese and the strategic treadmill
Japanese electronics manufactures had reached a remarkable level of efficiency
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but they did not meet or create needs for their customers
Porter 5 Forces Framework
New Entrants
Threat of New Entrants
Industry
Competitors
Buying Power
of Buyers
Bargaining Power
of Suppliers
Suppliers
Intensity of
Rivalry
Buyers
Threat of Substitutes
Substitutes
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Porter 5 Forces Framework
Entry Barriers
Economies of Scale
Proprietary Product Differences
Brand Identity
Switching Costs
Capital Requirements
Access to Distribution
Absolute Cost Advantages
- Proprietary learning curve
- Access to necessary inputs
- Proprietary low-cost product
design
Government Policy
Expected Retaliation
Rivalry Determinants
New Entrants
Threat of New Entrants
Industry
Competitors
Buying Power
of Buyers
Bargaining Power
of Suppliers
Suppliers
Intensity of
Rivalry
Determinants of Supplier Power
Differentiation of Inputs
Switching Costs of Suppliers and
Firms in the Industry
Presence of Substitute Inputs
Supplier Concentration
Importance of Volume to Supplier
Cost Relative to Total Purchases in
the Industry
Impact of Inputs on Cost or
Differentiation
Threat of Forward Integration Relative to
the Competition
Threat of Backward Integration by
Firms in the Industry
Industry Growth
Fixed (or Storage) Costs/Value
Added
Intermittent Over-Capacity
Product Differences
Brand Identity
Switching Costs
Concentration and Balance
Informational Complexity
Diversity of Competitors
Corporate Stakes
Exit Barriers
Buyers
Determinants of Buyer
Power Leverage
Bargaining
Price Sensitivity
Threat of Substitutes
Substitutes
Determinants of Substitutes
Relative Price Performance of
Substitutes
Switching Costs
Buyer Propensity to Substitute
Buyer Concentration
vs. Firm
Concentration
Buyer Volume
Buyer Switching Costs
Relative to Firm
Switching Costs
Buyer Information
Ability to Backward
Integrate
Substitute Products
Pull-Through
Price/Total
Purchases
Product
Differences
Brand Identity
Impact on
Quality/
Performance
Buyer Profits
Decision Makers’
Incentives
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Entry Barriers
Economies of Scale
Proprietary Product Differences
Brand Identity
Switching Costs
Capital Requirements
Access to Distribution
Absolute Cost Advantages
- Proprietary learning curve
- Access to necessary inputs
- Proprietary low-cost product design
Government Policy
Expected Retaliation
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Rivalry Determinants
Industry Growth
Fixed (or Storage) Costs/Value Added
Intermittent Over-Capacity
Product Differences
Brand Identity
Switching Costs
Concentration and Balance
Informational Complexity
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Determinants of Buyer Power
Bargaining Leverage
Buyer Concentration vs. Firm
Concentration
Buyer Volume
Buyer Switching Costs Relative
to Firm Switching Costs
Buyer Information
Ability to Backward Integrate
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Epistasis
This occurs when interaction between the parts
builds to such an extent that any positive
change in one part has ripple effects that
cause negative change elsewhere. The
system thus becomes more conservative as it
grows, and finding adaptations that don’t
have harmful side effects gets harder and
harder.
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Determinants of Buyer Power
Price Sensitivity
Price/Total Purchases
Product Differences
Brand Identity
Impact on Quality/Performance
Buyer Profits
Decision Makers’ Incentives
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Determinants of Supplier Power
Differentiation of Inputs
Switching Costs of Suppliers and Firms in the
Industry
Presence of Substitute Inputs
Supplier Concentration
Importance of Volume to Supplier
Cost Relative to Total Purchases in the
Industry
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Determinants of Supplier Power
Impact of Inputs on Cost or
Differentiation
Threat of Forward Integration Relative to
the
Competition
Threat of Backward Integration by Firms
in the Industry
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Determinants of Substitutes
Watch Technological developments
Relative Price Performance of Substitutes
Switching Costs
Buyer Propensity to Substitute
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To Do’s for Next Week
– Email me your contact information please include your major, work
history and expectations
– Get textbook and case package
– Complete the assigned readings
– Begin to form groups
– Contemplate company/industry for Project
*Reminder* The first half of next weeks class will be held in the
Library 2nd Floor
Research Seminar with Jane Binksma
Please be prompt
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