ANALYZING THE BUSINESS
LANDSCAPE
Determining Industry Attractiveness and
Identifying Strategic Opportunities
Distribution of Industry Returns
Average Return on Equity in US Industries, 1982-1993
16.5%
90
13.8%
11.7%
100
80
First Quartile
Average
22.2%
Fourth Quartile
Average
9.3%
70
Number 60
of
50
Industries
40
Average = 14.7%
Median = 13.8%
30
20
10
0
32%
Return on Equity = Net Income / Year End Shareholders’
Equity; Analysis based on sample of 593 industries
30%
Note:
28%
Source: Jan W. Rivkin’s Analysis
Based on Dun and Bradstreet Data
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
Return on Equity (Percent)
Profitability Differences Across
Selected Industries
Pharmaceuticals
Prepackaged software
Semiconductors
Women's clothing stores
Dental equipment
Eating places
Drug stores
Petroleum / natural gas
Race track operations
Trucking except local
Engineering services
Computer system design
Cable TV service
Motor vehicles
Scheduled airlines
Source: Jan W. Rivkin
based on Compustat
0
5
10
15
Operating Income / Assets, 1988-95 (%)
20
25
Critical Steps in
Business Landscape Analyses
Step 1: Analyze shocks and trends in the macro-environment
Step 2: Analyze the nature of market demand and
consumer behavior
Step 3: Analyze business landscape (industry)
- Five competitive forces Framework
- Coopetition and Value Net Framework
Step 4: Identify critical success factors
Step 5: Analyze the intra-industry(strategic group) structure
of the industry and identify critical differences
between groups
Step 6: Evaluate the competitive sustainability/
vulnerability of strategic positions of rivals
Components Of The Macro Environment
Demographic
Economic
Industry
Environment
Global
Political/
Legal
Competitive
Environment
Technological
Sociocultural
Analyzing Market Demand And
Consumer Behavior
• Identify market segments and the bases for inherent differences
among customers
•
•
•
•
•
buyer characteristics and preferences
price sensitivity and cross-price elasticities
patterns of use
receptivity to marketing
etc.
• Analyze aggregate and market segment growth rates, saturation
levels, replacement-purchase rates, etc.
• Estimate/forecast the “shape” of the demand curve for the
industry and each segment, keeping in mind that there is, ex
ante, no such thing as an industry life cycle.
• Distinguish the nature of the products/services. i.e. observable
goods, experience goods, communication effect goods
Industry Analysis
Analyzing the Competitive
Structure and Behavior of
Industries
Porter’s Five Forces Analysis
Threat of New Entry
Bargaining Power
of Suppliers
• Differentiation of inputs
• Switching costs
• Presence of substitute
inputs
• Supplier concentration
• Importance of volume to
supplier
• Cost relative to total
purchases
• Impact of inputs on cost or
differentiation
• Threat of forward
integration
• Economies of scale
• Proprietary product
differences
• Brand identity
• Switching costs
•
•
•
•
•
Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
Rivalry Among
Existing Competitors
• Industry growth
• Fixed costs / value
added
• Overcapacity
• Product differences
• Brand identity
•
•
•
•
•
•
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Threat of Substitutes
• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute
Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)
Bargaining Power
of Customers
•
•
•
•
•
•
•
•
•
•
•
Buyer concentration
Buyer volume
Buyer switching costs
Buyer information
Ability to integrate
backward
Substitute products
Price / total purchases
Product differences
Brand identity
Impact of quality /
performance
Buyer profits
SUPPLIER POWER
LOW
THREAT OF ENTRY
LOW
•economies of scale
•capital requirements
for R&D and clinical
trials
•product differentiation
•control of distribution
channels
•patent protection
INDUSTRY
COMPETITIVENESS
LOW
•high concentration
•product differentiation
•patent protection
•steady demand growth
•no cyclical fluctuations
of demand
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
DRUG
INDUSTRY
(ROE=28%)
THREAT OF
SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)
SUPPLIER POWER
HIGH
•strong labor unions
•concentrated aircraft makers
THREAT OF ENTRY
HIGH
•entrants have cost
advantages
•low capital requirements
•little product
differentiation
•deregulation of
governmental barriers
INDUSTRY
COMPETITIVENESS
HIGH
•many companies
•little product
differentiation
•excess capacity
•high fixed/variable costs
•cyclical fluctuations of
demand
BUYER POWER
MEDIUM/HIGH
Buyers extremely price sensitive
Good access to information
Low switching costs
Airline
Industry
(ROE=-1%)
THREAT OF
SUBSTITUTES
MEDIUM
•autos for short distance
travel
Coopetition and the Value Net
A player is your competitor with
respect to customers if customers
value your product less when they
have the other player’s product as
well
Competitors
A player is your competitor with
respect to suppliers if it is less
attractive for a supplier to provide
resources to you when it is also
supplying the other player
Customers
Firm
Suppliers
A player is your complementor
with respect to customers if
customers value your product more
when they have the other player’s
product as well
Complementors
A player is your complementor
with respect to suppliers if it is
more attractive for a supplier to
provide resources to you when it
is also supplying the other player
Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996)
Neutralizing The Five
Competitive Forces
Force
Entry
Method for Neutralizing Force
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
Buyers
Improve attractiveness compared to
substitutes: better service, more features, etc..
Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..
Suppliers
Reduce supplier uniqueness: backward
integrate, obtain minority position, second source, etc..
Analyzing Intra-industry
Heterogeneity
Market Segmentation,
Strategic Group and
Competitor Analysis
Strategic Group Analysis
• A strategic group is a group of firms in an industry following the
same or similar strategy
• Identifying strategic groups:
• Identify principal strategic variables which distinguish firms. For
example, single product Vs product family, private labeling Vs
branded products, push Vs pull marketing, etc.
• Choose variables that produces the greatest contrast between
firms, usually the CSFs. Do not use correlated variable.
• Sometimes it is useful to being grouping firms before selecting
strategic variables
• Position each firm in relation to these variables
• Analyzing the attractiveness of each group by performing a five
force on each group
• Identify the mobility barriers that inhibit movement of firms
between strategic groups
Key Strategic Variables
• Key strategic dimensions
•
•
•
•
•
•
•
•
•
•
•
specialization
brand identification
channel selection
product quality
technological leadership
vertical integration
cost position
service
price policy
financial leverage
relationship to parent company, if any
• Outcome variables (like price and market share) should
not be used to distinguish competitive groups
• Firms cluster into groups based on their commonality in
strategic approach
Strategic Groups and Mobility Barriers
• The “height” of entry barriers depends on the particular
strategic group that the entrant seeks to join
• Mobility barriers are group-specific entry barriers that
restrict shifting strategic position from one strategic group
to another
• Mobility barriers prevent quick imitation of successful
strategies
• The most important aspect of any strategic group analysis
is identifying the mobility barriers that impede movement
between groups
• There is no exhaustive list of mobility barriers
Strategic Maps of the United States Airline Industry
The Late 1970s
International
Laker
The Early 1990s
TWA
Pan
Am
International
United
World
Geographic Scope
Braniff
American
North
west
Conti- Northwest
nental
Eastern
TWA
United
USAir
Delta
National
Delta
National
American
Continental
Western
USAir
Southwest
Regional
Piedmont
Frontier
Texas Int’l
Southwest
RepublicOzark
AirCal
Kiwi
PSA
No Frills
Regional
Full Service
Quality of Service
Reno
Air
Americ
a
West
Others
No Frills
Full Service
Quality of Service
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