Average Return on Equity in US Industries, 1982-1993
100
90
80
70
Number of
Industries
60
50
40
30
20
10
0
Fourth Quartile
Average
9.3%
Average = 14.7%
Median = 13.8%
First Quartile
Average
22.2%
Source: Jan W. Rivkin’s Analysis
Based on Dun and Bradstreet Data
Return on Equity (Percent)
Note: Return on Equity = Net Income / Year End Shareholders’
Equity; Analysis based on sample of 593 industries

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

Components Of The Macro Environment
Demographic Economic
Global
Industry
Environment
Competitive
Environment
Political/
Legal
Technological Sociocultural

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
Threat of New Entry
• 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

THREAT OF ENTRY
LOW
•economies of scale
•capital requirements for R&D and clinical trials
•product differentiation
•control of distribution channels
•patent protection
SUPPLIER POWER
LOW
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.)
THREAT OF
SUBSTITUTES
LOW
No substitutes.
(Changing as managed care encourages generics.)

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
Customers
Competitors
Firm
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
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)

• 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 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
• Firms cluster into groups based on their commonality in strategic approach

• The “height” of entry barriers depends on the particular strategic group that the entrant seeks to join
• Mobility barriers are group-specific entry barriers that restrict shifting strategic position from one strategic group to another
• Mobility barriers prevent quick imitation of successful strategies
• The most important aspect of any strategic group analysis is identifying the mobility barriers that impede movement between groups
• There is no exhaustive list of mobility barriers

Strategic Maps of the United States Airline Industry
The Late 1970s The Early 1990s
International Laker
TWA
Pan
Am
International
United
World
American
Braniff
North west
United
Eastern
TWA
Continental
Northwest
Delta
USAir
Delta
National
American
National
Continental
Western
RepublicOzark
Regional
USAir Piedmont
Southwest
Texas Int’l
Frontier
PSA
AirCal
No Frills
Quality of Service
Full Service
Southwest
Regional
Kiwi
Americ a
West
Reno
Air
Others
No Frills
Quality of Service
Full Service

• Industries or landscapes are neither created equal nor stay equal
• 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

• Technical Standards & Positive Feedback
Loop
• Price War & Prisoners’ Dilemma
• Advertising War & Escalating Entry
Barriers