04 external environment

8/3/2019 04 External Environment

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2007 Prof. Dr. Bernd Venohr

Business Strategy

External Environment

Prof. Dr. Bernd Venohr

Berlin, April 2007

4


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2 2007 Prof. Dr. Bernd Venohr

Agenda

Introduction to StrategyCourse Overview and Strategy Concept

Economics of Strategy

Shareholder Value

Business Strategy

External EnvironmentInternal Environment

Competitive Positioning

Corporate StrategyDiversification

Mergers & Acquisitions

Global Strategy

Strategy ProcessOrganizational Structure and Control

Strategic Leadership

1

2

3

45

6

7

8

9

10

11


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Agenda

4

Introduction to Strategy


- General environment analysis

- Industry analysis

- Summary and Outlook next Session


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Where are we today?


Business Strategy Corporate StrategyExternalEnvironment

InternalEnvironment

CompetitivePositioning

Diversification

Mergers &Acquisitions

GlobalStrategy

Course OverviewStrategy Concept

Economics ofStrategy

Shareholder Value

Strategy Process

1 2

OrganizationalStructure andControl

StrategicLeadership

10

11

4 5

6

7

8 9

3


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General purpose of external analysis

Identify

Opportunities: conditions that may help firm achieve strategic competitiveness

Threats: hinders or constrains firms pursuit of strategic competitiveness

Two types of environment

Macro environment

Micro environment (industry)

Source: Robert M. Grant, Contemporary Strategy Analysis:

Concepts, Techniques, Applications (5th edition, Blackwell, 2004)


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General environment (macro environment)

Demographic

Population size, age structure,

geographic mix, ethnicity, income

distribution

Socio cultural

Social attitudes, cultural values

Political / legal

Arena of competition for attention andresources from govt.

Law and regulations guiding

competition

Technological

Institutions and activities that effect

knowledge creation

Translation of new knowledge into

new products and processes

Economic

Nature and direction of macro

economy




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PEST is an acronym for Political, Economic, Social andTechnological factors

technological competing technology developme nt

res earch funding

Associated / dependent technologies

replacement technology / solutions

maturity of technology

manufacturing m aturity and capacity

information and communications

consumer buying me chanisms / technology

technology legislation

innovation potential

technology access, licencing, patents

intellectual property issues

social lifestyle tre nds

demographics

consumer attitudes and opinions

media views

law changes affecting social factors

brand, company, technology image

consumer buying patterns

fashion and role m odels

major events and influences

buying access and trends

Ethnic / re ligious factors

advertising and publicity

economic home economy situation

home economy trends

overseas economies and trends

general taxation issues

taxation specific to product/services

Seasonality / weather issues

marke t and trade cycles

specific industry factors

marke t routes and distribution trends

Customer / end-user drivers

interest and exchange rates

political Ecological / environmental issues

current legislation home m arket

future legislation

European / international legislation

regulatory bodies and processes

governme nt policies

governme nt term and change

trading policies

funding, grants and initiatives

home market lobbying / pressure groups

international pressure groups




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4

Agenda




- Industry analysis



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Objectives of industry analysis

Explain and predict the average long-term profitability ofthe companies in a particular industry: empirical results showsubstantial and sustained differences in profitability amongindustries

Gain understanding of profit differences among competi-tors in the same industry (= relative performance):empirical results show that they are very often large and long-lived. Industry attributes shape such within-industry differences

and enable companies to pursue strategies

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)

Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning;

Michael Porter, Toward a dynamic theory of strategy


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Process of industry analysis (microenvironment)

Define industry boundaries

Identify the participants

Highlight the drivers of long term industry profitability (= five forces)

Identify the factors that drive each force

Assess the strength of each force

Conclusion: Assess industry profitability potential




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Michael Porter Background

Michael E. Porter is the Bishop William Laurence UniversityProfessor at the Harvard Business School.

He has written eighteen books and countless articles. Hismain bookCompetitive Strategy(1980), Techniques forAnalyzing Industries and Competitors, is now in its 63rdimprint and has been translated into 17 languages. His

second major strategy book, Competitive Advantage, is inits 34th printing.

Porter subsequently moved from competition between firmsto competition between nations. In The Competitive

Advantage of Nations (1990) he examined how somestates were wealthy and why others were not.

Porter als has been very active in consulting with majorcorporations worldwide and advises governments oneconomic strategies

Source: Wikepedia


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The art of strategy: to find an advantaged competitiveposition in an attractive industry

Lo Hi

Industry attractiveness

Incr

easing

retu

rns

Advantage

Competitive

position

Disadvantage


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Porter Framework:Five Forces determine industry attractiveness

In any competitive industry there are five basic forces at work that

determine long-term industry profitability.*The collective strength of

these five forces determines the potential for firms in the industry to

earn returns on investment in excess of opportunity cost of capital

(= industry attractiveness)

Underlying each of the five forces are a number of economic and

technical determinants of its strengths in a particular industry: e.g. the

threat of entry is a function of 7 types of structural entry barriers and the

expected retaliation of encumbents, itself a function of some predictable

industry characteristics

Source: Michael Porter, Industrial Organizai tion and the evolution of concepts for strategic planning;

Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Strategy and the business landscape

*The structure of the industry should be considered separately from short term fluctuations in the industry -

for example, variations in demand or cyclical economic conditions


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Porter Framework: Competitive Position determinesprofits differences vis-a-vis direct competitors (= relativeperformance versus competitors)

Holding industry constant, some firms do better because of their

relative competitive position, orcompetitiveadvantage, within the

industry

Basic economics of strategy:

a company cannot earn superior returns unless it achieves either

lower average costs or higher average prices than its competitors.

The gap between a firms profitability and industry average

profitability can be composed in cost and price components




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Porter Framework: There are two basic types of competitiveadvantage

= price - cost

to increase , a firm must either :

Decrease costbelow its

competitors

Increase priceabove its

competitors

Cost leadership Differentiation

Generic Strategies (Porter)Source: Michael Porter, Industrial Organizai tion and the evolution of concepts for strategic planning;



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Porters five forces framework brings three new aspects toeconomic analysis

Relax assumption of both large numbers of competitors / buyers and

homogeneity (oligopolistic rivalry instead of perfectly competitive market in

which behavior of market participants will be immaterial to one another,

need for strategy)

Along vertical dimension shift from two-stage vertical chains

consisting of a supplier and a buyer to three-stage chains made up of

suppliers, rivals, buyers

Create new horizontal dimension: account for potential entrants and

substitutes




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Porters Five Forces of Competition Framework:the collective strength of the five forces determinesan industrys long-term profitability and potentialfor value creation

SUPPLIERS

POTENTIAL

ENTRANTSSUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Source: Michael Porter, Competitive Strategy


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Industry Boundaries: Before one can analyze an industryone must define it

Key challenge: standard statistical definitions only partly relevant

official statistical definitions (SIC codes; NACE codes) are mostly basedon technical input considerations (=e.g. metal manufacturer) that rarelycorrespond to competitively relevant industry conditions (=e.g. carcomponents manufacturer)

it is rare that a company is in direct competition with every companystatistically defined as being in its industry; on the other hand it is likelythat the firm competes with many companies outside the industry

Company perspective important: who are my competitors?

substitution on demand side: competitors that offer products or services

that are close substitutes substitution on supply side/ technological substitutability: can know how

and production equipment be cross-utilized between two product lines?





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Three Scope issues in defining an industry

Horizontal: across product markets (narrow or broad definitions ofsubstitutes)

Vertical: along value chain (how many vertically linked stages?)

Geographic: across local / regional / national boundaries (are physicallyseparate markets treated as being served by the same industry or different

industries?)





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The concept of value proposition helps to define thehorizontal scope (=substitution products from thecustomer perspective)

What

Relative

Price?

What

Customers?

Which

Needs?

What end

users?

What

channels?

Which products?

Which features?

Which services?

Entrepreneurial/creative process:

A new value proposition can create a new industry

Source: Michael M. Porter; What is s trategy? World Business Forum, June 6, 2006


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The concept of value chain helps to define the verticalscope of an industry

Separate value chains One Integrated value chain

Ability to Leverage Key Activities Across Businesses


Marketing& Sales

(e.g. SalesForce,

Promotion,Advertising,

ProposalWriting, Website)

InboundLogistics

(e.g.IncomingMaterialStorage,

DataCollection,Service,CustomerAccess)

Operations

(e.g.Assembly,ComponentFabrication,

BranchOperations)

OutboundLogistics

(e.g. OrderProcessing,

Warehousing,Report

Preparation)

After-SalesService

(e.g.Installation,CustomerSupport,

ComplaintResolution,Repair)

Marg

in

Primary Activities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Serv ices)

Technology Dev elopment(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value:

What

buyers are

willing to

pay

Support

Activities


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The degree of integration of value chains across boardershelps to define the geographic scope of an industry

GlobalNationalLocal Regional

SupportActivities

Marketing

& Sales

(e.g. Sales

Force,Promotion,

Advertising,Proposal

Writing, Web

site)

Inbound

Logistics

(e.g. Incoming

MaterialStorage, Data

Collection,Service,

Customer

Access)

Operations

(e.g. Assembly,

Component

Fabrication,

Branch

Operations)

Outbound

Logistics

(e.g. Order

Processing,Warehousing,

ReportPreparation)

After-Sales

Service

(e.g. Installation,

CustomerSupport,

ComplaintResolution,

Repair)

M

a

r

g

i

n

Primary Activities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management

(e.g. Recruiting, Training, Compensation System)

Value

What buyersare willing to

pay

Separate local value

chains

Integrated global

value chainAbility to Leverage Key Activities Across Geography

Cross-

National

A distinct strategy is needed for each relevant geographic market



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Industry definition: Example car industry

What industry is BMW in?:

World Auto industry

European Auto industry

World luxury car industry?

Key criterion: SUBSTITUTABILITY

On the demand side: Are buyers willing to substitute between types of cars

and across countries (=similar value proposition)?

On the supply side: Are manufacturers able to switch production between

types of cars and across countries based on an integrated global value

chain?

May need to analyze industry at different levels for different types of

decision




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Segmenting the world automobile market

Luxury Cars

Full-size sedans

Mid-size sedans

Small sedans

Station wagons

Passenger minivans

Sports cars

Sport-utility

Pick-up trucks

US&Canada W.Europe E.Europe Asia Lat.America Australia Africa

REGION




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A strategic group is a group of firms in anindustry following the same or similar strategy

Identifying strategic groups:

Identify principal strategic variables which

distinguish firms Position each firm in relation to these variables

Identify clusters




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Strategic Group Mapping: Firms in same strategic grouphave two or more competitive characteristics in common

Sell in same price/quality range

Cover same geographic areas

Be vertically integrated to same degree

Have comparable product line breadth

Emphasize same types of distribution channels

Offer buyers similar services

Use identical technological approaches


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Strategic groups in the world automobile industry

Broad

PRODUCTRANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED,

SMALL, SPECIALIST

PRODUCERS e.g., Bristol

(U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

NATIONALLY FOCUSED,

INTERMEDIATE LINE

PRODUCERSe.g. Tofas, Proton, Maruti

First Auto Works (China)

REGIONALLY-FOCUSED

BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault,

Kia,

PERFORMANCE CAR

PRODUCERS e.g., Porsche,

Ferrari (owned by Fiat) Maserati,

Lotus

LUXURY CAR

MANUFACTURERS

e.g., Aston Martin, BMW,

Rolls Royce (owned by VW)

GLOBAL SUPPLIERS OF

NARROW MODEL RANGE

e.g., Subaru, Isuzu,

Suzuki, Saab, Hyundai,

Daihatsu

GLOBAL, BROAD-LINE

PRODUCERS

e.g., GM, Ford, Toyota,

Nissan, Honda, VW,

DaimlerChrysler




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Porters Five Forces of Competition Framework:the collective strength of the five forces determinesthe average profitability of an industry

SUPPLIERS

POTENTIAL

ENTRANTSSUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes



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Porters guiding question: what happens to the potentialprofit or value created by a product or service?

Is it bargained away by the suppliers?

Or by customers?

Is it dissipated in rivalry?

Is it appropriated by new entrants?

Is it limited by the existence of substitutes?



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Force 1: Rivalry among existing competitors usually the most powerful of the five forces

Strategic rivalry, not perfect competition

in perfect competition behavior of market participants would be immaterial to one another

rivalry: the purposeful behavior of one firm in a market is substantially affected by thepurposeful behavior of another firm in the same or a related market

Strategic rivalry creates several issues for managers:

who are the my rivals?

how will they be affected by my actions?

how will they react to my actions?

how will I react to their reaction?

Main objective is not to engage in rivalry but to develop mechanism that allow firm(s) toavoid rivalry and its profit destroying effects

Three main groups of structural determinants

number and relative size of competitors

industry-basic conditions

behavioral determinants



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Force 1: Degree of rivalry is high

Competitors are numerous or are roughly equal in size and power

Industry growth is slow

There is low product differentiation (products are commodities)

There are low switching costs

There are high fixed or storage costs

High fixed costs: pressure to fill capacity, probability of price cutting

High storage costs: cut prices to get rid of product

Capacity can only be added in large chunks (more disruptive than anything)

There are high exit barriers: specialized assets, fixed costs to exit,

emotional barriers, government restrictions Strategic confusion: Firms have diverse strategies, corporate priorities,

resources, and countries of origin



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Force 2: Threat of new entrants:New firms want piece of profits

New entrants bring new capacity, desire for market share and new

resources. Threat of new entry (potential competition) constrains price

and service levels competitors can offer

The strength of this threat depends primarily on barriers to entry

reaction from existing competitors

Entry barriers: whenever it is difficult or uneconomic for an outsider to

replicate the position the incumbents

reduce threat of entry whenever profits, adjusted for cost of capital, rise

above zero

protect incumbents from competition



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Force 2: Threat of new entrants - typical entry barriers

Barriers to entry can take many forms:

Economies of scale: declines in costs of production as absolute volume per

period increases

Product differentiation: established firms have brand identification and customer

loyalty

Capital requirements: for facilities, inventories, start up losses

Other cost disadvantages: proprietary technology, favorable access to raw

materials, favorable locations, government subsidies, learning curve

Distribution channels: established channels already carry existing firms products

Government policy : limits access to raw materials, licenses

Are established firms expected to respond forcefully?

Is there a history of such retaliation? Do established firms have substantial resources to retaliate (cash, capacity)?

Is there currently slow industry growth?


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Force 2: Threat of new entrants Minimum Efficient Scale as entry barrier

Volume

Unit

Costs

MESEntry

Point

Minimum Efficient Scale (MES) is the smallest volume

(market share) for which the unit costs reach a

minimum; required to enter an industry as efficient

competitor

MES determines what market share a potential entrant

must gain to be able to produce efficiently; it also sizes

an entrantss upfront capital commitment

Example: MES is the following industries is:

Cigarettes 20.0%

Tires 30%



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Force 2: Threat of new entrants brand images as entry barrier



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Force 3: Threat of substitute products or services

Every product and service has some substitute: at one level all products aresubstitutes since they compete for the buyers budget; e.g.

Plastic vs. Glass vs. Metal

Newspapers vs. TV vs. Internet

Eyeglasses vs. Contact Lens vs. Laser Surgery

A substitute can perform the same function (=fulfill the same needs) as theproduct of the industry in question

customer function performed, not just physically similar products/services

examples: e-mail/fax/overnight mail

The closeness and availability of substitutes set limits to the actions of everycompetitor in an industry:

the more substitutes and the greater the ease of switching between them

the less the latitude available to the competitors and the more intense their rivalry

Represents an implicit ceiling on prices that existing firms can charge



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Force 4: Bargaining power of buyers

Buyer power : vertical forces that influence who appropriates the valuecreated by an industry

Allows customers to squeeze industry margins

pressing competitors to reduce prices

increase level of service offered without recompense

Most important determinant: size and concentration of customers

A group of buyers is powerful, if:

It purchases large volumes relative to seller sales

The products it purchases are undifferentiated

The product the group purchases is a significant fraction of the buyers costs(Cost of purchases as % of buyers total costs)

It earns low profits

The industrys product is unimportant to the quality of the buyers products It faces few switching costs

Buyers pose a credible threat of backward integration



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Force 5: Bargaining power of suppliers

Mirror image of buyer power: who appropriates the value created by an

industry

Key determinants:

relative size and concentration of suppliers relative to industry participants

degree of differentiation in inputs supplied

A supplier group is powerful, if: It is dominated by a few firms and is more concentrated than the industry it sells to

The supplier groups products are differentiated or it has built up switching costs

There are few substitutes for the suppliers products

The supplier poses a credible threat of forward integration

The industry is not an important customer of the supplier group

Acid test: can supplier set prices that reflect the value of their inputs to the

industry and not just their own production cost?



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Capital requirements Economies of scale

Absolute cost advantage

Product differentiation

Access to distributionchannels

Legal / regulatorybarriers

Retaliation

Buyers propensity tosubstitute

Relative prices &performance ofsubstitutes

Buyers price sensitivity Relative bargaining

power

Concentration Diversity of competitors

Product differentiation

Excess capacity & exitbarriers

Cost structure

Buyers price sensitivity Relative bargaining

power

Summary: The structural determinants of competition

Threat of new entrantsThreat of substituteproducts / services

Bargaining powerof buyers

Rivalry amongexisting competitors

Bargaining powerof suppliers



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SUPPLIER POWER

LOW

THREAT OF ENTRY

LOW economies of scale

and high capital

requirements for R&D ,clinical trials and sales

force

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

THREAT OF

SUBSTITUTESLOW

no substitutes(Changing as managed

care encourages

generics)

BUYER POWERLOW

Physician as buyer:

Not price sensitive

No bargaining power

(Changing with managed care)

Example US drug industry (Long-term ROIC = 22%)

Source: Han, Strategic Management,CalState


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SUPPLIER POWER

HIGH

strong labor unions

concentrated aircraft makers

THREAT OF ENTRY

HIGH

entrants have costadvantages

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

THREAT OF

SUBSTITUTES

MEDIUM

autos for short distance

travel

BUYER POWERMEDIUM/HIGH

Buyers extremely price sensitive

Good access to information

Low switching costs

Example US Airline Industry (Long-term ROIC = 5%)

Source: Han, Strategic Management,CalState


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Strategic Implications of the Five Competitive Forces

Competitive environment is unattractive when:

Rivalry is strong

Entry barriers are low

Competition from substitutes is strong

Suppliers and customers have considerable bargaining power

Competitive environment is idealwhen:

Rivalry is moderate

Entry barriers are high

Good substitutes do not exist

Suppliers and customers are in a weak bargaining position


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Implications of five forces framework for strategy:Coping With the Five Competitive Forces

In a world of no competitive advantage, a firm is stuck in the price-

driven world of pure economic competition, selling commodity - like

goods in direct competition with many similar firms

The best industry a company can be in is one in which its position is

so unique that it has virtually no competition

near monopoly

category of one


Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Startegy and the business landscape


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Implications of five forces framework for strategy:key task of strategy is to create a competitive advantage

Competitive strategy is about taking action to create a defendable

position against the 5 forces

Position the firm so its capabilities provide the best defense against the

existing competitive forces

Influence the balance of forces Anticipate shifts in key factors underlying the forces and respond so as to

exploit the changes

The strongest force or forces become crucial for strategy formulation


Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Startegy and the business landscape


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Limitations of Five Forces Analysis

Static snapshot of industry attractiveness

Individual firm actions that change industry structure are not considered

Example: role of innovation de-emphasized

5 Forces are more or less mutually exclusive, but may not be exhaustive

e.g. role of related and supporting industries :Assumes buyers, suppliers,

competitors and substitute providers interact at arms length and ignores role ofcooperation and complementors (e.g. horizontal alliances; complementarycomponent providers)

impact of all macroeconomic forces understood only through their impact on fiveforces

Framework, not formal model

many variables, tries to capture complexity of actual competition identify the relevant variables and the questions that the user must answer in

order to develop conclusions tailored to a particular industry and company

limited empirical support

Source: Pnkaj Ghemawat, Strategy and the business l andscape


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When an industry with a reputation

for difficult economics meets a

manager with a reputation forexcellence, it is usually the industry

that keeps its reputation intact.

Warren Buffet

What is more important: industry (picking the righthorseor company (the skill of the jockey) ?


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For most businesses, competitive position has afar greater impact on profitability than industryattractiveness: Industry effects explain only about10 20% of the variation of a firms economic profitability

Percentage of variance in firms return on assets explained by:



Firm-specific

effects

Unexplained

variance

0.6% 80.4%

44.2% 44.8%

31.7% 48.4%

35.8% 52.0%

Industry effects

19.6%

4.0%

18.7%

8.1%

Schmalensee (1985)

Rumelt (1991)

McGahan & Porter

(1997)

Hawawini et al (2003)


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4

Agenda




- Industry analysis



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Read slides on session 4 downloaded from ILIAS

Visit company web pages and prepare as team a brief description

using Porters 5 Forces framework

What industry (industries) your company is in ?

Build a Porters five forces model for your companies main industry : Which

forces are the strongest/weakest ? Assess the attractiveness of your companies main industry: Is this a good

industry to be in? Use financial results (Return on sales/ROS) or, if available,

Return on Capital Employed/ROIC) for your company and 2 competitors to prove

your assertion.

Topics of next session

Brief 3 page presentation on each company (attractiveness of industry); bringpresentation on usb stick

Lecture: Internal environment

New Assignment and Outlook next Session


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Appendix


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The starting point: The Industrial Organization Model ofsuperior returns

Why are some firms more successful than others?

Profits = f (industry structure)

Characteristics of external environment largely determine

appropriate firm strategies and performance

Industry in which company operates has strong influence

on its economic performance

Choose attractive industries

Largely focuses on industry structure or attractiveness

rather than internal firm characteristics




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Structure-conduct-performance trilogy: Industry structureconstrains options and drives performance

Key thesis:industry structure determined

conduct / behavior of firms, whose joint

conduct the determined the collective

performance of the firms in the industry

Performance defined broadly:

Profitability

technical efficiency (cost minimisation)

innovativeness

Firm conduct (strategy): firms choice of

key decision variables like

Price

Advertising

Capacity

Product quality

Industry structure: relatively stable

economic and technical dimensions of an

industry in which competition occurred

barries to entry

number and size of distribution of firms

(conecentration ratio)

product differentiation and overall elasticityof demand

Key assumption: since structure determined

firms conduct, which jointly determined

performance, one could ignore conduct and

look directly at industry structure to explain

performance

Numerous empirical studies explored therelationship between structural variables and

performance focussing on a limited number of

structural variables




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Structure-conduct-performance

Number of buyers

and sellers

Degree of productdifferentiation

Barriers to entry

Cost structures

Vertical integration

Alliances

Pricing

Advertising

R&D

Investment in plant

and equipment

Economic profits

Accounting profits

(ratios)

NPV/DCF

MVA/EVA

Tobins Q

Industry Structure Firm Conduct Performance




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Limitations of IO framework for strategy

Framed in public policy terms: objective minimizing excess profits. Profitsreflect some problem in industry structure, that can/should be fixed bygovernment regulation

Mainly concernd with industries; firms assumed identical(firms in industry are strategically similar)

Analysis of competitors missing

Static perspective

Highlighting few key elements

Assume away conduct as relevant to performance:industry structure = firm performance


Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Strategy and the Business Landscape


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Uses of industry analysis for strategy

Business level: Develop strategies to outperform industryaverages; better understanding of intra-industry profitdifferences to develop better matches between internal

resources and industry environment

Corporate level: Decisions to enter/exit particular industries;allocation of resources and evaluation of performance acrossportfolio of businesses


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In addition, Porter stresses the management perspective inanalysing industries

Strategy and not public policy objective

strategy: maximizing economic profits and creating near-monopoly

positions rather than

public policy: minimizing excess profits and controlling monopolies

Industry structure partly exogenous and endogenous exogenous economic and technical factors are outside the control of a

company

endogenous factors are subject to influence by firm actions through

strategy (change rules of competition in an industry / shape industry

structure to attain advantaged position)

Industry structure is tied to company economics: structure manifests

itself in revenue, costs investment and on the collective balance sheets and

income statements of industry


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Porter Framework: There are two basic types of competitiveadvantage

Competitive advantage depends on driving a wider wedge between

Price (buyers willingness to pay) and

Costs than competitors

There are logically only two basic types of competitive advantage: lower cost: by designing, producing and marketing a comparable product

or service more efficiently than competitors a firm can gain higher

profitability at comparable or lower prices

differentiation: providing unique and superior non-price value to

customers through product or service performance, special features, after

sales support etc. and commanding premium prices that exceed the extracosts of differentiation




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0

5

0

10

15

20

25%

100%

Share of industry revenue

Auto loans

Leasing

Warranty

Gasoline

Auto

insurance

Aftermarket

partsAuto rental

Operatingmargin

Auto

manufacturing

New car

dealersUsed car dealers

Service & repair

Vertical segmentation & industry profit pools the US auto industry



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Guidelines: Strategic Groups

Constructing a Strategic Group Map

STEP 1: Identify competitive characteristics that differentiate firms in an industry

from one another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating

characteristics

STEP 3: Assign firms that fall in about the same strategy space to same strategic

group

STEP 4: Draw circles around each group, making circles proportional to size of

groups respective share of total industry sales

Variables chosen as axes should expose bigdifferences in how rivals compete

Variables do nothave to be either quantitative or continuous

Drawing sizes of circles proportional to combined sales of firms in each strategic

group allows map to reflect relative sizes of each strategic group

If more than two good competitive variables can be used, several maps can be

drawn


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3 C-Framework for business definition

Cost: defensible cost barriers that result in

large relative cost position differences

degree of cost sharing

similarity of value adding steps

degree of experience transfer possible

Customers: intrinisically different customer

needs leading to different price points

and defensible differentiation

degree of substitution

degree of customer sharing/customer

synergies

Competitoroverlap as acid test

Define the boundaries

where competitiveadvantage can be

established and

sustained (business

battlefield)

Source: Bain


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Demand and/or value chain differences lead tocost barriers and/or customer value barriers whichcreate a separate business arena

High Low

Customer value barriers

Low

Cost barriers

High One

Business

Separate

Business

Source: Bain & Company, Business Definition; Richard Koch, The Financial Times Guide to Strategy

04 external environment

Documents