ANALYZING THE BUSINESS LANDSCAPE

ANALYZING THE BUSINESS LANDSCAPE

Determining Industry Attractiveness and Identifying Strategic Opportunities

0

10

20

30

40

50

60

70

80

90

100

2%

4% 6% 8% 10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

Numberof

Industries

First QuartileAverage

22.2%

Fourth QuartileAverage

9.3%

Note: Return on Equity = Net Income / Year End Shareholders’ Equity; Analysis based on sample of 593 industries

Average = 14.7%Median = 13.8%

11.7%

13.8%

16.5%

Return on Equity (Percent)

Average Return on Equity in US Industries, 1982-1993

Distribution of Industry ReturnsDistribution of Industry Returns

Source: Jan W. Rivkin’s Analysis Based on Dun and Bradstreet Data

Source: Jan W. Rivkin based on Compustat

Computer system design

Operating Income / Assets, 1988-95 (%)

0 5 10 15 20 25

Scheduled airlines

Motor vehicles

Cable TV service

Engineering services

Trucking except local

Race track operations

Petroleum / natural gas

Drug stores

Eating places

Dental equipment

Women's clothing stores

Semiconductors

Prepackaged software

Pharmaceuticals

Profitability Differences Across Selected Industries

Profitability Differences Across Selected Industries

Critical Steps in Business Landscape Analyses

Critical Steps in Business Landscape Analyses

Step 1: Analyze shocks and trends in the macro-environmentStep 2: Analyze the nature of market demand and

consumer behaviorStep 3: Analyze business landscape (industry)

- Five competitive forces Framework- Coopetition and Value Net Framework

Step 4: Identify critical success factorsStep 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

Political/Legal

Industry Environment

Demographic Economic

Technological

Global

CompetitiveEnvironment

Sociocultural

Components Of The Macro EnvironmentComponents Of The Macro Environment

Analyzing Market Demand And Consumer Behavior

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 AnalysisIndustry Analysis

Analyzing the Competitive Structure and Behavior of

Industries

Threat of New Entry

Rivalry Among Existing Competitors

Bargaining Powerof Customers

Threat of Substitutes

Bargaining Powerof Suppliers

• Economies of scale• Proprietary product

differences• Brand identity• Switching costs

• Capital requirements• Access to distribution• Absolute cost advantages• Government policy• Expected retaliation

• Relative price performance of substitutes• Switching costs• Buyer propensity to substitute

• 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

• 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

• 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

Porter’s Five Forces AnalysisPorter’s Five Forces Analysis

Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

SUPPLIER POWERLOW

THREAT OF ENTRYLOW

•economies of scale•capital requirements

for R&D and clinical trials

•product differentiation •control of distribution

channels•patent protection

INDUSTRY COMPETITIVENESSLOW

•high concentration•product differentiation•patent protection•steady demand growth•no cyclical fluctuations of demand

THREAT OF SUBSTITUTES

LOW

No substitutes.(Changing as managed care

encourages generics.)

BUYER POWER LOW

Physician as buyer: Not price sensitive No bargaining power.(Changing with managed care.)

DRUG INDUSTRY(ROE=28%)

SUPPLIER POWERHIGH

•strong labor unions•concentrated aircraft makers

THREAT OF ENTRYHIGH

•entrants have cost advantages

•low capital requirements•little product differentiation •deregulation of governmental barriers

INDUSTRY COMPETITIVENESSHIGH•many companies•little product differentiation•excess capacity•high fixed/variable costs•cyclical fluctuations of demand

THREAT OF SUBSTITUTESMEDIUM

•autos for short distance travel

BUYER POWERMEDIUM/HIGH

Buyers extremely price sensitiveGood access to informationLow switching costs

Airline Industry(ROE=-1%)

Customers

Firm

Suppliers

Competitors Complementors

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

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

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

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

Coopetition and the Value NetCoopetition and the Value Net

Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996)

Neutralizing The Five Competitive Forces

Neutralizing The Five Competitive Forces

Force Entry

Rivalry

Substitutes

Buyers

Suppliers

Method for Neutralizing Force Erecting barriers (isolating

mechanisms) create exploit economies of scale, aggressive deterrence, design in switching costs, etc.

Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc.

Improve attractiveness compared to substitutes: better service, more features, etc..

Reduce buyer uniqueness: forward integrate, differentiate product, new customers, etc..

Reduce supplier uniqueness: backward integrate, obtain minority position, second source, etc..

Analyzing Intra-industry Heterogeneity

Analyzing Intra-industry Heterogeneity

Market Segmentation, Strategic Group and Competitor Analysis

Strategic Group AnalysisStrategic 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 VariablesKey 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 BarriersStrategic 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

Braniff

TWA

Eastern

United

American

Delta

WesternRepublicOzark

USAir Piedmont

FrontierAirCal

PSA

South-west

Texas Int’l

United

South-west

AmericaWest

International International

National National

Regional Regional

No Frills No FrillsFull Service Full ServiceQuality of Service Quality of Service

Geo

gra

ph

ic

Sco

pe

The Late 1970s The Early 1990s

RenoAir

Continental

PanAm

Northwest

Laker

WorldAmerican

TWA

Delta

USAir

NorthwestConti-nental

Kiwi

Others

LessonsLessons• 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