Further Further Topics Topics in in Industry Industry and and Competitive Competitive Analysis Analysis OUTLINE  Extending 5-forces analysis o Does industry matter? o Complements o Dynamic competition  Game Theory  Competitor Analysis  Segmentation  Strategic Groups Does Does Industry Industry Matter? Matter?     Schmalensee (1985) Rumelt (1991) McGahan & Porter 1997) Hawawini et al (2003) Percentage of variance in firms’ return on assets explained by: Industry Firm-specific Unexplained effects effects variance 19.6% 0.6% 80.4% 4.0% 44.2% 44.8% 18.7% 31.7% 48.4% 8.1% 35.8% 52.0% The The Value Value Net Net CUSTOMERS COMPETITORS COMPANY SUPPLIERS COMPLEMENTORS Five Five Forces Forces or or Six? Six? Introducing Introducing Complements Complements SUPPLIERS Bargaining power of suppliers The suppliers of complements create value for the industry and can exercise bargaining power INDUSTRY COMPETITORS POTENTIAL ENTRANTS COMPLEMENTS Threat of new entrants Threat of Rivalry among existing firms Bargaining power of buyers BUYERS SUBSTITUTES substitutes Dynamic Dynamic Competition Competition Porter framework assumes: (a) industry structure drives competitive behavior (b) Industry structure is (fairly) stable But, competition also changes industry structure: • Schumpeterian Competition: A “perennial gale of creative destruction” where firm strategies continually transforms industry structure innovation overthrows established market leaders • Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsolescing or neutralizing opponents’ competitive advantages Implication: Under dynamic competition, 5-forces framework is less useful—Competitive behavior and industry structure jointly determined by underlying conditions of technology, demand & costs The The Contribution Contribution of of Game Game Theory Theory to to Competitive CompetitiveAnalysis Analysis Main value: Framing strategic decisions as interactions between competitors Predicting outcomes of competitive situations involving a few, evenly-matched players Some key concepts: Competition and Cooperation—Game theory can show conditions where cooperation more advantageous than competition Deterrence—changing the payoffs in the game in order to deter a competitor from certain actions Commitment—irrevocable deployments of resources that give creditability to threats Signaling—communication to influence a competitor's decision Problems of game theory: Useful in explaining past competitive behavior—weak in predicting future competitive behavior What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions A A Framework Framework for for Competitor Competitor Analysis Analysis OBJECTIVES What are competitor’s current goals? Is performance meeting there goals? How are its goals likely to change? STRATEGY How is the firm competing? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES & CAPABILITIES What are the competitors’ key strengths and weaknesses? PREDICTIONS • What strategy changes will the competitor initiate? • How will the competitor respond to our strategic initiatives? Segmentation Segmentation Analysis: Analysis: The The Principal Principal Stages Stages • Identify key variables and categories • Construct a segmentation matrix • Analyze segment attractiveness • Identify KSFs in each segment • Analyze benefits of broad vs narrow scope Identify segmentation variables Reduce to or variables Identify discrete categories for each variable Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus The Basis for Segmentation: Customer and Product Characteristics Industrial Industrialbuyers buyers Characteristics Characteristics of ofthe theBuyers Buyers Household Householdbuyers buyers Distribution Distributionchannel channel Opportunities Opportunitiesfor for Differentiation Differentiation Characteristics Characteristics of ofthe theProduct Product Geographical Geographical location location ••Size Size ••Technical Technical sophistication sophistication ••OEM/replacement OEM/replacement ••Demographics Demographics ••Lifestyle Lifestyle ••Purchase Purchaseoccasion occasion ••Size Size ••Distributor/broker Distributor/broker ••Exclusive/ Exclusive/ nonexclusive nonexclusive ••General/special General/special list list ••Physical Physicalsize size ••Price Pricelevel level ••Product Productfeatures features ••Technology Technologydesign design ••Inputs Inputsused used(e.g (e.g.raw rawmaterials) materials) ••Performance Performancecharacteristics characteristics ••Pre-sales Pre-sales&&post-sales post-salesservices services Characteristics Characteristics of ofthe theBuyers Buyers Industrial Industrialbuyers buyers *Size *Size *Technical *Technical sophistication sophistication *OEM/replacement *OEM/replacement Household Householdbuyers buyers *Demographics *Demographics *Lifestyle *Lifestyle *Purchase *Purchaseoccasion occasion Distribution Distributionchannel channel Opportunities Opportunitiesfor for Differentiation Differentiation Characteristics Characteristics of ofthe theProduct Product Geographical Geographical location location *Size *Size *Distributor/broker *Distributor/broker *Exclusive/ *Exclusive/ nonexclusive nonexclusive *General/special *General/special list list *Physical *Physicalsize size *Price *Pricelevel level *Product *Productfeatures features *Technology *Technologydesign design *Inputs *Inputsused used(e.g (e.g.raw rawmaterials) materials) *Performance *Performancecharacteristics characteristics *Pre-sales *Pre-sales&&post-sales post-salesservices services Segmenting Segmenting the the European European Metal Metal Can Can Industry Industry Food Steel 3-piece Steel 2-piece Aluminum 2-piece General cans Composite cans Aerosol cans Fruit Juice Pet food Soft drink Beer Oil Segmenting Segmenting the the World WorldAutomobile Automobile Market Market REGION US& Canada Luxury Cars Full-size sedans Mid-size sedans Small sedans Station wagons Passenger minivans Sports cars Sport-utility Pick-up trucks W.Europe E.Europe Asia Lat America Australia Africa Vertical VerticalSegmentation Segmentation&& Industry IndustryProfit ProfitPools Pools —The —TheUS USAuto Auto Industry Industry 25 % Operating margin 20 Service & repair Leasing 15 Warranty Auto manufacturing New car dealers 10 Auto loans Used car dealers Auto insurance Aftermarket parts Auto rental 0 Gasoline Share of industry revenue 100% Segmentation Segmentationand andKey KeySuccess SuccessFactors Factorsin inthe theU.S U.S.Bicycle BicycleIndustry Industry SEGMENT Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g Sears’ “Free Spirit”); Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; KEY SUCCESS FACTORS * Low-costs through global sourcing of components & low-wage assembly * Supply contract with major retailer Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g Murray Ohio, Huffy *Cost efficiency through large scale operation and either low wages or automated manufacturing *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers * International marketing & distribution Leading competitors: Raleigh, Giant, Peugeot, Fuji High-priced bicycles for enthusiasts Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores) *Quality of components and assembly, Innovation in design (e.g minimizing weight and wind resistance) *Reputation (e.g through success in racing, through effective brand management) *Strong dealer relations Similar to low-price bicycle segment Strategic Strategic Group Group Analysis 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 • Position each firm in relation to these variables • Identify clusters Strategic StrategicGroups Groupsin in the theWorld WorldAutomobile Automobile Industry Industry GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, DaimlerChrysler Broad REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g Fiat, PSA, Renault, Kia, PRODUCT RANGE GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Subaru, Isuzu, Suzuki, Saab, Hyundai, Daihatsu NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g Tofas, Proton, Maruti First Auto Works (China) LUXURY CAR MANUFACTURERS NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) Narrow National e.g., Aston Martin, BMW, Rolls Royce (owned by VW) PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (owned by Fiat) Maserati, Lotus GEOGRAPHICAL SCOPE Global Strategic StrategicGroups GroupsWithin Within the the World World Petroleum Petroleum Industry Industry Kuwait Petroleum PDVSA NATIONAL Iran PRODUCTION COMPANIES NOC 1.5 1.0 0.5 Vertical Balance 2.0 INTERNATIONAL UPSTREAM Premier Apache COMPANIES Oil INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM Dana Petroleum INTEGRATED DOMESTIC OIL COMPANIES Exxon -Mobil Chevron Peme Petronas INTEGRATED Royal Dutch Texaco Lukoil x PetroChina INTERNATIONAL -Shell Gp Conoco Phillips Indian Oil Phillips MAJORS Petrobras ENI Statoil BP-Amoco Elf-Fina-Total ENI Repsol YPF Repsol Nippon Valero Sunoco 10 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES 20 30 40 INTERNATIONAL DOWNSTREAM OIL COMPANIES Neste Ashland 50 Geographical Scope 60 70 80 ... models, outcomes highly sensitive to small changes in assumptions A A Framework Framework for for Competitor Competitor Analysis Analysis OBJECTIVES What are competitor’s current goals? Is performance... weaknesses? PREDICTIONS • What strategy changes will the competitor initiate? • How will the competitor respond to our strategic initiatives? Segmentation Segmentation Analysis: Analysis: The The Principal... USAuto Auto Industry Industry 25 % Operating margin 20 Service & repair Leasing 15 Warranty Auto manufacturing New car dealers 10 Auto loans Used car dealers Auto insurance Aftermarket parts Auto