1. Further Topics in Industry and Competitive Analysis
OUTLINE
Extending 5-forces analysis
Does industry matter?
Complements
Dynamic competition
Game Theory
Competitor Analysis
Segmentation
Strategic Groups 30

2. Firm-specific effects
Does Industry Matter?
Percentage of variance in firms’ return on assets explained by:
Industry effects
Firm-specific effects
Unexplained variance
Schmalensee (1985)
19.6%
0.6%
80.4%
Rumelt (1991)
4.0%
44.2%
44.8%
McGahan & Porter (1997)
18.7%
31.7%
48.4%
Hawawini et al (2003)
8.1%
35.8%
52.0%
Also, X-inefficiency (Liebenstein, 1966) 30

3. Dynamic Competition Porter framework assumes:
industry structure drives competitive behavior
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 14

4. Five Forces or Six? —Introducing Complements
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
COMPLEMENTS
POTENTIAL
ENTRANTS
Threat of
new entrants
Threat of
substitutes
Rivalry among
existing firms
SUBSTITUTES
Why does Sun give Java away from free?
Why does IBM support Linux and OpenOffice?
Bargaining power of buyers
BUYERS 7

5. The Value Net COMPANY CUSTOMERS SUPPLIERS COMPETITORS
COMPLEMENTORS
COMPETITORS
(customers value your product less)
(customers value your product more) 5 16

6. Concept of Coopetition
Think complementors as well as competitors.
Suppliers, competitors, customers can also be complementors.
Added value
Size of pie when you’re in– size of pie when you’re out
AV Card game (each black/red combo is worth $100)
Alan has 25 red cards, 25 other people have black cards
Barry has 22 red cards, 25 other people have black cards
Logically can’t get more than your added value
Should be complementors in making the market and competitors in dividing it.
Think about HD DVD standards – effective?
Changing the players, perceptions, added value, rules
Changing the rules can also affect value
English auction, Dutch auction, Australian auction
Right of first refusal can be powerful (American Idol)

7. Competitive Positioning: Game Theory
Companies are players that are simultaneously making choices
The potential profitability varies depending on the strategy one company selects and the strategies that its rivals select
Sequential move and simultaneous move games
Look forward and reason back

8. A Decision Tree for UPS’s Pricing Strategy

9. A Payoff Matrix for GM and Ford
Examples: IPD & IPDEO – how does it change things?

10. The Contribution of Game Theory to Competitive Analysis
Main value:
Good way of representing problems: players/states/payoffs
Standard games can be used to predict optimal strategies
Some key concepts:
Competition and Cooperation – iterated prisoner’s dilemma
Deterrence—shoot all deserters
Commitment—burn the boats
Signaling—market for lemons
Problems of game theory:
Useful in explaining past competitive behavior—weak in predicting
future competitive behavior.
What’s the problem? Outcomes highly sensitive to small changes
in assumptions. Hard to identify all players/states/payoffs.

11. A Framework for Competitor Analysis
OBJECTIVES
What are competitor’s current goals?
Is performance meeting their goals?
How are its goals likely to change?
STRATEGY
How is the firm competing?
PREDICTIONS
What strategy changes
will the competitor
initiate?
How will the competitor
respond to our strategic
initiatives?
ASSUMPTIONS
What assumptions does the competitor
hold about the industry and itself?
RESOURCES & CAPABILITIES
What are the competitors’ key
strengths and weaknesses? 5

12. Segmentation Analysis: The Principal 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 2 or 3 variables
Identify discrete categories for
each variable
Potential for economies
of scope across segments
Similarity of KSFs
Product differentiation benefits
of segment focus 31

13. The Basis for Segmentation: Customer and Product Characteristics
Size
Technical
sophistication
OEM/replacement
Industrial buyers
Characteristics
of the Buyers
Demographics
Lifestyle
Purchase occasion
Household buyers
Size
Distributor/broker
Exclusive/
nonexclusive
General/special
list
Distribution channel
Opportunities for
Differentiation
Geographical
location
Physical size
Price level
Product features
Technology design
Inputs used (e.g. raw materials)
Performance characteristics
Pre-sales & post-sales services
Characteristics
of the Product 1

14. Segmenting the European Metal Can Industry
What about MBA market?

15. Segmenting the World Automobile Market
US& Canada W.Europe E.Europe Asia Lat America Australia Africa
Luxury cars
Full-size cars
Mid-size cars
Small cars
Station wagons
Passenger vans
Sports cars
Sport-utility
Pick-up trucks

16. Vertical Segmentation & Industry Profit Pools
—The US Auto Industry
25% 20
Leasing
Service & repair
Operating margin 15
Warranty
Aftermarket
parts
Auto manufacturing 10
Auto rental
Auto insurance
Auto loans
New car dealers 5
Used car dealers
Gasoline
100%
Share of industry revenue

17. Segmentation and Key Success Factors in the U.S. Bicycle Industry
* 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
Low price bicycles sold primarily
through department and discount
stores, mainly under the retailer’s
own brand (e.g. Sears’ “Free Spirit”);
*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
Medium-priced bicycles sold
primarily under manufacturer’s brand
name and distributed mainly through
specialist bicycles 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.
High-priced bicycles for enthusiasts.
Children’s bicycles (and tricycles) sold
primarily through toy retailers (discount
toy stores, department stores, and
specialist toy stores).
Similar to low-price bicycle segment. 2

18. Strategic Group Analysis
A strategic group is a group of firms in an industry that follow the same or similar strategies
Identifying strategic groups:
Identify principal strategic variables which
distinguish firms.
Position each firm in relation to these
variables.
Identify clusters. 33

19. Strategic Groups in the World Automobile Industry
Broad
GLOBAL, BROAD-LINE
PRODUCERS
e.g., GM, Ford, Toyota, Nissan, Honda, VW, DaimlerChrysler
REGIONALLY-FOCUSED BROAD-LINE PRODUCERS
e.g. Fiat, PSA, Renault, Kia,
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)
PRODUCT
RANGE
LUXURY CAR MANUFACTURERS
e.g., Aston Martin, BMW, Rolls Royce (owned by VW)
NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.)
PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (owned by Fiat) Maserati, Lotus
Narrow
National
GEOGRAPHICAL SCOPE
Global 3

20. Strategic Groups Within the World Petroleum Industry
INTERNATIONAL
UPSTREAM
COMPANIES
Premier
Oil
INTEGRATED OIL MAJORS
INTERNATIONAL
UPSTREAM,
REGIONALLY
FOCUSED
DOWNSTREAM
Apache
Adanarko
Kuwait Petroleum
PDVSA
INTEGRATED
DOMESTIC
OIL COMPANIES
NATIONAL
PRODUCTION
COMPANIES
Iran
NOC
Statoil BP
Exxon
-Mobil
Vertical Balance
Chevron
Pemex
Petronas
THE
SUPER
MAJORS
Lukoil
Conoco Phillips
ENI
Elf-Fina-Total
Repsol YPF
Royal Dutch
Shell
PetroChina
Indian Oil
Phillips
Petrobras
ENI
Nippon
Repsol
INTERNATIONAL
DOWNSTREAM
OIL COMPANIES
Valero
Neste
Ashland
Sunoco
NATIONALLY-FOCUSED
DOWNSTREAM COMPANIES
Geographical Scope 4