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

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

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

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

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

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)

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

A Decision Tree for UPS’s Pricing Strategy

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

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.

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

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

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

Segmenting the European Metal Can Industry What about MBA market?

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

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

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

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

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

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 0 0.5 1.0 1.5 2.0 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 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope 4