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Cola Wars Key Take-aways.

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Presentation on theme: "Cola Wars Key Take-aways."— Presentation transcript:

1 Cola Wars Key Take-aways

2 How much does industry matter?
10-20% of the variation in firms’ profits accounted for by the industry in which the firm competes Analysis based on accounting profits in publicly held companies

3 How much does industry matter really?
Average Economic Profits of U.S. Industry Groups, Value Line Industry Groups Source: Ghemawat, Strategy and the Business Landscape, p20.

4 Porter’s Five Forces Porter’s five forces framework is a key tool for Industry analysis

5 Rivalry Among Existing Competitors
Porter’s Five Forces Threat of New Entry Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation Bargaining Power of Suppliers Bargaining Power of Customers 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 Rivalry Among Existing Competitors Industry growth Fixed costs / value added Overcapacity Product differences Brand identity 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 Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers Threat of Substitutes Relative price performance of substitutes Switching costs Buyer propensity to substitute Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

6 Rivalry How hard firms compete on price (or increase quality levels at a given price) depends on: Concentration and balance Industry growth Fixed versus marginal costs Product differences Brand identity Switching costs Business cycle fluctuation/intermittent over-capacity Diverse stakes Exit barriers

7 Entry Barriers to entry include: Economies of scale
Product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Learning/experience curve Access to necessary inputs Low cost product design Government policy Expected retaliation

8 Threat of Substitutes The ability of the industry as a whole to profitably raise price (the elasticity of the industry’s demand curve) Tobacco & pharmaceuticals – inelastic demand Steel – elastic demand Likely to change over time with technological changes or changes in consumer tastes Determined in part by relative performance / price of substitutes

9 Buyer power Intrinsic Strength Price Sensitivity Buyer concentration
Buyer volume Switching costs Buyer information Ability to backward integrate Substitute products Price Sensitivity Price/Total purchase Product differences Brand identity Impact on quality/performance Buyer profits Decision maker’s incentives

10 Supplier Power Mirror image of buyer power
Amount of value chain captured by suppliers influenced by: size and concentration of suppliers degree to which suppliers provide commodity vs. custom inputs (differentiation) availability of substitute inputs ability to backward integrate importance of volume to suppliers

11 Dynamics Industry analysis provides a “snapshot” of current conditions in an industry As we saw in Coors, the industry “landscape” is subject to “tectonic shifts” over time. Some of these shifts are under the control of the players in the industry Coke and Pepsi shaped the terrain with respect to their bottlers Franchising Exclusivity Consolidation and spinoff

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