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