1. ANALYZING THE BUSINESS LANDSCAPE
Determining Industry Attractiveness and Identifying Strategic Opportunities

2. Distribution of Industry Returns
Average Return on Equity in US Industries,
100
11.7%
13.8%
16.5% 90 80
First Quartile
Average
22.2%
Fourth Quartile
Average
9.3% 70
Number of
Industries 60 50 40
Average = 14.7%
Median = 13.8% 30
Have shown you this slide repeatedly
Point out where trucking, concentrate production, bottling, video games lie
Apparently the industry in which you compete has an effect on ROE
Indeed, research we’ll discuss later indicates that industry effects account for 10-20% of variation in business profitability, stable within-industry effects for 30-45%, transient effects for the remainder
Possible (but possibly dangerous) discussion: So what?
If you’re trying to maximize shareholder returns, doesn’t it just matter whether you can surprise the capital markets? Investment analysts know what industry you’re in, so can industry membership possibly be the source of any pleasant surprise? 20 10 2% 4% 6% 8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
Return on Equity (Percent)
Source: Jan W. Rivkin’s Analysis
Based on Dun and Bradstreet Data
Note: Return on Equity = Net Income / Year End Shareholders’ Equity; Analysis based on sample of 593 industries 7

3. Profitability Differences Across Selected Industries
Pharmaceuticals
Prepackaged software
Semiconductors
Women's clothing stores
Dental equipment
Eating places
Drug stores
Petroleum / natural gas
Race track operations
Trucking except local
Engineering services
Computer system design
Cable TV service
Motor vehicles
Scheduled airlines 5 10 15 20 25
Source: Jan W. Rivkin
based on Compustat
Operating Income / Assets, (%)

4. Critical Steps in Business Landscape Analyses
Step 1: Analyze shocks and trends in the macro-environment
Step 2: Analyze the nature of market demand and consumer behavior
Step 3: Analyze business landscape (industry)
- Five competitive forces Framework
- Coopetition and Value Net Framework
Step 4: Identify critical success factors
Step 5: Analyze the intra-industry(strategic group) structure of the industry and identify critical differences between groups
Step 6: Evaluate the competitive sustainability/ vulnerability of strategic positions of rivals

5. Components Of The Macro Environment
Demographic
Economic
Industry Environment
Political/Legal
Global
Competitive
Environment
Technological
Sociocultural

6. Analyzing Market Demand And Consumer Behavior
Identify market segments and the bases for inherent differences among customers
buyer characteristics and preferences
price sensitivity and cross-price elasticities
patterns of use
receptivity to marketing
etc.
Analyze aggregate and market segment growth rates, saturation levels, replacement-purchase rates, etc.
Estimate/forecast the “shape” of the demand curve for the industry and each segment, keeping in mind that there is, ex ante, no such thing as an industry life cycle.
Distinguish the nature of the products/services. i.e. observable goods, experience goods, communication effect goods

7. Analyzing the Competitive Structure and Behavior of Industries
Industry Analysis
Analyzing the Competitive Structure and Behavior of Industries

8. Porter’s Five Forces Analysis
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
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
Industry growth
Fixed costs / value added
Overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
There’s a laundry list of things to consider under each force
But the key is to sort through the list quickly and identify the important factors, explore those in depth
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)

9. (Changing as managed care
DRUG
INDUSTRY
(ROE=28%)
SUPPLIER POWER
LOW
THREAT OF ENTRY
LOW
economies of scale
capital requirements for R&D and clinical trials
product differentiation
control of distribution channels
patent protection
INDUSTRY COMPETITIVENESS
LOW
high concentration
product differentiation
patent protection
steady demand growth
no cyclical fluctuations of demand
THREAT OF SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)

10. Airline Industry (ROE=-1%) SUPPLIER POWER HIGH THREAT OF ENTRY HIGH
strong labor unions
concentrated aircraft makers
THREAT OF ENTRY
HIGH
entrants have cost advantages
low capital requirements
little product differentiation
deregulation of governmental barriers
INDUSTRY COMPETITIVENESS
HIGH
many companies
little product differentiation
excess capacity
high fixed/variable costs
cyclical fluctuations of demand
THREAT OF SUBSTITUTES
MEDIUM
autos for short distance travel
BUYER POWER
MEDIUM/HIGH
Buyers extremely price sensitive
Good access to information
Low switching costs

11. Coopetition and the Value Net
A player is your competitor with respect to customers if customers value your product less when they have the other player’s product as well
A player is your complementor with respect to customers if customers value your product more when they have the other player’s product as well
Customers
Firm
Suppliers
Competitors
Complementors
A player is your competitor with respect to suppliers if it is less attractive for a supplier to provide resources to you when it is also supplying the other player
A player is your complementor with respect to suppliers if it is more attractive for a supplier to provide resources to you when it is also supplying the other player
See let’s go back to the HBS example
Who’s a competitor on the customer side? Other B-schools (for students), private firms (e.g., McKinsey, for exec ed and talent), other professional schools, popular business press, other publishers (vs. HBSP)
Who’s a competitor on the supplier side? Other B-schools competing for faculty, other professional schools competing for faculty
Who’s a complementor on the customer side? Alumni associations, other B-schools (in legitimizing the MBA), book publishers, journal publishers, popular business press, private firms (as employers who value the HBS degree)
Who’s a complementor on the supply side? Perhaps outside executive education programs. I’m more willing to work for HBS when I also get some involvement in outside programs
Note that HBS has had a hand in creating complements (e.g., alumni associations, B-schools in some parts of the world)
Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996) 19

12. Neutralizing The Five Competitive Forces
Entry
Rivalry
Substitutes
Buyers
Suppliers
Method for Neutralizing Force
Erecting barriers (isolating mechanisms) create exploit economies of scale, aggressive deterrence, design in switching costs, etc.
Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc.
Improve attractiveness compared to substitutes: better service, more features, etc..
Reduce buyer uniqueness: forward integrate, differentiate product, new customers, etc..
Reduce supplier uniqueness: backward integrate, obtain minority position, second source, etc..

13. Analyzing Intra-industry Heterogeneity
Market Segmentation, Strategic Group and Competitor Analysis

14. Strategic Group 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. For example, single product Vs product family, private labeling Vs branded products, push Vs pull marketing, etc.
Choose variables that produces the greatest contrast between firms, usually the CSFs. Do not use correlated variable.
Sometimes it is useful to being grouping firms before selecting strategic variables
Position each firm in relation to these variables
Analyzing the attractiveness of each group by performing a five force on each group
Identify the mobility barriers that inhibit movement of firms between strategic groups

15. Key Strategic Variables
Key strategic dimensions
specialization
brand identification
channel selection
product quality
technological leadership
vertical integration
cost position
service
price policy
financial leverage
relationship to parent company, if any
Outcome variables (like price and market share) should not be used to distinguish competitive groups
Firms cluster into groups based on their commonality in strategic approach 28

16. Strategic Groups and Mobility Barriers
The “height” of entry barriers depends on the particular strategic group that the entrant seeks to join
Mobility barriers are group-specific entry barriers that restrict shifting strategic position from one strategic group to another
Mobility barriers prevent quick imitation of successful strategies
The most important aspect of any strategic group analysis is identifying the mobility barriers that impede movement between groups
There is no exhaustive list of mobility barriers 29

17. Strategic Maps of the United States Airline Industry
The Late 1970s
The Early 1990s
TWA
International
United
International
Pan Am
American
TWA
Delta
USAir
Northwest
Conti-
nental
Laker
World
North
west
Braniff
United
Eastern
Delta
American
Geographic Scope
National
National
Continental
South-
west
Western
Republic
Ozark
USAir
Piedmont
America
West
AirCal
South-
west
Frontier
Kiwi
PSA
Reno Air
Others
Regional
Texas Int’l
Regional
No Frills
Full Service
No Frills
Full Service
Quality of Service
Quality of Service 46 38

18. Lessons
Industries or landscapes are neither created equal nor stay equal
The concept of “extended competition” provides a comprehensive framework for assessing structural attractiveness
A firm’s strategy can increase or decrease its exposure to competitive forces
Other things being equal, a firm should seek to trigger actions that improve structural attractiveness
But it isn’t enough to look at just structural attractiveness: competitive position must also be considered