1. Strategic Management
Industry Analysis

2. Sources of Superior Profitability
Attractive
Industry
Superior
Profitability
Firm Resources
& Capabilities

3. Historical ROE Spreads Across Industries (1976-91)
Equity Spread (ROE-Ke) 13
Soft Drinks
Ethical Drugs 11
Tobacco
mean = - 1 . 3 9
std.dev. = 5 . 7 5
Grocery Stores 3
Publishing
Food Wholesalers 1
Integrated Oil
Hotels/Gaming
Basic Chemicals -1
Packaging & Container -3
Tire & Rubber -5
Auto & Truck Mfg.
Metals & Mining -7
Textiles -9
-11
-13
Air Transport
-15
Steel
Number of Industries
-17
Oil Field Services 2 4 6 8 10 12 14 16 18
Source: Marakon Associates, Value Line

4. Perspectives on Strategic Management
Industry Opportunities
-Analyze industry structure
-Superior product positioning
in an attractive industry
“Industry
Structure”
HOW TO BUILD
SUSTAINABLE
COMPETITIVE
ADVANTAGE
STRATEGY
From readings see that in general two perspectives on what impacts a strategy
Industry analysis: Porter
Analyze industry structure to see where can position your firm
to create advantage
What do i need to do well?
FRAMEWORK: 5 forces
Firm Analysis: (Montgomery)
Analyze firm resources and characteristics that provide unique
advantages in potentially multiple markets
What do I do well, where can I apply it?
FRAMEWORK: Firm Capabilities
Firm Resources and Capabilities
“Firm
Capability”
-Analyze firm resources
-Develop unique resources
and capabilities

5. Bargaining Power of Suppliers Bargaining Power of Buyers
“Industry Structure” Perspective “Five Forces” Analysis of Competitive Strategy
Bargaining Power of Suppliers
Threat of
New Entrants
Rivalry among
Existing
Competitors
Bargaining Power of Buyers
Threat of Substitutes
How can we understand the “structure” of an industry and the influence of that structure on firm performance?
(Industry structure determines strategy determines performance)
Examples:
Buyer power (reduce power to appropriate value)
brand loyalty (cigarettes, coke), switching costs (software platforms) COUNTER EXAMPLE--ATT-MCI
Supplier power (reduce power to appropriate value)
multiple sources (dedicated auto industry suppliers, all raw materials are commodities) COUNTER EXAMPLE: Pharmaceuticals (dependent on patented products)
Threat of Entrants (create limits on entry)
Scale economies (old ATT-natural monopoly), learning effects (semiconductors, chemicals), capital investments (pharmaceutical R&D), proprietary technology , distribution channels (coke vs 7-up at McDonalds)
Substitutes (incorporate benefits same “need” satisfied by other products)
vacation (skiing vs snorkeling),
Rivalry (Avoid excessive rivalry)
understand and focus nature of rivalry, anticipate reaction
dimensions, price, technology, quality, advertising, line extensions

6. Barriers to Entry What factors keep potential competitors out?
Scale economies
e.g., aerospace industry
Scope economies
e.g., retailing
Capital requirements
Switching costs
e.g., Windows operating system
Access to distribution
e.g., soft drinks
Product Complexity
e.g., supercomputers, microprocessors
Entry deterring regulations
e.g., Tobacco D A B C
Industry

7. Threat of Substitutes What alternatives are available to customers
Industry A
Direct substitution with the same functionality
diesel vs gas engines
DirecTV vs cable
Eliminating need for product
water meters vs flat rate C B D
Customers

8. Nature and Focus of Rivalry Why industries are more or less “competitive”?
Factors
Industry growth rates
Where to secure growth
Exit barriers
e.g., specialized assets, emotional barriers
Fixed costs
e.g. capacity increments
Lack of product differentiation
e.g. differences in functionality, performance
Switching costs
Industry A C B
Competitive rivalry can focus on many factors, including price,
quality, technology, features, service, etc.

9. Supplier or Buyer Power How can my suppliers or customers extract value
Supplier Power
Supplier concentration
Few vs many suppliers
Supplier volume
Large vs small purchase decisions
Product differences
Dependence on unique features
Threat of forward integration
Ability to become competitor
Switching costs
Limitations on ability to change suppliers
Buyer Power
Buyer concentration
Few vs many customers
Volume of purchases
Large vs small purchase decisions
Available alternative products
Competitive products
Threat of backward integration
Ability to become a competitor
Switching costs
Threat of switching suppliers

10. How Industry Structure Influences Profitability
Others (>10)
(20%)
Green Giant
(4%%)
Percent of
Market
Others
(>1000)
(90%)
Campbell
(17%)
Others
(>10,000)
Swanson
(25%)
Stouffer
(34%)
American (2%)
ConAgra
(1%)
Kroger(3%)
Safeway (4%)

11. INDUSTRY COMPETITIVENESS
THREAT OF ENTRY
HIGH
entrants have cost advantages
moderate capital requirements
little product differentiation
deregulation of governmental barriers
Example:
Airlines
INDUSTRY COMPETITIVENESS
HIGH
many companies
little differentiation
excess capacity
high fixed/variable costs
cyclical demand
BUYER POWER
MEDIUM/HIGH
Buyers extremely price sensitive
Good access to information
Low switching costs
SUPPLIER POWER
HIGH
strong labor unions
concentrated aircraft makers
THREAT OF SUBSTITUTES
MEDIUM
Autos/train for short distances
Source: J. de la Torre

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

13. Successful Strategies Should:
Minimize buyer power
(e.g., build customer loyalty)
Offset supplier power
(e.g., alternative source(s))
Avoid excessive rivalry
(e.g., attack emerging vs entrenched segments)
Raise barriers to entry
(e.g., make preemptive investments)
Reduce the threat of substitution
(e.g., incorporate their benefits)