1. STRUCTURAL ANALYSIS, COMPETITIVE DYNAMICS, AND POSITIONING

2. 0 10 20 30 40 50 60 70 80 90 100 2% 4%6%8% 10%12%14%16%18%20%22%24%26%28%30%32% Number of Industries First Quartile Average 22.2% Fourth Quartile Average 9.3% Note:Return on Equity = Net Income / Year End Shareholders’ Equity; Analysis based on sample of 593 industries Average = 14.7% Median = 13.8% 11.7% 13.8% 16.5% Return on Equity (Percent) Average Return on Equity in US Industries, 1982-1993 Distribution of Industry Returns Source: Jan W. Rivkin’s Analysis Based on Dun and Bradstreet Data

3. Source: Jan W. Rivkin based on Compustat Computer system design Operating Income / Assets, 1988-95 (%) 0510152025 Scheduled airlines Motor vehicles Cable TV service Engineering services Trucking except local Race track operations Petroleum / natural gas Drug stores Eating places Dental equipment Women's clothing stores Semiconductors Prepackaged software Pharmaceuticals Profitability Differences Across Selected Industries

4. Political/ Legal Industry Environment DemographicEconomic Technological Global Competitive Environment Sociocultural Components Of The Macro Environment

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

6. Threat of New Entry Rivalry Among Existing Competitors Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation Relative price performance of substitutes Switching costs Buyer propensity to substitute 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 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 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 Porter’s Five Forces Analysis Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

7. 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.) DRUG INDUSTRY (ROE=28%)

8. Customers Firm Suppliers CompetitorsComplementors 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 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 suppliers if it is more attractive for a supplier to provide resources to you when it is also supplying the other player 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 Coopetition and the Value Net Source: Adam Brandenburger and Barry Nalebuff, Co-operation (New York: Currency Doubleday, 1996)

9. Analyzing Intra-industry Heterogeneity: Strategic Groups

10. 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

11. 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 Firms cluster into groups based on their commonality in strategic approach

12. 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

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

14. Lessons Industries or landscapes are neither created equal nor stay equal 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

15. COMPETITIVE DYNAMICS: EXAMPLES Technical Standards & Positive Feedback Loop Price War & Prisoners’ Dilemma Advertising War & Escalating Entry Barriers