3. Source: Jan W. Rivkin
based on Compustat
Computer system design
Operating Income / Assets, 1988-95 (%)
0 5 10 15 20 25
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
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
Competitors Complementors
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)
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
Republic
Ozark
USAir Piedmont
Frontier
AirCal
PSA
South-
west
Texas Int’l
United
South-
west
Americ
a
West
International
International
National National
Regional Regional
No Frills No Frills
Full Service Full Service
Quality of Service Quality of Service
Geographic
Scope
The Late 1970s The 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
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
