Kate Gies Disability Consultant Guest Presentation for GSSC 1073.
Strategic Management 1e - Gies College of Businessbusiness.illinois.edu/josephm/BADM544_S… · PPT...
Transcript of Strategic Management 1e - Gies College of Businessbusiness.illinois.edu/josephm/BADM544_S… · PPT...
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Part 1 Strategy Analysis
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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.
LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.
LO 3-3Apply the five forces model to understand the profit potential of the firms industry.
LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.
LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.
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Chapter Case 3
Build Your Dreams (BYD) to Sidestep Entry Barriers
Changing U.S. car market
More competition from outside the U.S.
However, NO new entry firms in the last 2 decades
High barriers to entry
BYD led by founder, Wang Chuanfu in China is entering the car market
Batteries to carsbypassing many hurdles
Electric cars have fewer parts
BYD has the battery technology
Selling in China, Africa, & South America
Hybrid Car Video
3*
INSTRUCTOR: The embedded video (click on Hybrid Car Video while in slideshow mode) is 3 minutes on some thoughts on the future of cars in the U.S. URL link is below also.
http://bigthink.com/felixkramer#!video_idea_id=18790
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BYD Electric Vehicles
What are their chances of success?Warren Buffet invested for 10% equity.
-- Sticker price half that of a Chevy Volt.
-- Many obstacles are ahead
Which PESTEL factors will be most important for electric vehicles in the 21st century?BYD was Chinas fastest-growing carmaker
Sold more than 500,000 cars in 2010
Shanghai government subsidy for EVs
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PESTEL Framework
Political
Government pressures
Subsidies and incentives
Differences in countries, states, and regions
Economic
Growth rates
Interest rates
Employment levels
Currency exchange
Sociocultural
Norms, culture, values
Demographics
Lifestyle changes
Technological
Innovation
Diffusion
Research & development
Environmental
Global warming
Sustainability
Pollution
Legal
Court system
Legislation
Hiring laws
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EXHIBIT 3.1
The Firm Embedded in Its External Environment
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INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
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STRATEGY HIGHLIGHT 3.1
UBS Relents to Pressure
by U.S. Government
Large Swiss bank in troubleU.S. government accused UBS of aiding in tax evasionBillions of dollars moved offshoreNames of 52,000 U.S. citizens soughtEventually over 4,450 names were releasedImperils Swiss Bank secrecyHistorically, a competitive advantage
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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.
LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.
LO 3-3Apply the five forces model to understand the profit potential of the firms industry.
LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.
LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.
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EXHIBIT 3.2
Industry Structures along the Continuum
Bank Oligopolies Video
INSTRUCTOR: A 3-minute embedded video from CNBC is found at the bottom of this slide (click on Bank Oligoplolies Video while in slideshow mode). It discusses banking in Australia as an oligopolistic industry.
http://www.cnbc.com/id/15840232?play=1&video=1614100860
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Efficient Markets
The efficient market hypothesis, in financial markets, is one in which prices reflect information instantaneously and one in which extra-ordinary profit opportunities are thus rapidly dissipated by the action of profit-seeking individuals in the market.
How well does the efficient market hypothesis for capital markets apply to product markets?
If the efficient market hypothesis applied fully to product markets then we should see over time equalization in risk-adjusted rates of return across industries.
What do the data support?
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Average Return on Equity in US Industries, 1982-1993
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
Source:Silverman 2000
Average = 14.7%
Median = 13.8%
11.7%
13.8%
16.5%
Return on Equity (Percent)
Differences in Profitability Across Industries
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Industries differ in how much profit they typically provide. In this chart, we take each industry in the U.S. over a long period of time and for each, calculate ROE. Then plot a histogram. A big range. Top quartile roughly 2.5x as profitable as bottom quartile
Possible (but possibly dangerous) discussion: So what?
If youre trying to maximize shareholder returns, doesnt it just matter whether you can surprise the capital markets? Investment analysts know what industry youre in, so can industry membership possibly be the source of any pleasant surprise?
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Industries differ in how much profit they typically provide. In this chart, we take each industry in the U.S. over a long period of time and for each, calculate ROE. Then plot a histogram. A big range. Top quartile roughly 2.5x as profitable as bottom quartile
Possible (but possibly dangerous) discussion: So what?
If youre trying to maximize shareholder returns, doesnt it just matter whether you can surprise the capital markets? Investment analysts know what industry youre in, so can industry membership possibly be the source of any pleasant surprise?
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%
79.bin
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Some Industries Are More Profitable Than Others
ROE & ROA - Selected Industries, 1989
0%
5%
10%
15%
20%
25%
30%
Pharmaceuticals
Tires / Rubber
Home Appliances
ROE
ROA
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Differences in Profitability Across Selected Industries
Source: Pankaj Ghemawat and Jan W. Rivkin, Creating Competitive Advantage
Chart3
1.345
4.273
5.21
6.711
7.996
8.56
9.825
11.294
11.429
13.591
14.934
16.085
16.882
22.365
24.955
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Operating income / assets, 1988-95 (%)
Sheet1
PRIM_SICNTEMPROA
484114.0005.210Cable television serviceScheduled air transport1.345
737336.5006.711Computer integrated system designMotor vehicles4.273
1311169.25011.294Crude petroleum and natural gasCable television service5.210
38436.00014.934Dental equipment and suppliesComputer system design6.711
59129.75011.429Drug storesEngineering services7.996
581257.25013.591Eating placesTrucking except local8.560
871117.6257.996Engineering servicesRace track operations9.825
371112.6254.273Motor vehicles and car bodiesPetroleum / natural gas11.294
283456.62524.955PharmaceuticalsDrug stores11.429
737247.62522.365Prepackaged softwareEating places13.591
79487.0009.825Race track operationsDental equipment14.934
451214.0001.345Scheduled air transportWomen's clothing stores16.085
367444.75016.882SemiconductorsSemiconductors16.882
421324.0008.560Trucking except localPrepackaged software22.365
562110.00016.085Women's clothing storesPharmaceuticals24.955
679215.12555.162
679415.62528.271
24517.12524.788
50137.00023.929
36516.00022.504
28518.00020.994
384544.25018.906
357618.37517.851
34437.25016.951
36787.25016.847
271120.00016.329
384125.25016.311
27619.00015.967
73717.75015.913
366330.75015.908
628214.87515.723National Semiconductor5.59116053.800
384224.25015.322Analog Devices10.0954864.184
284418.50015.006AMD11.62112243.504
27218.75014.999Motorola14.02936173.000
87326.00014.996Texas Instruments18.14438065.000
283613.50014.943Intel24.49557050.466
679511.62514.744
242112.75014.184Harris3.9174836.200
37216.00013.990Micron Technology28.7137421.496
282112.50013.973LSI Logic8.4325784.874
362112.00013.855
28916.12513.849
20136.00013.794
27317.87513.646TWA-4.08230599.112
73639.75013.626Continental-2.73449884.766
56518.00013.614USAir-0.43453272.364
737413.75013.385Delta0.97980143.990
37248.87513.117United2.29297768.984
382324.25013.007American3.037103487.510
35646.62512.986Southwest8.50413822.385
356110.25012.655
358513.12512.441
78127.50012.208
371436.12511.942
807110.00011.768
357121.75011.724
39447.00011.421
531121.00011.274
367211.12511.167
52118.00011.159
382615.62511.071
533114.25010.912
541130.00010.873
263115.12510.828
20158.00010.760
641122.37510.569
35557.00010.461
381219.50010.418
22536.00010.407
57318.37510.194
596110.0009.714
701119.2509.678
32418.0009.630
481363.5009.598
481211.5009.479
30816.2509.420
353112.0009.402
34336.0009.039
873410.8758.938
25116.0008.894
50519.5008.789
35377.0008.777
491193.0008.749
20867.0008.724
35729.6258.707
492313.8758.668
386110.1258.660
262122.3758.634
291130.7508.588
382523.0008.572
37318.0008.568
492465.7508.443
35638.0008.429
382712.6258.283
57127.0008.229
35787.0008.205
366137.2507.909
483324.0007.895
32736.0007.659
679857.0007.587
63246.2507.491
51227.6257.278
494121.0007.222
492216.6256.913
401114.0006.785
45226.0006.642
34527.5006.611
495516.3756.098
504512.0006.031
35237.6255.907
48326.0005.523
49917.7505.486
331227.2505.361
44128.0005.341
615317.7505.210
50846.3754.705
104119.3754.519
49618.0004.445
635112.3754.370
655221.5004.274
61628.8753.873
153125.2503.724
617213.7503.609
651229.2503.533
621133.0002.911
633145.5002.635
631129.7502.016
614118.6251.977
138113.7500.873
873116.625-5.299
283534.750-10.162
INTEL CORP24.49557050.466
TEXAS INSTRUMENTS INC18.14438065.000
MOTOROLA INC14.02936173.000
NATIONAL SEMICONDUCTOR CORP5.59116053.800
ADVANCED MICRO DEVICES11.62112243.504
MICRON TECHNOLOGY INC28.7137421.496
LSI LOGIC CORP8.4325784.874
ANALOG DEVICES10.0954864.184
HARRIS CORP3.9174836.200
VLSI TECHNOLOGY INC5.5453499.298
INTEGRATED DEVICE TECH INC12.7442459.910
CYPRESS SEMICONDUCTOR CORP13.8912429.972
INTL RECTIFIER CORP5.7422161.622
EG&G INC17.1221993.196
BURR-BROWN CORP9.9881496.662
SILICONIX INC3.7061295.666
CHIPS & TECHNOLOGIES INC2.7461294.723
ALTERA CORP20.4091124.034
DALLAS SEMICONDUCTOR CORP16.9141035.814
LINEAR TECHNOLOGY CORP25.7621021.687
EXAR CORP12.2191008.277
UNITRODE CORP6.599924.573
MICROSEMI CORP8.020824.497
MAXIM INTEGRATED PRODUCTS22.912801.991
XICOR INC-5.673779.672
LATTICE SEMICONDUCTOR CORP17.469767.794
ALPHA INDS1.982582.386
IMP INC0.148459.621
OPTEK TECHNOLOGY INC7.907424.122
SEEQ TECHNOLOGY INC-5.054323.993
SYMMETRICOM INC2.657270.369
ZITEL CORP3.146244.149
SUPERTEX INC13.607218.215
SEMTECH CORP13.512215.619
DIODES INC12.162196.097
JETRONIC INDUSTRIES INC23.035161.234
SOLITRON DEVICES INC-3.303158.097
LOGIC DEVICES INC9.819111.388
MICROPAC INDUSTRIES INC9.93584.170
DENSE-PAC MICROSYSTEMS INC4.40274.626
SEMICON INC-0.14272.685
HYTEK MICROSYSTEMS INC-20.70559.036
DIONICS INC-25.69513.021
MSI ELECTRONICS INC-70.5468.712
AMR CORP-DEL3.037103487.510
UAL CORP2.29297768.984
UNITED AIR LINES INC2.31997275.831
DELTA AIR LINES INC0.97980143.990
USAIR GROUP-0.43453272.364
CONTINENTAL AIRLS INC -CL A-2.73449884.766
U S AIR INC-2.11645694.939
KLM ROYAL DUTCH AIR -NY REG2.47334773.300
TRANS WORLD AIRLINES-4.08230599.112
SOUTHWEST AIRLINES8.50413822.385
COMAIR HOLDINGS INC15.7402064.029
SKYWEST INC9.1921234.397
CCAIR INC-3.375459.400
BIG SKY TRANSPORTATION-2.84355.679
COMCAST CORP -CL A SPL7.4856489.350
CABLEVISION SYSTEMS -CL A3.0435203.926
STORER COMMUNICATIONS INC2.4323880.368
VIACOM INC -CL A8.6043016.680
ADELPHIA COMMUN -CL A5.8362328.797
CENTURY COMMUN -CL A5.9412264.412
WASHINGTON POST -CL B9.1111285.606
TCA CABLE TV INC12.2751031.454
JONES INTERCABLE INC -CL A2.445981.637
C TEC CORP0.050598.971
JONES INTERCABLE -LP-CL A-2.541255.352
WINNEBAGO INDUSTRIES-33.58291.643
NTN CANADA INC1.84916.740
SHENANDOAH TELECOMMUN CO3.4235.195
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Operating income / assets, 1988-95 (%)
Profitability Differences Across Selected Industries
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Operating income / assets, 1988-95 (%)
Profitability Differences Within the Semiconductor Industry
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Operating income / assets, 1988-95 (%)
Profitability Differences Within the Airline Industry
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Looking within that distribution, a few selected industries. Pharmaceuticals far more profitable than scheduled air transport
What patterns do you see?
Goal of next module is to allow you to see the patterns across a much broader set of industries well
Looking within that distribution, a few selected industries. Pharmaceuticals far more profitable than scheduled air transport
What patterns do you see?
Goal of next module is to allow you to see the patterns across a much broader set of industries well
-50510152025
Scheduled air transport
Cable television service
Engineering services
Race track operations
Drug stores
Dental equipment
Semiconductors
Pharmaceuticals
Operating income / assets, 1988-95 (%)
82.bin
83.bin
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Within Industries, Some Competitors Perform Better than Others.
ROE - Pharmaceutical Industry 1989
0%
10%
20%
30%
40%
50%
60%
Amgen
AMP
Eli Lilly
Merck
Mylan
Pfizer
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Differences in Profitability Within Selected Industries
Source: Pankaj Ghemawat and Jan W. Rivkin, Creating Competitive Advantage
Chart2
5.591
10.095
11.621
14.029
18.144
24.495
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Operating income / assets, 1988-95 (%)
Semiconductor Industry
Sheet1
PRIM_SICNTEMPROA
484114.0005.210Cable television serviceScheduled air transport1.345
737336.5006.711Computer integrated system designMotor vehicles4.273
1311169.25011.294Crude petroleum and natural gasCable television service5.210
38436.00014.934Dental equipment and suppliesComputer system design6.711
59129.75011.429Drug storesEngineering services7.996
581257.25013.591Eating placesTrucking except local8.560
871117.6257.996Engineering servicesRace track operations9.825
371112.6254.273Motor vehicles and car bodiesPetroleum / natural gas11.294
283456.62524.955PharmaceuticalsDrug stores11.429
737247.62522.365Prepackaged softwareEating places13.591
79487.0009.825Race track operationsDental equipment14.934
451214.0001.345Scheduled air transportWomen's clothing stores16.085
367444.75016.882SemiconductorsSemiconductors16.882
421324.0008.560Trucking except localPrepackaged software22.365
562110.00016.085Women's clothing storesPharmaceuticals24.955
679215.12555.162
679415.62528.271
24517.12524.788
50137.00023.929
36516.00022.504
28518.00020.994
384544.25018.906
357618.37517.851
34437.25016.951
36787.25016.847
271120.00016.329
384125.25016.311
27619.00015.967
73717.75015.913
366330.75015.908
628214.87515.723National Semiconductor5.59116053.800
384224.25015.322Analog Devices10.0954864.184
284418.50015.006AMD11.62112243.504
27218.75014.999Motorola14.02936173.000
87326.00014.996Texas Instruments18.14438065.000
283613.50014.943Intel24.49557050.466
679511.62514.744
242112.75014.184Harris3.9174836.200
37216.00013.990Micron Technology28.7137421.496
282112.50013.973LSI Logic8.4325784.874
362112.00013.855
28916.12513.849
20136.00013.794
27317.87513.646TWA-4.08230599.112
73639.75013.626Continental-2.73449884.766
56518.00013.614USAir-0.43453272.364
737413.75013.385Delta0.97980143.990
37248.87513.117United2.29297768.984
382324.25013.007American3.037103487.510
35646.62512.986Southwest8.50413822.385
356110.25012.655
358513.12512.441
78127.50012.208
371436.12511.942
807110.00011.768
357121.75011.724
39447.00011.421
531121.00011.274
367211.12511.167
52118.00011.159
382615.62511.071
533114.25010.912
541130.00010.873
263115.12510.828
20158.00010.760
641122.37510.569
35557.00010.461
381219.50010.418
22536.00010.407
57318.37510.194
596110.0009.714
701119.2509.678
32418.0009.630
481363.5009.598
481211.5009.479
30816.2509.420
353112.0009.402
34336.0009.039
873410.8758.938
25116.0008.894
50519.5008.789
35377.0008.777
491193.0008.749
20867.0008.724
35729.6258.707
492313.8758.668
386110.1258.660
262122.3758.634
291130.7508.588
382523.0008.572
37318.0008.568
492465.7508.443
35638.0008.429
382712.6258.283
57127.0008.229
35787.0008.205
366137.2507.909
483324.0007.895
32736.0007.659
679857.0007.587
63246.2507.491
51227.6257.278
494121.0007.222
492216.6256.913
401114.0006.785
45226.0006.642
34527.5006.611
495516.3756.098
504512.0006.031
35237.6255.907
48326.0005.523
49917.7505.486
331227.2505.361
44128.0005.341
615317.7505.210
50846.3754.705
104119.3754.519
49618.0004.445
635112.3754.370
655221.5004.274
61628.8753.873
153125.2503.724
617213.7503.609
651229.2503.533
621133.0002.911
633145.5002.635
631129.7502.016
614118.6251.977
138113.7500.873
873116.625-5.299
283534.750-10.162
INTEL CORP24.49557050.466
TEXAS INSTRUMENTS INC18.14438065.000
MOTOROLA INC14.02936173.000
NATIONAL SEMICONDUCTOR CORP5.59116053.800
ADVANCED MICRO DEVICES11.62112243.504
MICRON TECHNOLOGY INC28.7137421.496
LSI LOGIC CORP8.4325784.874
ANALOG DEVICES10.0954864.184
HARRIS CORP3.9174836.200
VLSI TECHNOLOGY INC5.5453499.298
INTEGRATED DEVICE TECH INC12.7442459.910
CYPRESS SEMICONDUCTOR CORP13.8912429.972
INTL RECTIFIER CORP5.7422161.622
EG&G INC17.1221993.196
BURR-BROWN CORP9.9881496.662
SILICONIX INC3.7061295.666
CHIPS & TECHNOLOGIES INC2.7461294.723
ALTERA CORP20.4091124.034
DALLAS SEMICONDUCTOR CORP16.9141035.814
LINEAR TECHNOLOGY CORP25.7621021.687
EXAR CORP12.2191008.277
UNITRODE CORP6.599924.573
MICROSEMI CORP8.020824.497
MAXIM INTEGRATED PRODUCTS22.912801.991
XICOR INC-5.673779.672
LATTICE SEMICONDUCTOR CORP17.469767.794
ALPHA INDS1.982582.386
IMP INC0.148459.621
OPTEK TECHNOLOGY INC7.907424.122
SEEQ TECHNOLOGY INC-5.054323.993
SYMMETRICOM INC2.657270.369
ZITEL CORP3.146244.149
SUPERTEX INC13.607218.215
SEMTECH CORP13.512215.619
DIODES INC12.162196.097
JETRONIC INDUSTRIES INC23.035161.234
SOLITRON DEVICES INC-3.303158.097
LOGIC DEVICES INC9.819111.388
MICROPAC INDUSTRIES INC9.93584.170
DENSE-PAC MICROSYSTEMS INC4.40274.626
SEMICON INC-0.14272.685
HYTEK MICROSYSTEMS INC-20.70559.036
DIONICS INC-25.69513.021
MSI ELECTRONICS INC-70.5468.712
AMR CORP-DEL3.037103487.510
UAL CORP2.29297768.984
UNITED AIR LINES INC2.31997275.831
DELTA AIR LINES INC0.97980143.990
USAIR GROUP-0.43453272.364
CONTINENTAL AIRLS INC -CL A-2.73449884.766
U S AIR INC-2.11645694.939
KLM ROYAL DUTCH AIR -NY REG2.47334773.300
TRANS WORLD AIRLINES-4.08230599.112
SOUTHWEST AIRLINES8.50413822.385
COMAIR HOLDINGS INC15.7402064.029
SKYWEST INC9.1921234.397
CCAIR INC-3.375459.400
BIG SKY TRANSPORTATION-2.84355.679
COMCAST CORP -CL A SPL7.4856489.350
CABLEVISION SYSTEMS -CL A3.0435203.926
STORER COMMUNICATIONS INC2.4323880.368
VIACOM INC -CL A8.6043016.680
ADELPHIA COMMUN -CL A5.8362328.797
CENTURY COMMUN -CL A5.9412264.412
WASHINGTON POST -CL B9.1111285.606
TCA CABLE TV INC12.2751031.454
JONES INTERCABLE INC -CL A2.445981.637
C TEC CORP0.050598.971
JONES INTERCABLE -LP-CL A-2.541255.352
WINNEBAGO INDUSTRIES-33.58291.643
NTN CANADA INC1.84916.740
SHENANDOAH TELECOMMUN CO3.4235.195
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Profitability Differences Across Industries
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Profitability Differences Within the Semiconductor Industry
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Those industry averages mask a lot of variation. Lets take semiconductors and airlines from the top and bottom respectively
Point out Intel
Understanding difference between Intel and TWA requires understanding both the industry and intra-industry differences
Companies make decent money even in poor industries. Companies do poorly even in attractive businesses. So we need to understand intra-industry competitive advantage
Would you rather be at a disadvantage in a good industry or at an advantage in a poor one?
Those industry averages mask a lot of variation. Lets take semiconductors and airlines from the top and bottom respectively
Point out Intel
Understanding difference between Intel and TWA requires understanding both the industry and intra-industry differences
Companies make decent money even in poor industries. Companies do poorly even in attractive businesses. So we need to understand intra-industry competitive advantage
Would you rather be at a disadvantage in a good industry or at an advantage in a poor one?
Semiconductor Industry
-50510152025
National Semiconductor
Analog Devices
AMD
Motorola
Texas Instruments
Intel
Operating income / assets, 1988-95 (%)
85.bin
-
*
5-*
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
The U.S. Auto Industrys Profit Pool
Exhibit 5.7 The U.S. Auto Industrys Profit Pool
Source: Adapted by permission of Harvard Business Review. Exhibit from A Fresh Look at Strategy by O. Gadiesh and J. L. Gilbert, Harvard Business Review 76, no. 3 (1998), pp. 139-48. Copyright 1998 by the Harvard Business School Publishing Corporation, all rights reserved.
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-
*
-
Decomposition of Variance in Profitability
Source: Anita M. McGahan and Michael E. Porter, How Much Does Industry Matter Really? Strategic Management Journal, 1997
Tendency to ask, which matters more. Lots of conventional wisdom and research on this
Warren Buffets line on this: When an industry with a reputation for tough economics meets a manger with a reputation for excellent performance, its usually the industry that keeps its reputation intact
Research in this line: takes the full distribution of returns across not just firms, but across business segments within firms. So Disney split into film & TV, theme parks, consumer products. By regression techniques, tease out how much of the variation is due to differences across industry vs. differences in the advantage enjoyed by a segment within its industry. Other effects also considered: corporate parent, year, transient effects
Research indicates that, despite a fair amount of year-to-year noise, business segment effects are very large and industry effects are also large. [Industry effects perhaps overstated]
Large business segment effects => need some systematic way to think through differences in success within industries. Start doing that in the competitive positioning module
Tendency to ask, which matters more. Lots of conventional wisdom and research on this
Warren Buffets line on this: When an industry with a reputation for tough economics meets a manger with a reputation for excellent performance, its usually the industry that keeps its reputation intact
Research in this line: takes the full distribution of returns across not just firms, but across business segments within firms. So Disney split into film & TV, theme parks, consumer products. By regression techniques, tease out how much of the variation is due to differences across industry vs. differences in the advantage enjoyed by a segment within its industry. Other effects also considered: corporate parent, year, transient effects
Research indicates that, despite a fair amount of year-to-year noise, business segment effects are very large and industry effects are also large. [Industry effects perhaps overstated]
Large business segment effects => need some systematic way to think through differences in success within industries. Start doing that in the competitive positioning module
Year
2%
Industry
18%
Corporate
parent
4%
Business
segment
30%
Transient
46%
91.bin
-
*
Three Factors Determining Company Performance
Industry Context
e.g., during the last two decades, companies in the airlines industry have been persistently less profitable than those in the pharmaceutical industry
National Context
e.g., worlds most successful consumer electronics firms are in Japan
Company Capabilities and Strategies
e.g., Wal-mart and Southwest Airlines
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93.bin
-
*
-
Structure-Conduct-Performance
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
95.bin
-
*
-
The Structure-Conduct-Performance Paradigm
The Feedback Critique
No one-way causal link.
Conduct can affect market structure.
Market performance can affect conduct as well as market structure.
The Causal View
Market Structure
Conduct
Performance
Clarke Modifications of Baye Chapter 7
97.bin
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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.
LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.
LO 3-3Apply the five forces model to understand the profit potential of the firms industry.
LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.
LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.
3*
-
Competitive Forces and Firm Strategy
The Five Forces Model
The classic industry analysis model
Threat of Entry/Barriers to Entry
Note: High barriers to entry means threat of entry is low
Power of SuppliersPower of BuyersThreat of SubstitutesRivalry Among Existing Competitors
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
EXHIBIT 3.3
Porters Five Forces Model
Source: Porter, M. E. (2008), The five competitive forces that shape strategy, Harvard Business Review
5 forces video- M. Porter
3*
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INSTRUCTOR: The embedded video at the bottom of this slide is a 13-minute-long interview with Michael Porter. He uses the airline vs. soft drinks industries as examples of applying the five forces model. The URL is also posted below. It was taped in summer 2008 and is referenced in the text (endnote 37).
THIS LINK IS REPEATED IN SLIDE 27 IF YOU PREFER TO WAIT TO USE IT UNTIL THE APPLICATION OF THE 5 FORCES TOOL THERE.
http://www.youtube.com/watch?v=mYF2_FBCvXw
*
-
Barriers To Entry
The free entry and free exit assumption that works reasonably well for describing financial markets seems to be a premise that strays so far from our world of experience that the assumption impedes our understanding of real-world product competition. Thus, empirical evidence suggests that (risk-adjusted) ROE does NOT equalize in the long run.
3*
-
A Taxonomy of Barriers to Entry
(1) Economies of Scale
Product-specific economies of scale
Lower setup costs as a percentage of total costs
More specialized machinery and tooling (e.g., Honda)
Plant-specific economies of scale
Engineers 2/3 rule: Since the area of a sphere or cylinder varies as two-thirds power of volume, the cost of constructing process industry plants can be expected to rise as two thirds power of their output capacity. (This rule applies to petroleum refining, cement making, iron ore reduction and steel conversion).
Also economies of massed reserves
3*
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A Taxonomy of Barriers to Entry
Economies of Scale
Multi-product economies of scale (economies of scope)
Example: Cost (Iron, Steel) < Cost (Iron) + Cost (Steel)
Key idea: Shareable input (In this case, thermal economies in the production of iron and steel)
Modern examples: Aircraft, Automobiles, Consumer electronics, Household Appliances; Personal Computers, Software, Power Tools
Multi-plant economies of scale
Economies of multi-plant production, investment, and physical distribution.
3*
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-
*
Examples of Economies of Scope
Aircraft: Common wing, nose, and tail components allow several models to be leveraged using different numbers of fuselage modules to create aircraft of different lengths and passenger capacities by Boeing and Airbus Industries.
Automobiles: The Taurus platform was leveraged to provide the basis for Taurus sedans and minivans.
Consumer Electronics: Over 160 variations of the Sony Walkman were leveraged by mixing and matching modular components in a few basic system designs. (Legos)
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A Taxonomy of Barriers to Entry
(2) Experience Curve Advantages
Marvin Lieberman, a management professor at UCLA, found that in the chemical industry, on average, each doubling of plant scale over time was accomplished by an 11% reduction in unit costs. Thus, there is an 89% learning curve.
(Note: The mere presence of an experience curve does not insure an entry barrier. Another critical prerequisite is that the experience be kept proprietary, and not be made available to competitors and potential entrants.)
3*
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A Taxonomy of Barriers to Entry
(3) Intended Excess Capacity
Building extra capacity for the intended purpose of deterring entrants from entering the industry. (Note: potential free-rider problems)
Excess capacity deters entry by increasing the credibility of price cutting as an entry response by incumbents (ex: Dupont in the production of Titanium Dioxide for paint)
Innocent excess capacity: Demand is cyclical; Demand falls short of expectations; Demand is expected to grow.
3*
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A Taxonomy of Barriers to Entry
(4) Reputation
A history of incumbent firms reacting aggressively to entrants may play a role in current market interactions.
(5) Product Differentiation
Brand identification and customer loyalty to incumbent products may be a barrier to potential entrants (e.g., Coca-Cola). Product differentiation appears to be an important entry barrier in the market for over-the counter drugs and in the brewing industry.
3*
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A Taxonomy of Barriers to Entry
(6) Capital Requirements
(7) High Switching Costs of Buyers
E.g., changing may require employee retraining (e.g., IV solutions, and computer software).
3*
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A Taxonomy of Barriers To Entry
(8) Access to Distribution Channels
The manufacturer of a new food product, for example, must persuade the retailer to give it space on the fiercely competitive supermarket shelf via promises of promotion, and intense selling efforts to retailers.
(9) Favorable Access to Raw Materials
and to Markets
Alcoa --> bauxite
Exclusive dealing arrangements
Favorable geographic locations
3*
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A Taxonomy of Barriers To Entry
(10) Proprietary Technology
Product know how
Low cost product design
Patents (and other government restrictions)
(11) Exit barriers (of incumbents) can be entry barriers (to potential entrants)
3*
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A Taxonomy of Barriers To Entry
High exit costs:
High exogenous and endogenous sunk costs (not just high fixed costs!)
High asset specificity
Highly illiquid assets
Low salvage value if exit occurs
High switching costs
Low mobility of assets
Credible commitments
Irreversible investment
e.g., Alaskan pipeline built in 1977 at a cost of $10 billion
3*
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Power of Suppliers HIGH IF:
Dominated by a few companies
No substitutes for supplier products
Suppliers products are differentiated
Incumbents face high switching costs
Product is important input to buyer
Forward Integration is a credible threat
3*
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-
Power of Buyers HIGH IF:
A few large buyers (potential collusion)
Large buyers relative to a seller (e.g., HMO power buying pharmaceuticals)
Products are standardized and undifferentiated
Buyers face few switching costs
High switching costs for sellers
Backward Integration is credible (buyer has full information)
3*
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-
Threat of Substitutes HIGH IF:
Substitute is good price-performance trade-off
Buyers switching costs to substitute is low
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-
Incumbent Rivalry HIGH IF:
Many competitors in the industry (industry concentration is low)
Firms are of equal size
Industry growth is slow or shrinking
(over-capacity is high)
Exit barriers are high
Contractual obligations
Geographic or historical attachments
Products and services are direct substitutes (product differentiation is low)
3*
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Degree of Rivalry
Advertising battles, on the other hand, may well expand or enhance the level of product differentiation in the industry for the benefit of all firms.
In other words, advertising is not necessarily a zero-sum game.
3*
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The Uses of Industry Analysis
Static Analysis -
How do we explain current rivalry and profitability?
Dynamic Analysis -
Where is the industry Headed In likely to be in the future?
3*
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-
Industries Evolve over Time as the Relationships Between the Five Forces Change
Dynamic 5-Forces Analysis
3*
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-
LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.
LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.
LO 3-3Apply the five forces model to understand the profit potential of the firms industry.
LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.
LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.
3*
-
*
-
SUPPLIERS
POTENTIAL
ENTRANTS
SUBSTITUTES
BUYERS
INDUSTRY
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrants
Threat of
substitutes
COMPLEMENTS
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
Five Forces or Six? Introducing Complements
7
7
-
Substitutes and Complements
Substitute: An alternative from outside the given industry for its product or service. When its performance increases or its price falls, industry demand decreases.
Plastic vs. aluminium containers
Video conference vs. business travel
Complement: A product or service or competency that adds value to original product. When its performance increases or its price falls, industry demand increases.
Paper for Xerox copiers
iTunes for iPod music players
Complementor: If customers value your product more when combined with another firms product or service.
Michelin tires for Ford & GM
3*
*
-
A Sixth Force -- Complementors
The biggest benefit of considering complementors is that they add a cooperative dimension to Porters (1980) competitive forces model.
Thinking [about] complements is a different way of thinking about business. Its about finding ways to make the pie bigger rather than fighting with competitors over a fixed pie. To benefit from this insight, think about how to expand the pie by developing new complements or making existing complements more affordable.
Brandenburger & Nalebuff
3*
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EXHIBIT 3.5
Determining Industry Attractiveness
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.
LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.
LO 3-3Apply the five forces model to understand the profit potential of the firms industry.
LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.
LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.
3*
-
Strategic Groups
Mobility Barrier Dimensions To Consider:
Specialization
Width of product line
Target customer segments
Geographic markets served
Brand Identification
Advertising
Sales Force
Technological Leadership
First Mover vs. Imitation Strategy
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
Strategic Groups
Mobility Barrier Dimensions To Consider:
Product Quality
Raw materials
Specifications
Features
Durability
Cost Position
Economies of scale and scope
Vertical Integration
Backward and/or forward
Exclusive contracts and in-house service networks
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
Strategic Groups
Mapping Groups
Auto industry example
GM, Ford, Toyota gas
BYD, Tesla electric
ID best dimensions
Choose two for map
Locate firms on map
Bubble size = market share
Rivalry is strongest in the same group
Some groups are more profitable than others
Mobility Barriers
Firms would try to move to the profit spots BUT
Specific factors that separate groups
Airlines
International routes
Regulations: airport slots
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
EXHIBIT 3.7
Strategic Groups and Mobility Barrier U.S. Airlines
3*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
-
Empirical Testing of Structure-Conduct (Strategy)- Performance
ROE(j) = 14.7 + .050 CR4(j) + .119 [CAP/S](j) +
(2.08) (1.98)
1.30 [A/S](j) +1.40 [R&D/S](j) +0.26 [GROW](j)
(7.20) (2.95) (2.90)
t-statistics in parenthesesR-squared = .43
CR4 = 4-firm concentrationROE = return on equity
R&D/S = R&D/SalesA/S = advertising/sales
CAP/S = capital expenditures/SalesGROW = demand growth
3*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Model Specification
In practice, researchers estimate a statistical model of the following form where data are aggregated to the industry level:
Industry Profit Rates = f (Concentration, Barriers to Entry, Demand )
3*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Model Specification
Multiple regression analysis seeks to evaluate the degrees to which deviations of the dependent variable (and in this course our focus has been on profit rates as the dependent variable) from its mean are explained by or associated with variations in each of a set of independent or explanatory variables (e.g., concentration, barriers to entry, demand, etc.)
3*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Model Specification
The nature of this association is captured by regression coefficients relating the profit rates in the industry of each independent variable, allowing us to determine the effect, for example, of a 10% increase in seller concentration on profit rates, holding all other explanatory variables constant (i.e., ceteris paribus)
3*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Model Specification
Variable Predicted Sign Reason
CR4+Higher concentration enables higher prices
CAP/S+Capital-cost barrier to entry
A/S+Advertising intensity as a product differentiation barrier to entry
R&D/S+Technological know-how
GROW+Demand growth leads toless likely price wars
3*
-
Structure-Conduct-Performance
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
-
Empirical Testing of Structure-Conduct (Strategy)- Performance
Model Specification
Note that the multiple regression results are consistent with (but do not prove!) the structure-conduct-performance model.
As you probably are aware from your statistics classes, there are many potential problems that can interfere with the reliable estimation of regression models, leading to incorrect inference about the statistical significance and economic importance of explanatory variables.
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Three Potential Problems:
(1)Mis-specification problems;
(2)Measurement problems; and
(3)Identification problems
3*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
(1) Mis-specification Problems:
Important Variables Omitted. In our regression, the impact of substitute products, and the power of buyers and suppliers have not been included in the model specification.
Irrelevant Variables Included. If you believe in perfect capital markets then you may question the idea of capital cost entry barriers and therefore you would question the inclusion of the independent variable [CAP/S] in the model.
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Empirical Testing of Structure-Conduct (Strategy)- Performance
(1) Mis-specification Problems:
Model assumes a linear relationship. Since the regression assumes a linear relationship, this may turn out to be a poor approximation if some of the explanatory variables (e.g., ADV/S) influence the dependent variable (i.e., ROE) in a non-linear way.
Independent variable may not be truly independent. For example, not only can increased concentration affect profit rates but profit rates may affect industry concentration.
Multicollinearity. If independent variables such as (ADV/S) and {R&D/S) are highly correlated, then the validity of the t-statistics come into question.
142.bin
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Empirical Testing of Structure-Conduct (Strategy)- Performance
(2) Measurement Problems:
For example, CR4 may not be the best measure of industry concentration, where the HHI is a better measure. Perhaps some performance measure other than ROE would also be better for testing the theory.
Note: If the evidence is not consistent with the theory it is not necessarily the case that we abandon the theory. One of the many possibilities is that we do not have good measures of the theoretical concepts.
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Empirical Testing of Structure-Conduct (Strategy)- Performance
Identification Problems:
- These problems are related to the idea that correlation does not imply causality.
For example, you might maintain that high advertising/sales is a barrier to entry (product differentiation) strategy that causes high profit rates. The regression is consistent with Porters (1980) theory.
3-*
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Empirical Testing of Structure-Conduct (Strategy)- Performance
(3) Identification Problems
However, you might argue instead that high profit rates allow more discretionary spending in marketing and thus, high profit rates cause high advertising/sales. The empirical evidence is also consistent with this theory. Thus, we have an identification problem. The data are consistent with multiple theories and we must find more refined tests and better econometric methods in order to advance our scientific knowledge in strategic management.
145.bin
*
*
INSTRUCTOR: The embedded video (click on Hybrid Car Video while in slideshow mode) is 3 minutes on some thoughts on the future of cars in the U.S. URL link is below also.
http://bigthink.com/felixkramer#!video_idea_id=18790
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
*
INSTRUCTOR: A 3-minute embedded video from CNBC is found at the bottom of this slide (click on Bank Oligoplolies Video while in slideshow mode). It discusses banking in Australia as an oligopolistic industry.
http://www.cnbc.com/id/15840232?play=1&video=1614100860
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
INSTRUCTOR: The embedded video at the bottom of this slide is a 13-minute-long interview with Michael Porter. He uses the airline vs. soft drinks industries as examples of applying the five forces model. The URL is also posted below. It was taped in summer 2008 and is referenced in the text (endnote 37).
THIS LINK IS REPEATED IN SLIDE 27 IF YOU PREFER TO WAIT TO USE IT UNTIL THE APPLICATION OF THE 5 FORCES TOOL THERE.
http://www.youtube.com/watch?v=mYF2_FBCvXw
*
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
*
2005 Mara Lederman, Rotman School of Management
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%
Average Return on Equity in US Industries, 1982
-
1993
Number
of
Industries
First Quartile
Average
22.2%
Fourth Quartile
Average
9.3%
Note:
Return on Equity = Net Income / Year End Shareholders Equity; A
nalysis based on sample of 593 industries
Source:
Silverman 2000
Average = 14.7%
Median = 13.8%
11.7%
13.8%
16.5%
Return on Equity (Percent)
Differences in Profitability Across Industries
2005 Mara Lederman, Rotman School of Management
Differences in Profitability Across Selected Industries
-5
0
5
10
15
20
25
Scheduled air transport
Cable television service
Engineering services
Race track operations
Drug stores
Dental equipment
Semiconductors
Pharmaceuticals
Operating income / assets, 1988-95 (%)
Source:
Pankaj
Ghemawat
and Jan W.
Rivkin
, Creating Competitive Advantage
2005 Mara Lederman, Rotman School of Management
Differences in Profitability Within Selected Industries
Semiconductor Industry
-5
0
5
10
15
20
25
National Semiconductor
Analog Devices
AMD
Motorola
Texas Instruments
Intel
Operating income / assets, 1988-95 (%)
Source:
Pankaj
Ghemawat
and Jan W.
Rivkin
, Creating Competitive Advantage
5
-
22
Copyright 2005 by The McGraw
-
Hill Companies, Inc. All rights reserved.
The U.S. Auto Industrys Profit Pool
Exhibit 5.7 The U.S. Auto Industrys Profit Pool
Source: Adapted by permission of Harvard Business Review. Exhibi
t from A Fresh Look at Strategy by O. Gadiesh
and J. L. Gilbert,
Harvard Business Review
76, no. 3 (1998), pp. 139
-
48. Copyright
1998 by the Harvard Business
School Publishing Corporation, all rights reserved.
2005 Mara Lederman, Rotman School of Management
Decomposition of Variance in Profitability
Year
2%
Industry
18%
Corporate
parent
4%
Business
segment
30%
Transient
46%
Source: Anita M. McGahan and Michael E. Porter, How Much Does
Industry Matter
Really?
Strategic Management Journal,
1997
Structure
-
Conduct
-
Performance
Structure
-
Conduct
-
Performance
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
Clarke Modifications of Baye Chapter 7
4
The Structure
-
Conduct
-
Performance Paradigm
The Causal View
Market
Structure
Conduct
Performance
The Feedback Critique
n
No one
-
way causal link.
n
Conduct can affect market structure.
n
Market performance can affect
conduct as well as market structure.
SUPPLIERS
POTENTIAL
ENTRANTS
SUBSTITUTES
BUYERS
INDUSTRY
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrants
Threat of
substitutes
COMPLEMENTS
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
Five Forces or Six?
Introducing Complements
Five Forces or Six?
Introducing Complements