Industry Dynamics Analysis and Strategic Segmentation Framework

1. Further Topics in Industry and Competitive Analysis • Extending 5-forces analysis • Does industry matter? • Complements • Dynamic competition • Game Theory • Competitor Analysis • Segmentation • Strategic Groups OUTLINE

2. Percentage of variance in firms’ return on assets explained by: Industry effects Firm-specific effects Unexplained variance Schmalensee (1985) 19.6% 0.6% 80.4% Rumelt (1991) 4.0% 44.2% 44.8% McGahan & Porter 1997) 18.7% 31.7% 48.4% Hawawini et al (2003) 8.1% 35.8% 52.0% Does Industry Matter?

3. The Value Net CUSTOMERS COMPETITORS COMPANY COMPLEMENTORS SUPPLIERS

4. Five Forces or Six? —Introducing Complements The suppliers of complements create value for the industry and can exercise bargaining power SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS COMPLEMENTS Threat of new entrants POTENTIAL ENTRANTS Threat of substitutes SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS

5. Dynamic Competition Porter framework assumes: • industry structure drives competitive behavior • Industry structure is (fairly) stable. But, competition also changes industry structure: • Schumpeterian Competition: A “perennial gale of creative destruction” where firm strategies continually transforms industry structure innovation overthrows established market leaders • Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsolescing or neutralizing opponents’ competitive advantages Implication: Under dynamic competition, 5-forces framework is less useful—Competitive behavior and industry structure jointly determined by underlying conditions of technology, demand & costs

6. The Contribution of Game Theory to Competitive Analysis • Main value: • Framing strategic decisions as interactions between competitors • Predicting outcomes of competitive situations involving a few, • evenly-matched players • Some key concepts: • Competition and Cooperation—Game theory can show conditions • where cooperation more advantageous than competition • Deterrence—changing the payoffs in the game in order to deter • a competitor from certain actions • Commitment—irrevocable deployments of resources that • give creditability to threats • Signaling—communication to influence a competitor's decision Problems of game theory: Useful in explaining past competitive behavior—weak in predicting future competitive behavior. What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions

7. A Framework for Competitor Analysis OBJECTIVES What are competitor’s current goals? Is performance meeting there goals? How are its goals likely to change? STRATEGY How is the firm competing? • PREDICTIONS • What strategy changes • will the competitor • initiate? • How will the competitor • respond to our strategic • initiatives? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES & CAPABILITIES What are the competitors’ key strengths and weaknesses?

8. Segmentation Analysis: The Principal Stages • Identify key variables and categories. • Construct a segmentation matrix • Analyze segment attractiveness • Identify KSFs in each segment • Analyze benefits of broad vs. narrow scope. Identify segmentation variables Reduce to 2 or 3 variables Identify discrete categories for each variable Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus

9. Size • Technical • sophistication • OEM/replacement The Basis for Segmentation: Customer and Product Characteristics Industrial buyers Characteristics of the Buyers • Demographics • Lifestyle • Purchase occasion Household buyers • Size • Distributor/broker • Exclusive/ • nonexclusive • General/special • list Distribution channel Opportunities for Differentiation Geographical location • Physical size • Price level • Product features • Technology design • Inputs used (e.g. raw materials) • Performance characteristics • Pre-sales & post-sales services Characteristics of the Product

10. *Size *Technical sophistication *OEM/replacement Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product

11. Segmenting the European Metal Can Industry

12. Segmenting the World Automobile Market US& Canada W.Europe E.Europe Asia Lat America Australia Africa Luxury cars Full-size cars Mid-size cars Small cars Station wagons Passenger vans Sports cars Sport-utility Pick-up trucks

13. Vertical Segmentation & Industry Profit Pools —The US Auto Industry 25% 20 Service & repair Leasing Operating margin 15 Warranty Aftermarket parts Auto manufacturing 10 Auto rental Auto insurance Auto loans New car dealers 5 Used car dealers 0 Gasoline 100% 0 Share of industry revenue

14. SEGMENT Segmentation and Key Success Factors in the U.S. Bicycle Industry KEY SUCCESS FACTORS * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); *Cost efficiency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. High-priced bicycles for enthusiasts. Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment.

15. Strategic Group Analysis A strategic group is a group of firms in an industry that follow the same or similar strategies • Identifying strategic groups: • Identify principal strategic variables which • distinguish firms. • Position each firm in relation to these • variables. • Identify clusters.

16. Strategic Groups in the World Automobile Industry Broad GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, DaimlerChrysler REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, Kia, GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Subaru, Isuzu, Suzuki, Saab, Hyundai, Daihatsu NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Proton, Maruti First Auto Works (China) PRODUCT RANGE LUXURY CAR MANUFACTURERS e.g., Aston Martin, BMW, Rolls Royce (owned by VW) NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (owned by Fiat) Maserati, Lotus Narrow National GEOGRAPHICAL SCOPE Global

17. Strategic Groups Within the World Petroleum Industry INTERNATIONAL UPSTREAM COMPANIES Premier Oil INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM Apache Adanarko Kuwait Petroleum PDVSA INTEGRATED DOMESTIC OIL COMPANIES • NATIONAL • PRODUCTION • COMPANIES Iran NOC 0 0.5 1.0 1.5 2.0 Statoil BP Exxon -Mobil Vertical Balance Chevron Pemex Petronas THE SUPER MAJORS Lukoil Conoco Phillips ENI Elf-Fina-Total Repsol YPF Royal Dutch Shell PetroChina Indian Oil Phillips Petrobras ENI Nippon INTERNATIONAL DOWNSTREAM OIL COMPANIES Repsol Valero Neste Ashland Sunoco 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope