Industry Analysis

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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 4

Further Topics in Industry

and Competitive Analysis

Objectives

The limits of industry analysis

Does Industry Matter?

Hypercompetition

Winner-Take-All Industries

Beyond the Five-Forces

Complements

Ecosystems

Business Models

Competitive Interaction

Game Theory

Competitor Analysis

Segmentation and strategic groups

Further Topics in Industry and

Competitive Analysis

OUTLINE

To recognize the limits of the Porter five forces framework, and extend the framework to include the role of complements as well as substitutes

To acknowledge competition as a dynamic process, to appreciate the insights that game theory offers into the dynamics of rivalry, and to use competitor analysis to predict competitive moves by rivals

To segment an industry into its constituent markets, appraise the relative attractiveness of different segments and apply strategic group analysis to classify firms according to their strategic types

FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS

Objectives

THE LIMITS OF INDUSTRY ANALYSIS

Does Industry Matter?

Chart1

Misangy et al (2006)i	Misangy et al (2006)i	Misangy et al (2006)i
Roquebert et al (1996)	Roquebert et al (1996)	Roquebert et al (1996)
Hawawini et al (2003)	Hawawini et al (2003)	Hawawini et al (2003)
McGahan& Porter ((1997)	McGahan& Porter ((1997)	McGahan& Porter ((1997)
Rumelt (1991)	Rumelt (1991)	Rumelt (1991)
Schmalensee (1985)	Schmalensee (1985)	Schmalensee (1985)

Industry effects

Firm effects

Other and unexplained

7.6

43.8

48.6

10.2

34.8

8.1

35.8

56.1

18.7

31.7

49.6

44.2

51.8

19.6

0.8

79.6

Sheet1

	Industry effects	Firm effects	Other and unexplained
Misangy et al (2006)i	7.6	43.8	48.6
Roquebert et al (1996)	10.2	55	34.8
Hawawini et al (2003)	8.1	35.8	56.1
McGahan& Porter ((1997)	18.7	31.7	49.6
Rumelt (1991)	4	44.2	51.8
Schmalensee (1985)	19.6	0.8	79.6

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” –market leaders overthrown by innovation
Hypercompetition: “intense and rapid competitive moves…. continuously creating new competitive advantages and destroying existing competitive advantages”

Implication: --Within 5-forces framework:

INDUSTRY STRUCTURE COMPETITION

--Under dynamic competition:

COMPETITIVE STRATEGY INDUSTRY STRUCTURE

Competition as a Dynamic Process: Hypercompetition

LIMITS OF INDUSTRY ANALYSIS

In some industries, the notion of “industry attractiveness” is meaningless because one firm takes all the industry’s profits and other firms earn little or no profit

These “winner-take-all” industries tend to be those with extreme scale economies (e.g. search engines) or network externalities (online auction sites, social networks)

LIMITS OF INDUSTRY ANALYSIS

Winner-Take-All Industries

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

BEYOND THE 5-FORCES

www.contemporarystrategyanalysis.com

A business ecosystem is the “community of organizations, institutions, and individuals that impact the enterprise”

BEYOND THE 5-FORCES

Business Ecosystems: Managing Value Migration

Change within a business ecosystem causes value to migrate between firms and groups of firms

A firm can influence value migration within a business ecosystem in order to increase its share of value within the system. E.g. by becoming a “guardian of quality”, becoming irreplaceable, exploiting changing customer needs, or reconfiguring the value chain.

Infrastructure

Activities

Resources

Partners

Customer

Segments

Channels

Relationships

Offer

Value

Proposition

Financial viability

Revenues

Costs

Profit

BEYOND THE 5-FORCES

Using Business Models to Manage the Ecosystem

A business model is a simplified description of a business that specifies the core logic for creating value

Business models are useful for developing strategies that can exploit the opportunities available in complex business ecosystems

The Business Model Canvas is a graphical tool for designing business models:

THE BUSINESS

MODEL CANVAS

Frames strategic decisions as interactions between competitors
Predicts outcomes of competitive situations involving a few,

evenly-matched players

Provides key insights into the nature and determinants of interactions

among competitors. E.g.:

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:

Able to explain past competitive behavior—weak in predicting future behavior.
Lack of an integrated general theory— Many different models; outcomes highly

sensitive to small changes in assumptions

The Contribution of Game Theory to Competitive Analysis

COMPETITIVE INTERACTION

PREDICTIONS

What strategy changes

will the competitor

initiate?

How will the competitor

respond to our strategic

initiatives?

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?

ASSUMPTIONS

What assumptions does the competitor

hold about the industry and itself?

RESOURCES & CAPABILITIES

What are the competitors’ key

strengths and weaknesses?

A Framework for Competitor Analysis

COMPETITIVE INTERACTION

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

Differentiation benefits of

segment focus

Segmentation Analysis: The Principal Stages

SEGMENTATION AND STRATEGIC GROUPS

Opportunities for

Differentiation

Characteristics

of the Buyers

Characteristics

of the Product

Industrial buyers

Household buyers

Distribution channel

Geographical

location

Size
Technical

sophistication

OEM/replacement

Demographics
Lifestyle
Purchase occasion

Size
Distributor/broker
Exclusive/

nonexclusive

General/specialist

Size
Price
Features
Technology/design
Inputs used (e.g. raw materials)
Performance characteristics
Pre-sales/after-sales services

Customer and Product Characteristics as Segmentation Variables

SEGMENTATION AND STRATEGIC GROUPS

Segmenting the World Automobile Market

REGIONS

SEGMENTATION AND STRATEGIC GROUPS

North America	Latin America	W. Europe	E. Europe	East Asia	South Asia	Pacific	Africa/Mid-dle East
Luxury cars
Large/midsize sedans
Compact family cars
Mini cars
Sports cars
SUVs
Multi-purpose vehicles
Pickup trucks
Hybrid cars
Electric cars

100

Share of industry revenue (%)

Auto loans

Leasing

Warranty

Gasoline

Auto insurance

Aftermarket

parts

Auto rental

Operating margin (%)

Auto manufacturing

New car dealers

Used car dealers

Service & repair

Vertical Segmentation & Industry

Profit Pools: The US Auto Sector

SEGMENTATION AND STRATEGIC GROUPS

Batteries

Vehicle production

Distri-bution

Financing

Servicing

& repair

Power

generation

Charging

points

Power

management

Value added services

(e.g. entertainment, navigation, information)

Revenue

EBIT

/Sales

(%)

SEGMENTATION AND STRATEGIC GROUPS

Vertical Segmentation & Industry

Profit Pools: Electric Vehicles

SEGMENT

Low price bicycles sold primarily

through department and discount

stores, mainly under the retailer’s

own brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

Low-costs of components and assembly.
Supply contract with major retailer.

Leading competitors: Assemblers in Taiwan & China

+ a few U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold mainly

under manufacturer’s brand and

distributed through specialist cycle

stores

Cost efficiency through scale and low wage costs
Reputation for quality
Good dealer relations

* International marketing & distribution.

Leading competitors: Giant, Peugeot, Fuji

Quality components and assembly
Innovation in technology and design
Reputation (including success in racing)
Strong dealer relations.

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles /tricycles) sold

through discount stores, & toy stores)

Segmentation and Key Success

Factors: The U.S. Bicycle Market

SEGMENTATION AND STRATEGIC GROUPS

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.

Strategic Group Analysis

SEGMENTATION AND STRATEGIC GROUPS

Broad

PRODUCT

RANGE

Narrow

National

GEOGRAPHICAL SCOPE

Global

GLOBAL, BROAD-LINE

PRODUCERS

e.g., GM, Ford, Toyota, Honda, VW, Renault-Nissan, Fiat-Chrysler

GLOBAL PRODUCERS OF A LIMITED RANGE OF MODELS e.g., BMW, Fuji/Subaru, Isuzu, Suzuki,

NATIONALLY- FOCUSED, SPECIALIST PRODUCERS e.g., Bristol (UK), BDY (China), Premier (India), Classic Roadsters (US), Morgan (UK),

NATIONAL PRODUCERS OF INTERMEDIATE RANGE OF MODELS

e.g. Tofas (Turkey), Proton (Malaysia), Tata Motors (India), Chery (China) , Avtovaz (Russia)

PERFORMANCE CAR PRODUCERS e.g., Ferrari (Italy), Aston Martin (UK), Tesla, Fisker (US)

Strategic Groups within the World
Automobile Industry

SEGMENTATION AND STRATEGIC GROUPS

Geographical Scope

National Global

Vertical

Balance

Upstream

NATIONAL

PRODUCTION

COMPANIES

e.g. Saudi Aramco, Kuwait

Petroleum, Qatar

Petroleum,

INTEGRATED

NATIONAL OIL COMPANIES

e.g. Petrobras, PDVSA, CNPC,

Indian Oil, Pemex

DOMESTIC-FOCUSED

DOWWNSTREAM

COMPANIES

e.g. Valero, Nippon Oil,

Neste

SUPER MAJORS

e.g. ExxonMobil, Shell,

BP, Chevron, Total,

INTEGRATED

INTERNATIONAL

MAJORS

e.g. Eni, Repsol,

PetroCanada

INTERNATIONAL

EXPLORATION & PRODUCTION

COMPANIES

e.g. Conoco, Apache, Occidental,

Marathon Oil

Down

stream

Integrated

Strategic Groups within the World
Petroleum Industry

SEGMENTATION AND STRATEGIC GROUPS

Conventional industry analysis is limited to the extent that:

Industry membership is a minor influence on firm profitability

It assumes industry structure is stable—the competitive process can transform industry structures

In “winner-take-all” industries, the notion of industry attractiveness is meaningless

We can extend our analysis of industry and competition to take account of:

complementary products

platform-based competition

business ecosystems

Competitive interactions between close rivals can be analyzed:

game theory

competitor analysis—which is less formal than game theory, but can help us to understand competitors and predict their behavior

Segmentation analysis and strategic group analysis allows us to understand industries at a more detailed level

Summary

FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS