2. Internal Analysis (SW) External Analysis (OT)
• Value chain • PESTEL
• VRINE • 5 Forces
• Corporate value • Game theory
Arenas
Staging Vehicles
& Economic M&A
Logic
Pacing 4C
Differentiators
Implementation
• Business plan
Strategy
People Structure
• Resource allocation
Symbols
Rewards Processes
• Organizational design/∆
2 Industry & Competitor Analysis
3. PESTEL framework for analyzing the macro
environment (beyond the industry).
Industry Analysis: What determines the
overall profitability of an industry?
How will it change over time?
How can firms use this information to formulate
strategy?
Competitor analysis & game theory. How do
we predict our rivals actions?
3 Industry & Competitor Analysis
4. Economic Socio-Cultural
Political Industry Technological
Legal Environmental
4 Industry & Competitor Analysis
5. Perfect Competition Oligopoly Monopoly
Numerous firms. A few firms. One firm.
No market power: Price- Outcome depends on Market power: Choose
takers on identical how firms compete: price to maximize profit
products. Bertrand: Competition subject to demand.
Free entry & exit. on price. Quantity No entry or exit.
adjusts to demand.
Long-run: Economic Cournot: Competition Long-run: Positive
profits driven to zero. on quantity. Price economic profits.
(Good for consumers & adjusts to demand. (Good for firm, bad for
society, bad for firms) consumers & society)
Collusion: Firms choose
price cooperatively.
6 Industry & Competitor Analysis
7. Industry Concentration v.
6%
Profitability 24 Industries
Book publishing
5%
Process-control
instruments
4%
Industry Median ROS
3%
2% Why does this diverge
from expectations?
1% What factors explain Flour Alkalies & chlorine
performance differences
across industries.
0%
0% 20% 40% 60% 80% 100%
8-Firm Concentration Ratio
8 Industry & Competitor Analysis
9. Economic Socio-Cultural
Industry Environment
Entry
Barriers
Political Supplier Rivalry Buyer Technological
Power Power
Substitute
Products
Legal Environmental
10 Industry & Competitor Analysis
10. Entry
Barriers
Supplier Buyer
Power Rivalry Power
Substitute
Products
11 Industry & Competitor Analysis
11. Low economies of scale/capital requirements
Undifferentiated product
Incumbents cannot retaliate easily
Restrict access to distribution channels or suppliers
Limit pricing
No critical proprietary knowledge/technology
No network externalities
Entry
No government/legal barriers Barriers
Supplier Rivalry Buyer
Power Power
Substitute
Products
12 Industry & Competitor Analysis
12. Two types of entry barriers:
Structural: Inherent natural advantages that incumbents
have simply by their incumbency – no action is required.
Strategic: Active entry-deterring behavior by incumbents
(e.g., pre-emptive capacity expansion or “limit pricing”).
Opposite effects on industry profits:
Structural barriers tend to increase industry profits since
they keep out entrants at no additional cost.
Strategic barriers may decrease industry profits, since they
impose costs on incumbents (e.g., reduced margins from
limit pricing, or costs of excess capacity).
Always know which type of barrier you’re talking about!
13 Industry & Competitor Analysis
13. Buyers are large and concentrated/little rivalry
Undifferentiated products reduce switching costs
Buyer can backward integrate (in-source)
Buyers know the cost structure
Product represents a large % of buyers’ total costs
Product has little impact on the quality of the
buyers’ final output Entry
Barriers
Supplier Rivalry Buyer
Power Power
Substitute
Products
14 Industry & Competitor Analysis
14. Suppliers are large and concentrated/little rivalry
Differentiated products increase switching costs
between vendors and/or substitute products
Suppliers can forward integrate
Focal industry represents a small % of suppliers’
business
Entry
Barriers
Supplier Rivalry Buyer
Power Power
Substitute
Products
15 Industry & Competitor Analysis
15. Substitute product/service is comparable or
superior (in the price/performance relationship)
Low switching costs for buyers
(redesign, retooling, etc.)
Buyers are highly price sensitive
Entry
Barriers
Supplier Rivalry Buyer
Power Power
Substitute
Products
16 Industry & Competitor Analysis
17. Large number of competitors in industry.
Industry is stagnant or declining.
Opportunity to spread fixed or sunk costs:
Excess capacity
Large fixed cost investment.
High storage costs for product.
Competitors’ costs differ.
Product is undifferentiated.
Entry
Buyers have low switching costs. Barriers
Exit barriers are high. Supplier
Power Rivalry Buyer
Power
Substitute
Products
18 Industry & Competitor Analysis
18. “Rivalry” here mainly means intensity of
competition that erodes margins.
The focus is mainly on price competition since it
directly erodes margins.
In most cases, differentiation-based
competition protects or increases margins
resulting in greater industry profitability.
19 Industry & Competitor Analysis
19. Market entry/exit based on forecasts of prices,
costs, & profits.
Positioning: Find ways to mitigate the greatest
threats among the 5 forces (supply chain,
switching costs, entry barriers, etc.)
Industry evolution: Anticipate & prepare for
changes in the 5 forces.
Industry transformation: Find ways to change
the 5 forces to your advantage (new business
models, etc.).
20 Industry & Competitor Analysis
20. PESTEL framework for analyzing the macro
environment (beyond the industry).
Industry Analysis: What determines the
overall profitability of an industry?
How will it change over time?
How can firms use this information to formulate
strategy?
Competitor analysis & game theory. How do
we predict our rivals actions?
22 Industry & Competitor Analysis
22. Red
C D
$500 $550
B $1000 $100
Blue
$50 $55
A
$1100 $110 N
Prisoner’s Dilemma?
• Dominant strategies? Two
• Nash equilibrium? One
• Pareto inefficient? Yes
24 Industry & Competitor Analysis
23. Apple 100
++
Samsung +50
Samsung Apple + 50
Samsung ++75
Apple
Apple + 50
Samsung Samsung ---50
Apple - 25
Samsung - -25
25 Industry & Competitor Analysis
25. Awareness
of Rival
Motivation Rival’s
/Perceived Response
Threat (e.g., lag, order,
magnitude)
Ability to
Respond
27 Industry & Competitor Analysis
26. IsResource
firm in same
Similarity
league?
Awareness
of Rival
Market
Do the mkts
Commonality
overlap?
Motivation Rival’s
/Perceived Response
Threat (e.g., lag, order,
Rival
Is firm viewed magnitude)
Cognition
as a threat?
Resource Ability to
Strength Respond
28 Industry & Competitor Analysis
27. Internal Analysis (SW) External Analysis (OT)
• Value chain • PESTEL
• VRINE • 5 Forces
• Corporate value • Game theory
Arenas
Staging Vehicles
& Economic M&A
Logic
Pacing 4C
Differentiators
Implementation
• Business plan
Strategy
People Structure
• Resource allocation
Symbols
Rewards Processes
• Organizational design/∆
30 Industry & Competitor Analysis