Transcript Course Summary - Faculty Directory | Berkeley-Haas

Cola Wars
Key Take-aways
How much does industry matter?
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10-20% of the variation in firms’ profits accounted for
by the industry in which the firm competes
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Analysis based on accounting profits in publicly held
companies
How much does industry matter really?
Average Economic Profits of U.S. Industry Groups, 1978-1996
Value Line Industry Groups
ROE-Ke Spread
Toiletries/Cosmetics
Pharmaceuticals
Soft Drink
20%
15%
Tobacco
Food Processing
Household Products
Electrical Equipment
Financial Services
Specialty Chemicals
Newspaper Integrated Petroleum Electric Utility - East
Bank
Retail Store
Telecom
10%
5%
0%
(5%)
(10%)
(15%)
0
100
200
300
Tire & Rubber
Electric Utility - Central
Medical Services
Machinery
Auto & Truck
Computer & Peripheral
Paper & Forest
Air Transport
Average Invested Equity ($B)
Steel
400
500
600
700
800
900 1,000 1,100 1,200 1,300
Source: Ghemawat, Strategy and the Business Landscape, p20.
Porter’s Five Forces

Porter’s five forces framework is a key tool for Industry
analysis
Porter’s Five Forces
Threat of New Entry
Bargaining Power
of Suppliers
• 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
• Economies of scale
• Proprietary product
differences
• Brand identity
• Switching costs
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Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
Rivalry Among
Existing Competitors
• Industry growth
• Fixed costs / value
added
• Overcapacity
• Product differences
• Brand identity
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Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Threat of Substitutes
• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute
Bargaining Power
of Customers
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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
Source: Michael E. Porter,
Competitive Advantage
(New York: Free Press, 1985)
Rivalry
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How hard firms compete on price (or increase quality
levels at a given price) depends on:
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Concentration and balance
Industry growth
Fixed versus marginal costs
Product differences
Brand identity
Switching costs
Business cycle fluctuation/intermittent over-capacity
Diverse stakes
Exit barriers
Entry
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Barriers to entry include:
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Economies of scale
Product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
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Learning/experience curve
Access to necessary inputs
Low cost product design
Government policy
Expected retaliation
Threat of Substitutes
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The ability of the industry as a whole to profitably raise
price (the elasticity of the industry’s demand curve)
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Tobacco & pharmaceuticals – inelastic demand
Steel – elastic demand
Likely to change over time with technological changes
or changes in consumer tastes
Determined in part by relative performance / price of
substitutes
Buyer power
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Intrinsic Strength
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Buyer concentration
Buyer volume
Switching costs
Buyer information
Ability to backward integrate
Substitute products
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Price Sensitivity
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Price/Total purchase
Product differences
Brand identity
Impact on
quality/performance
Buyer profits
Decision maker’s incentives
Supplier Power
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Mirror image of buyer power
Amount of value chain captured by suppliers
influenced by:
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size and concentration of suppliers
degree to which suppliers provide commodity vs. custom
inputs (differentiation)
availability of substitute inputs
ability to backward integrate
importance of volume to suppliers
Dynamics
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Industry analysis provides a “snapshot” of current
conditions in an industry
As we saw in Coors, the industry “landscape” is
subject to “tectonic shifts” over time.
Some of these shifts are under the control of the
players in the industry
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Coke and Pepsi shaped the terrain with respect to their
bottlers
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Franchising
Exclusivity
Consolidation and spinoff