National Park: covers large area; non-consumptive. National Preserve: large like parks; consumptive ... Most national parks managed for single use ... – PowerPoint PPT presentation
2 Explaining differences in firm-level profitability
Historically the CP industry has been very profitable while the bottling industry has been less so
Exhibit 5 pretax margin 35 vs. 9
Exhibit 4 average ROE 20-25 vs 5-10
Five forces analysis is a good starting point in explaining these differences
Key factors that differ between these two industries
supplier buyer power
rivalry
3 How intense was the Cola War How do Coke and Pepsi compete with each other
The competitive front
shelf-space
advertising
direct store delivery
selective discounting downstream
Concentrate prices rising (Ex. 6)CPs do not compete on price
4 Factors that mitigate the intensity of rivalry
By the 1980s any move made by one player can be matched by the other
ad campaigns
Pepsi--Michael Jackson then Britney Spears
Coke--Bill Cosby then Harry Potter
Vertical integration
Coke buys and recapitalizes bottlers
Pepsi does same
New products
Coke C2
Pepsi Pepsi Edge
Most games played to a stalemate
5 How did Pepsi catch up
Pepsis Strategy
Take-away market lower price youth emphasis different segment
Pepsi Challenge
Why didnt Coke respond more aggressively
Fat/happy/lazy() arrogant() focused on international expansion
Lessons
Indirect attack
Exploit inflexibility
Different segment
Exploit (technological) change (i.e. growth of supermarkets)
6 Vertical integration in the beverage industry
Historically CPs wrote (semi-)exclusive contracts with bottlers but did not own them
contracts gave bottlers correct incentives
non-integration kept the capital requirements of the CP industry small
In the 1980 and 1990s CPs moved toward anchor bottler model
ownership over bottlers allowed CPs to reap economic efficiencies as well as to ensure that bottlers would adapt to changing product strategies (intro of many new products new packages competition in a growing number of channels etc.)
equity markets appetite for new offerings allowed CPs to do this relatively cheaply
7 Summary
Coke and Pepsi are examples of how firms can create and exercise market power
they didnt inherit this business they created it
future success will depend on their ability to structure the industry as well as their own businesses
Coke and Pepsi are smart
when they go to war they kill the bystanders not themselves!
Will these factors change as the basis of competition expands to include non-carbs 8 Buy Sell or Hold Source Yahoo Finance 3/17/2005 9 How much does industry matter
10-20 of the variation in firms profits accounted for by the industry in which the firm competes
Analysis based on accounting profits in publicly held companies
10 How much does industry matter really 11 Objectives of industry analysis
Explain the differences in profitability across industries
Identify the drivers of industry-level profitability
Who in the value chain captures the value generated by the industry
Establish a foundation for making a strategic choice
e.g. decisions about entry exit or expansion
Highlight important relationships that need to be managed
12 Industry analysis has traditionally been a major input into portfolio analysis for diversified firms 13 Porters Five Forces Threat of New Entry
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
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
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
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
Source Michael E. Porter Competitive Advantage (New York Free Press 1985) 14 Biotech Supply Industry Investment thesis for Invitrogen Threat of New Entry
Patents and physical control over biological materials (such as cell lines) limits entry
Exclusive licenses to sell some products
Economies of scope makes it difficult to enter with a half-full product line
Niche entry feasible
Bargaining Power of Suppliers
Many new research tools come out of university labs must be licensed but universities have limited bargaining power since they cant commercialize these products themselves
Internal RD
Varies by segment
University research labs fragmented buy based on grant money have little information and little incentive to bargain down price
Biotech research industry is also fragmented but has more bargaining power especially when sharing procurement effort across a variety of products
Switching costs high insome lines of business (bio-informatics SW)
Informationalcomplexity
Threat of Substitutes
None these products are absolutely critical to biotechnology research
15 Invitrogen performance 16 Rivalry
How hard firms compete on price (or increase quality levels at a given) price depends on
Concentration and balance
Industry growth
Fixed (or storage costs)/Value added
Product differences
Brand identity
Switching costs
Intermittent over-capacity
Diverse stakes
Exit barriers
17 Threat of Entry
Factors that create barriers to entry include
Economies of scale
Proprietary product differences
Brand image
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve
Access to necessary inputs
Low cost product design
Government policy
Expected retaliation
18 Threat of Substitutes
The ability of the industry as a whole to profitably raise price (the elasticity of the industrys demand curve)
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
19 Buyer power
Intrinsic Strength
Buyer concentration
Buyer volume
Switching costs
Buyer information
Ability to backward integrate
Substitute products
Pull through
Price Sensitivity
Price/Total purchase
Product differences
Brand identity
Impact on quality/performance
Buyer profits
Decision makers incentives
20 Supplier Power
Mirror image of buyer power
Amount of value chain captured by suppliers influenced by
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
21 Dynamics
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
Coke and Pepsi shaped the terrain with respect to their bottlers
Franchising
Exclusivity
Consolidation and spin-off
22 An example of industry dynamics Number of Firms Entry and Exit In the US Tire Industry (1905-1980)
Industry structure is frequently changing
Many but not all industries follow predictable patterns corresponding to product life-cycles
S-curve adoption
Introduction
Growth
Maturity
Decline ()
Source Klepper and Simons (2000). The Making of an Oligopoly Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry Journal of Political Economy. 1084 p. 731 23 Some common long-run dynamics 24 A major challenge for industry analysis is where to draw the boundaries
Typically industry analysis will be motivated by some choice or set of possible strategic choices
Horizontal scope
Which product markets
Vertical scope
How many vertically-linked stages in the value chain should be considered
Geographic scope
Which geographic markets
25 Final words on industry analysis
A starting point for many types of strategic decisions
Strategy should fit the external business environment
In the long run the business environment is not fixed
It can be shaped by the strategic choices taken by a firm and its rivals
It also changes based on factors over which the firm has little control
The role of the strategist is to identify these changes and adapt the firms strategy to them
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