Strategic foundation roles: Industry structure

1
Strategic foundation roles Industry structure
Strategic foundation
Industry structure
Customer value
Business capabilities
Competitive position

• To capture basic snapshot of industry
• To identify paradigm shifts and external trends

• To identify customer needs and company role in
  their fulfillment
• To prioritize customer requirements and
  competitive markets

• To identify a companys core competencies and
  gaps
• To understand a companys competitive advantage
  and sustainability

• understand differentiating qualities of
  competitor portfolios
• To predict competitor moves and market positions

2
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
3
Market overview learning objectives

• Gain an understanding of market maps and
  different ways in which they can be viewed
• Learn how to create market maps
• Know where to best search for data to conduct
  market analyses

4
Discussion questions
How do you define your business boundaries
whats in and whats out? What are the biggest
challenges in data collection?
5
A market can be segmented many ways
What is the most important way to segment your
business?
To what level should you segment?
6
Market maps show the size of market segments,
market share and level of fragmentation
Medical Device Market
Source Medical and Healthcare Marketplace Guide
Analyst Reports (In-vitro SG Cowen) Internal
Analysis
7
Mapping revenues and profits help identify the
most attractive market segments
U.S. Healthcare Revenues 2001
U.S. Healthcare Profits 2001
Total 1,389B
Total 135B
8
Mapping markets by geography can show the size of
regional opportunities
Medical Device Market by Geography
Medical Device Profit Pool by Geography
9
Mapping regional market segments can also uncover
distinct differences
Source Jaako Pöyry ABC estimates
10
Market sizing procedures may vary based on how
well an industry is documented
Poorly Documented
Well Documented

• Market size information is usually publicly
  available
• Examples
• Government purchases
• Consumer products
• Housewares
• Automobile industry

• Market size information needs to be constructed
• Examples
• Unique goods (e.g., weather forecasting software)
• Handicrafts

• Be willing to make educated assumptions
• Look for proxies to represent missing data
• Develop creative approaches and calculations to
  obtain market size

• Get to the central data source quickly
• Look at the sources source
• Talk to industry associations

11
Example Mattress sales have outpaced GDP growth
Real
12
Example The mattress market is large and
fragmented in all channels
13
Example Growth has been driven in large part
from the specialty mattress channel
14
Example A Summary helps pull insights out of the
data

• The mattress industry is attractive for several
  reasons
• Large and fragmented
• High level of profitability from components
  through retailers
• Long-run growth rates well above GDP
• Historic growth drivers, however, may contribute
  less to future industry growth
• Unit volume growth slowing
• Expansion of the specialty mattress channel
• Manufacturers who achieve high rates of growth
  over the next five years will likely need to
• Take significant market share
• Enhance sales mix in higher price points
• Win across a broad range of channels and customer
  types

15
Tips for success

• Look at the data in the most insightful way(s)
• Revenue, profits, customers, competitors, product
  categories
• Regional, national, international?
• Define your market at both high and low levels
• So that you have 5-10 share so that you are 1
  or 2
• Make sure segments used are mutually exclusive
• Attempt to explain 80-90
• Be aware of cyclical industries
• Growth (utilization, etc.) will not be constant
• Separate volume and price effects
• Be careful when predicting a deviation from
  previously observed cycles
• Check and double check numbers
• Reality check use multiple sources
• Be wary of overly optimistic growth forecasts
• Estimates are often wrong be aware of source
  (ulterior motives)

16
Exercise Draw a map of the market in which your
business participates
Instructions

• Determine the most relevant way to segment your
  market vertically
• Channel? Customer? Technology? Geography?
  Product?
• Whats the most relevant way to segment
  horizontally?
• Channel? Customer? Technology? Geography?
  Product?
• Draw a market map on the following page with your
  chosen methodology

17
Exercise Draw a map of the market in which your
business participates
___
18
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
19
Value chain learning objectives

• Understand the basic components of a value chain
  
• Know when to apply value chain analysis, and to
  what level of detail
• View different ways that value chain analysis can
  be depicted and used

20
Value Chain analysis

• Value chain analysis provides a systematic method
  for disaggregating a firm or industry into its
  major discrete activities to understand sources
  of competitive advantage

Equipment
Design
Install
Operate
Service
Successively finer disaggregations of activities
can expose differences important to competitive
advantage

21
Value chain scope depends largely on the purpose
for which it is being used

• Sample Use

System or industry value chain
Inputs (Supplier)
Conversion (Manufacturer)
Distribution (Distributor/ Retailer)
Consumption (End-User)

• Potential supplier identification

Distribu-tion/ Outbound Logistics
Tech., RD
Purchas-ing/ Inbound Logistics
Service
Manu- facturing/ Operations
Marketing Sales
Firm value chain

• Cost analysis

Major activity value chain

• Process re-engineering
• Cost analysis

Conversion
Final Assembly
Quality Assurance
Packaging

22
When to use value chain analysis at different
levels
Map Major Activities
MapSub-Activities
Cost analysis
Process re-engineering
Business definition
Industry collaboration/Identifying potential
suppliers
Competitive positioning

23
There are three major questions to answer in a
value chain analysis
1. What are the activities?
?
2. Which activities are most critical?
Design
Install
Equip-ment
Operate
Service
Monitor
3. Which critical activities provide the most
opportunity?
Install
Monitor
Equip-ment
Design
Operate
Service

24
Example Disaggregating the chain helps you
decide where you should or need to play
Install
Product (Equipment and software)
Database integration
Service
Monitor
Consulting/Engineering
SecuritySystems


Assess
Assess
Plan
Specify
Equip ongoing
Software only
Central station
On-site
Description
Spec systems for larger projects (100K)
Install and commission equipment
Merge databases of disparate systems
Maintenance
Manufacture and sell hardware and software
Support, upgrade
Monitor system
Influence on buying decision
High
Low
Low
Medium
Low
Low
Compe- tencies
Engineering and design
Technician
Computer programming
RD, manufacturing, distribution
Tech.
Computer programming
Guard
Operator
Revenue stream
One time
One time
One time
On going
On going
One time upgrades and service
Importance of local market share
Medium
High
Low
Manuf low Dealer high (except natl accounts)
High
Low
High
Low
25
Tips for success

• Be comprehensive
• Consider all value chain components
• Further sub-divide important value chain
  components for greater insight
• Look for clear break points that truly
  disaggregate industries
• Search for new technology trends that could merge
  or disaggregate value chain elements

26
Exercise Draw your customers value chain
Instructions

• What activities exist in your customers value
  chain?
• Which activities are most critical?
• Which critical activities provide the most
  opportunity?
• Where should we participate and how should we win
• Complete the value chain on the following page

27
Exercise Draw your customers value chain
Description
Influence on buying decision
Compe- tencies
Revenue stream
Importance of local market share
28
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
29
Profit pools learning objectives

• Learn the profit pool concept and how you can use
  profit pools to better understand your industry
  and where to compete
• Learn the basic steps on how to create a profit
  pool

30
Profit Pools are the total profits earned in an
industry at all points along the value chain
U.S. Consumer Photographic Industry Profit Pool
Total profit 1.9B
Operating profit

Photofinishing equipment
Enhanced services
31
Profit can be defined in several ways

• Accounting profit - business earnings as formally
  reported
• Most commonly used as the basic profit measure
• Examples include Net Income or Earnings per Share
  calculations
• Return on investment - business earnings after
  taking the cost of capital into account. Commonly
  used measures include
• Return on Capital (book value)
• Return on Invested Capital (book value)
• Return on Assets
• Cash-flow contribution - business earnings before
  taking fixed-asset and capital costs into account
  (e.g. Earnings before interest, tax, depreciation
  and amortization EBITDA)
• Used as a basis for decision-making in mature,
  high fixed cost and cyclical industries

32
Mapping a profit pool involves four steps
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates
Tasks

• Identify which value chain activities influence
  the industrys ability to generate current and
  future profits

• Develop a baseline estimate of the profits
  generated by all profit pool activities within
  the value chain

• Determine the profits generated by each activity
  within the value chain

• Compare the results previous two steps and
  reconcile numbers

• List of value chain activities in profit pool (in
  sequential order)

• Estimate of total profit pools (may be a range)

• Point estimates of profit for each value chain
  activity

• Final estimates of activity and total pool profits

Output

33
Profit pool choke points control profit flow
Computer industry example
Micro- processors
Other Components
Personal Computers
Software
Peripherals
Services

• Intels dominance of microprocessors
• Establishment of an industry-wide standard that
  all companies must now follow

• Microsofts dominance of Windows
• Consolidation of control over the customer
  interface

Examples
Impact
34
Example Choke points
Computer industry example
Operating margin
40
30
20
10
0
Other Components
Soft-
Periph-erals
Ser-vices
Personal Computers
ware
Micro-
processors
Share of Industry Revenue
35
Discussion questions
Where are the choke points in your industry?
Why do they exist? Can they be broken down?
36
Three ways to use profit pools

• U-Haul identified a large untapped source of
  profit in the low margin truck rental business
• Seized first mover advantage
• Entered accessory business at a low cost
• Reduced prices (and profits) in core truck rental
  business to attract customers for higher margin
  accessory business

Identify new sources of profit

• Dell evaluates which customers to pursue and
  which channels to use
• With direct sales, Dell splits what would be
  dealers profits with itself and customers
  through lower prices
• Regular customer re-segmentation identifies most
  profitable customers, allowing Dell to react
  quickly to new profit sources

Develop distribution strategy
Guide pricing, product and operating decisions

• Anheuser Bush recognized industrys profit pool
  driven by premium beer
• Increased marketing of premium brands
• Vertically integrated into can production,
  thereby raising competitive barriers around the
  pool by cutting manufacturing and distribution
  cost

Seeing what others do not will best prepare you
to capture a disproportionate share of industry
profits
37
Example U.S. auto industry high profit segments
have smallest revenues
Operating margin
25
20
15
10
5
0
Automanu- facturing
Used car dealers
Autoinsurance
Leasing
Gasoline
Aftermarket parts
Auto rental

Auto loans
Service repair
New car dealers
Share of Industry Revenue
38
Tips for success

• Take a broad view of the value chain
• Examine the industry from different views,
  building estimates from multiple perspectives
• Prioritize focus to look at the largest and
  easiest components first
• Look at relevant internal and external
  comparables
• Think creatively

39
Exercise Where are the sources of profit in your
industry?

Source of profit
Key
High
Med.
Low
40
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
41
Technology overview and evolution learning
objectives

• View potential frameworks and tools you can use
  to assess technology evolution and convergence
• Gain a better understanding as to why some
  technologies failed to live up to their hype
• See how studying analogies and talking to
  customers can help provide insights into and
  better predict technological evolution

42
Assessing technologys evolution and its
potential impact is a multi-step process
Competitors capabilities
My capabilities
Current and future customer needs
43
As product life cycles (PLCs) continue to
shorten, assessing new threats is more important
than ever
44
Product life cycles continue to shorten today
Printers and related (HP)
Auto Engines (Renault, GM)
45
Convergence is a major technological trend seen
in many industries
In the future, your TV and your computer will
merge into ONE UNIT!
46
Convergence blurs business boundaries creating
new opportunities
IT
Pharmacogenomics drug e.g Herceptin antibody
therapy (e.g. Genentech)
Disease management (e.g. Pfizer)
Rx
Diagnostics
Smart Drug Delivery (e.g. Ortho Evra/JJ Alza)
Remote patient monitoring (e.g Medtronic, Guidant
End-to-end diabetes solution (e.g. Novo
Nordisk) Artificial Pancreas e.g Medtronic, Roche
Drug-eluting stent (e.g. JJ Cordis)
Drug Delivery
MedicalDevices
Implantable drug pumps (e.g Medtronic, Amgen)
47
Convergence has created new combinations in
health care
IT
Diagnose
Intervene
RD
Monitor/Manage
Inva- sive
In vivo internal
Non- invasive
Min. invasive
Rehab/ Recovery
Moni-toring
Disease Mgmt
In vivo external
In vitro
Research
Dvpt.
Targeted Rx delivery
Radiation Implants
Smart Implants
Endoscopy-enabled Procedures
Image-enabled Procedures
Imaging for Soft Tissue Characterization
Molecular Imaging, Radiopharmaceuticals
Pharmacogenomics
Treatment Efficacy Monitoring
PoC Dx Monitoring, Remote Monitoring
GEMS Core
GEMS Core
48
Discussion questions
What is an example of a technology convergence in
your industry?
49
There are four requirements for technology
convergence to be successful
50
Studying business analogies can be useful in
trying to predict technologys evolution
Market impact
Overview
A drug eluting stent represents the convergence
of
three different technologies
Converging
Description
Example
Technology
Chemical/biologic agent
Drug
Rapamune
that prevents restenosis
(Wyeth)
and promotes tissue
healing
Medical
BX Stent
Bare metal stent
Device
(
JJ as licensor and marketer
IsoStent)
Coating
Biocompatible materials
Nanoporous
technology
with
nanoporous
eluting
Polymer
properties
(
Surmodics)
4
white deck
BOS
This information is confidential and was prepared
by ABC Comp
any solely for the use of our client it is not
to be relied on
Rationale
by any 3rd party without Bain's prior written
consent.
Clear Clinical Benefit
Comparable Economics
and Manageable Adoption Barriers
Restenosis Rate (1 year)
Total Treatment Costs (1 year)

• Physicians
• Identical procedure as before
• No new training required
• Payers
• Favorable long term economics
• Suppliers
• Favorable economics
• Higher profit margins

Repeat angioplasty procedure required to treat
restenosis
51
Penetration curves from analogous technologies
can help estimate future adoption
52
Technology may develop differently across the
world (Example Wireless voice)
U.S.
Europe
Asia

• Multiple dwelling units - 25 not taking first
  lines
• Households - 5 not taking primary lines
• Cross Elasticity high for wireless and data
• Long Distance 2001 minutes of use fell!

• Home phone not as important as in US
• Wireless emerged earlier with full feature set
• Push-to-talks (PTT) had long distance franchise
  to protect
• But, relative wireless pricing is significantly
  higher

• Very limited wireline network (except Japan)
• Early adopters of data services
• Digital Subscriber Lines (DSL) significantly later

High Substitution
Limited Substitution
Wireless Wireline
53
Customer interviews can help assess trends and
their impact on current/future boundaries

• For each key product or service (and related
  business extension currently being discussed),
  who at the customer makes the buying decision?
  Who are the influencers?
• Which products or services are bought at the same
  time? Different?
• What else does each decision maker buy? Each
  influencer?
• How valuable would a fully integrated system be?
  Why?
• How will the buying process change in the near to
  medium term? (Convergence?)

54
Tips for success

• Be realistic when hypothesizing on future
  technology impacts
• Dont just think about the impact the new
  technology will have on the industry, think of
  how it impacts your business decisions today
• Make technology bets in bite-size increments
• Have frequent go/no-go decision points
  (pharmaceutical drug development model)
• Make sure that convergence analysis covers all
  areas
• Unmet needs, economic attractiveness, adoption
  barriers and existing triggers

55
Exercise Identify and assess potential
technology convergence in your industry
Instructions

• Identify the top four threats for technology
  convergence in your industry
• Challenge each threat to the four convergence
  requirements
• Grade each threat for each requirement
• favorable
• 0 neutral
• unfavorable

56
Exercise Identify and assess potential
technology convergence in your industry
--------------------- Convergence requirements
---------------------
Unmet needs
Attractive economics (Consumer vs Supplier)
Manageable adoptionbarriers
Existingtriggers
Topthreats

• _______
• _______
• _______
• _______

57
Appendix

• New threat assessment
• Regulatory, geo-political and globalization
  trends
• Industry structure data sources
• Value chain detailed methodology
• Profit pools detailed methodology
• S-curve (penetration curve) detailed methodology

58
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
59
New threat assessment learning objectives

• Gain introduction and understanding of how to
  apply Porters Five Forces market analysis tool,
  with special focus on assessing new threats

60
Porter's Five Forces offers a framework to assess
new threats (1 of 6)
Potential entrants
Threat of new entrants
Bargaining power of suppliers
Bargaining power of buyers
Rivalry among existing firms
Suppliers
Buyers
Industry competitors
Threat of substitute products or services
Substitutes
61
Porters Five Forces (2 of 6)
Entry barriers

• Economies of scale
• Proprietary product differences
• Brand identity
• Switching costs
• Capital requirements
• Access to distribution
• Absolute cost advantages
• Proprietary learning curve access to necessary
  inputs proprietary low-cost product design
• Government policy
• Expected retaliation

Potentialentrants

Industrycompetitors
Suppliers
Buyers
Substitutes

62
Porters Five Forces (3 of 6)
Determinants of rivalry among existing firms

• Industry growth
• Fixed (or storage) costs/value added
• Intermittent overcapacity
• Product differences
• Brand identity
• Switching costs
• Concentration and balance
• Informational complexity
• Diversity of competitors
• Corporate stakes
• Exit barriers

Potentialentrants

Industrycompetitors
Suppliers
Buyers
Substitutes

63
Porters Five Forces (4 of 6)
Determinants of supplier power

• Differentiation of inputs
• Switching costs of suppliers and firms in the
  industry
• Presence of substitute inputs
• Supplier concentration
• Importance of volume to supplier
• Cost relative to total purchases in the industry
• Impact of inputs on cost or differentiation
• Threat of forward integration relative to threat
  of backward integration by firms in the industry

Potentialentrants

Industrycompetitors
Suppliers
Buyers
Substitutes

64
Porters Five Forces (5 of 6)
Determinants of substitution threat

• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute

Potentialentrants

Industrycompetitors
Suppliers
Buyers
Substitutes

65
Substitution example Pricing and sales trends
uncover insights and potential threats

66
Porters Five Forces (6 of 6)
Determinants of buyer power
BargainingLeverage
Price Sensitivity

• Buyer concentration versus firm concentration
• Buyer volume
• Buyer switching costs relative to firm switching
  costs
• Buyer information
• Ability to backward integrate
• Substitute products
• Pull-through

• Price/total purchases
• Product differences
• Brand identity
• Impact on quality/performance
• Buyer profits
• Decision makers incentives

Potentialentrants

Industrycompetitors
Suppliers
Buyers
Substitutes

67
Narrow application of Five Forces can miss
possibility of earning good returns in bad
businesses
68
Tips for success

• Porters Five Forces should not be used as a
  cookie cutter template. Use as a way to drive
  thinking, not output in and of itself
• Many companies miss the obvious just because
  things have stayed the same for many years, it
  does not mean that they will forever question
  the status quo
• Be sensitive to even slight changes in
• Market share
• Brand erosion
• Value chain disruption/re-organization
• Prices are likely to decline, but at different
  rates for different products pay attention to
  how steep price curves are for potential
  substitute products
• If your margins are growing over time, you may be
  inviting unwanted competition
• Study competitor moves and investments attempt
  to understand motives
• Talk to your customers and their feeling on the
  price/value equation for your product

69
Exercise Porters Five Forces exercise
New entrants
How would Porters Five Forces model apply to new
threats in your business?
Buyers
Industry competitors
Suppliers
Substitutes

70
Industry structure tools
Industry structure
Customer value
Business capabilities
Competitive position
Strategic questions answered
Related tools
71
Regulatory, geo-political and globalization
trends learning objectives

• View some potential tools and frameworks to help
  you better assess opportunities and challenges
  provided by regulatory, geo-political and
  globalization trends

72
Regulations are one of the a of inter-related
forces that can change industries
Telecom Regulation

• Modified Final Judgement 1982
• The big bang
• ATT local divestiture
• Competitive regions and rules
• Telecom Act 1996
• Incumbent local exchange carriers (ILECs) in long
  distance and new businesses
• Interconnection rules
• Broadcast ownership rules opened
• Universal service fund
• EC Deregulation 1989
• Opened European telecom markets to foreign
  competition

73
Regulatory structure and government involvement
can significantly impact profitability
Structural attractiveness

Low

High
Examples

• Germany

• France/Italy

• UK

Government intervention

• Banks often used to further public policy goals

• France Lenders potentially subject to usury laws
  at high yield levels

• Low favorable lending environment

Repossession/ senior debt laws

• Supplier has claim on goods until they are paid
  for

• Supplier has claim on inventory until sold

• No claim on inventory

Pricing environment

• Banks not return driven

• France Can exploit niches with attractive
  pricing
• Italy Captives not return driven

• Attractive

74
Geo-political and globalization trends must be
examined
Geo-Political Key Issues

• Government stability
• China/Taiwan/Hong Kong
• Asia economic outlook
• World currencies
• Levels and locations of Foreign Direct Investment
  (FDI)
• Military action

Potential data sources

• Analyst reports
• Industry trade groups
• Industry lobby groups
• Literature searches
• Expert interviews

Globalization Key Trends

• Global capital markets
• Trade liberalization
• WTO, GATT, NAFTA, EU
• Technology innovation electronic distribution
• Deregulation

75
Example The Chinese express delivery market is
structurally very different from the US
Definition
Domestic regulation
International regulation

• Paper-based articles that fit into a
  standard-sized express envelop
• Weight lt500g

• Non-Express Mail Service (EMS) companies not
  allowed to deliver documents with informational
  content
• Heavily restricted market

• All non-EMS companies are allowed to participate,
  BUT
• Grey area due to definition of personal mail,
  business mail and parcels

Documents

• Packages that weigh up to 25kg (international)
  and up to 30kg (domestic) per shipment

• Non-EMS companies are allowed to participate,
  BUT
• can not deliver documents with informational
  content

• All non-EMS companies are allowed to participate,
  BUT
• EMS and China Post are trying to close up this
  segment

Parcels

• Heavy weight parcels, greater than 25kg
  (international) and 30kg (domestic) per shipment

• All companies are allowed to participate

• All companies are allowed to participate

Express Freight
Source Literature Search Interviews. 2001 data.
76
Example Using a heat map can help identify
global opportunities

Credit cards
Mort-gages
Mutual funds
De-posits
Life insur-ance
PC insur-ance
MA
Under-writing
Deriva-tives
Corp. lending
Foreign ex-change
Opportunity assessment
United States











Hot
Ger-many











Cold
Japan











Italy











UK











Korea











Peru











Each cell represents a geographic product market
and is shaded according to its likely
profitability and growth
77
Discussion questions

• What key non-controllable externalities (eg.
  regulations, environmental) have impacted your
  business over the last ten years?
• What did you do/could you have done to prepare
  for these?
• How could this have been an opportunity?

78
Tips for success

• Gain an understanding of non-controllable
  factors that apply to your business
• Industry regulars often over-estimate
  externalities impact (bias towards blaming
  outside factors)
• News often over-reports these issues because they
  are documentable
• Determine size and likelihood of external impacts
  by reviewing historical effects and outcomes
• Global opportunities may seem numerous and
  tempting, but be sure to
• Prioritize opportunities
• Understand time and investment necessary to
  harvest opportunities
• Ensure proper management talent outside of the US
• Recognize cultural differences and successful
  business structures/partnerships
• Chart high-level profit pool differences by
  country
• Balance the pros and cons of foreign growth with
  the impact on the business core operations
• Value chains may differ by country/region be
  sure to map out each country/regions value chain
  and discern key operational differences and
  business impacts

79
Industry structuredata sources
80
Typically, there are several sources for the
information you are seeking

General industry facts
Specific facts about suppliers, customers, or
competitors

• Government agencies
• Trade associations
• Magazine editors
• Authors of articles
• Source cited in article
• Investment analysts

Type of information
Sources

• General information

Investor relations, Public relations

Purchasing Associations

• Cost data

Manufacturing Experts, Maintenance Experts

• Plant size and operations

DB

• Number of employees

Engineering Firms, Suppliers

• Automation, new technology

Industry Experts

• Sales plans, distribution strategy

Be cautious in contacting investment analysts.
If not approached correctly, your call could spur
Wall Street speculation.
81
Key Sources - Industry Research
Industry Overview
Market Size
Market Share
Trends

• Onesource
• SIC code description
• SP industry overviews
• major players
• industry news
• Industry/Trade Associations
• expert contacts
• industry publications
• regulatory issues
• recent events
• Market Research Reports
• industry overviews
• key technologies
• major players
• market size

• Industry/Trade Associations
• expert contacts
• industry publications
• market size
• Analyst Reports
• market size by industry product groups
• market shares
• OneSource
• market size
• Market Research Reports
• market size by industry product groups

• Industry/Trade Associations
• expert contacts
• industry publications
• market shares
• OneSource
• market share
• Market Research Reports
• market shares by key competitor
• competitor profile

• Industry/Trade Associations
• expert contacts
• industry publications
• consolidation trends
• growth trends (units)
• Analyst Reports
• share trends
• growth trends
• consolidation trends
• OneSource
• growth trends
• consolidation trends

82
Key Sources - Company Research
Company Overview
Financial Overview
Key Competitors
Recent Events
Executive Bios

• Company Website
• Organization
• Product portfolio
• History
• Strategy
• Locations
• Annual Report
• Strategy
• 10-K, 10-Q
• Business groups
• Onesource
• Business overview
• SIC code
• Locations
• Analyst Reports
• Strategy

• Company Website
• Current and historical revenues/ profitability
• Annual Report
• Current and historical revenues/ profitability
• cost structure
• Onesource
• Current and historical revenues/ profitability
• Stock price
• Market cap
• 10-K, 10-Q
• Current and historical revenues/ profitability
• Cost structure
• Analyst Reports
• Current, historical and future revenues/
  profitability
• Bloomberg/Financial Websites
• Stock price
• Market cap

• Onesource
• Identify key competitors (articles or peer
  profile)
• Analyst Reports
• Identify and profile competitors
• Market Research
• Competitor list
• Environmental Protection Agency (EPA)
• Manufacturing facility locations

• Company Website
• Press releases on reorganization
• OneSource
• Recent events (acquisitions/ divestitures)
• Articles on reorganization
• Dow Jones Interactive
• Articles in acquisitions/ divestitures
• Articles on reorganization

• Company Website
• Management bios
• OneSource
• Executive bios
• Dow Jones Interactive
• Articles with management appointments
• Library Resources
• Whos Who
• Dialog

83
Key Sources Other

Economics and Statistics
Reference

• Census Bureau
• Bureau of Labor Statistics
• Department of Transportation
• Federal Highway Statistics
• Metropolitan Statistical Area (MSA)
• State Government Agencies
• USA Data
• demographic data
• Statistical Abstract
• statistical data
• demographic data

• Webopedia (Webopedia.internet.com)
• tech terms
• Library
• Maps
• Census Library
• detailed maps
• state
• counties
• MSA

84
Off the Beaten Path When the industry is
relatively uncommon

• SDC Database
• MA transactions
• Profound/Markintel
• Market research reports
• Imarket (DB)
• Identify companies by SIC, size, location
• Access company company information (address,
  number, contact)
• Compustat
• 20 years of detailed financials and stock price
• Encyclopedia of Associations
• book listing associations/organizations by
  industry (available at reference desk)

• Market Research
• Chartwell Inc.
• www.chartwellinc.com (800-432-5879)
• Frost Sullivan
• www.frost.com
• Freedonia Group
• www.freedoniagroup.com
• IMR (Insurance Market Research)
• www.imrcorp.com
• IMR Research (consumer products)
• www.imrresearch(630-654-1077)
• www.marketresearch.com
• State government agencies
• www.piperinfo.com/state/index.cfm
• Federal government agency websites

85
Critical Activities Data Sources
Market Definition/ Sizing
Competitor Dynamics/ Profile
Cost Reduction Opportunities
Industry Dynamics
Industry Trends
Competitor Market Map
Competitor Benchmarking
Customer Analysis
Impact of Input Costs
Internal BDP Opportunities
Growth Opportunities
Activities
Primary Data Gathering

• Management interviews

• Customer interviews

• Competitor interviews

• Industry expert interviews

• Supplier interviews

• Plant/facility visits

Secondary Data Gathering

• Confidential memorandum

• Annual report/ 10-K

• Analyst reports (industry/company)

• SDC

• Literature searches

• Market research reports

• Trade publications/ associations

• Onesource

• D B Filings

• Hoovers/Thompson

• Internal company data

86
Value chain detailed methodology
87
There are three major questions to answer in a
value chain analysis
1. What are the activities?
?
2. Which activities are most critical?
Purchas-ing/ Inbound Logistics
Mfg/ Opera-tions
Tech., RD
Marketing Sales
Distri- bution/ Outbound Logistics
Service
3. Which critical activities provide the most
opportunity?
Mfg/ Opera-tions
Service
Tech., RD
Purcha- sing/ Inbound Logistics
Marketing Sales
Distri- bution/ Outbound Logistics

88
Step one determines the appropriate activities to
map
1. What are the activities?
?

• Determine key steps in designing, producing,
  marketing, delivering and supporting a product or
  service
• Activities can be separated and grouped based on
• Different economics
• Processes using different people/equipment/technol
  ogy
• High or growing percentage of total cost
• Distinction in mind of customer
• Helpful methodologies for mapping out activities
• Product flow
• Order flow
• Paper flow

89
Step two determines the most critical activities
2. Which activities are most critical?
Market- ing Sales
Service
Tech., RD
Mfg/ Opera-tions
Purch- asing/ Inbound Logistics
What are thecost drivers?
Percent of total cost
Explanation

• Allocate costs to each major activity
• Determine which activities account for the
  greatest portion of total cost

Manu- facturing/ Opera-tions
Marketing Sales
Tech., RD
Purch- asing/ Inbound Logistics
Distri- bution/ Outbound Logistics
Service
Which criteria drive customer decisions?
Product Innovation
Brand Image
Speed of Delivery
Responsiveness
Customer importance scale (1low, 7high)
Price
Reliability
4.0
4.8
6.3
6.0
5.1
4.7

• Determine which activities drive purchase
  decision
• Determine relative importance of each activity in
  customers mind

Explanation
90
Step three determines which activities provide
the most opportunity
3. Which critical activities provide the most
opportunity?
Mfg/ Oper-ations
Tech., RD
Market- ing Sales
Service
Where is the greatest relative opportunity to
improve cost structure?
Distribu- tion/ Outbound Logistics
Purch- asing/ Inbound Logistics
Explanation

• Determine which costs are most controllable
• e.g., raw materials costs may be largely
  commodity
• Determine where largest relative performance gap
  lies
• Relative to competitors
• Relative to internal comparables

Where is the greatest relative opportunity to
improve performance relative to competitors?
Market- ing Sales
Mfg/ Oper-ations
Tech., RD
Purcha- sing/ Inbound Logistics
Distribu- tion/ Outbound Logistics
Service
Explanation

• Determine where largest relative performance gap
  lies
• Relative to customer expectations
• Relative to competitors

91
Profit pool detailed methodology
92
Mapping a profit pool involves four steps
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates
Tasks

• Identify which value chain activities influence
  the industrys ability to generate current and
  future profits

• Develop a baseline estimate of the profits
  generated by all profit pool activities within
  the value chain

• Determine the profits generated by each activity
  within the value chain

• Compare the results previous two steps and
  reconcile numbers

• List of value chain activities in profit pool (in
  sequential order)

• Estimate of total profit pools (may be a range)

• Point estimates of profit for each value chain
  activity

• Final estimates of activity and total pool profits

Output

93
1. Defining the pool Identify value chain
activities relevant to the business
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates

• Take a broad view of the value chain - look
  beyond traditional industry definitions
• Examine the industry from 3 perspectives
• Company/business, competitors and customers
• Talk to industry players and analysts to uncover
  new or emerging business models
• Dont disaggregate activities more than necessary
• Consider parallels from other industries
• Are there activities that could substitute for
  activities in this industry?

94
2. Determining the size of the pool Develop a
rough but accurate baseline
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates

• Take the easiest analytical routes available
• Focus on the largest components first
• Large companies
• Start with the biggest players who account for a
  large portion of the industrys profits
• Gauge the profits of the smaller players by
  adjusting the leaders margins to account for the
  smaller players competitive advantages or
  disadvantages
• Add the profits together
• High volume products

95
3. Estimate the distribution of profits Find the
data and think creatively
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates

• Go where the data is (e.g. products, customers,
  channels, companies, or regions, etc.)
• Use proxies if relevant data is unavailable
• Prioritize focus - look at business economics,
  then large pure players, large mixed players,
  then a sample of smaller players
• Use the 80/20 rule - in most cases 20 of the
  companies constitute 80 of the revenues
• Shift between aggregation and disaggregation in
  analysis
• Aggregation - use in industries where most of the
  players focus on one value chain activity Pure
  players
• Disaggregation - if the industrys players are
  vertically integrated mixed players you will
  need to disaggregate companys financial data
• Triangulate with analyst reports, 10Ks, annual
  reports, literature searches, market share
  estimates

96
4. Reconcile the estimates Getting to final
numbers can be an iterative process
1. Define the pool
2. Determine the size of the pool
3. Estimate the distribution of profits
4. Reconcile the estimates
Compare total pool estimate (top-down approach)
with estimates for each value chain activity
(bottoms-up approach)
Check assumptions and calculations if the numbers
dont add up
Collect additional data if necessary
Resolve inconsistencies

97
S-curve (penetration curve) detailed methodology
98
Forecasting tools Penetration Curves (S-Curve)

• Products can be thought of as following a
  life-cycle that has several distinct phases
• Early adoption/trial
• Mass adoption
• Saturation/substitution
• Decline
• The product life-cycle generates a series of
  market penetration rates that tend to follow a
  specific pattern, called an S-curve (or
  penetration curve)
• Given the pattern of penetration curves over
  time, and given that this relationship holds to
  some extent in almost every case, penetration
  curves can be a powerful tool in predicting the
  growth of new products

99
S-Curve Methodology (1 of 3)

• Gather historic data and set up spreadsheet
• Pick saturation point
• this should be the logical ceiling on a products
  penetration (i.e. not every home will have a
  computer, even in the most optimistic of
  scenarios)
• saturation point 100 in this example
• Calculate penetration ratio
• (historic percent) / (saturation point - historic
  percent)

Years
Historic Penetration
1989 1990 1991 1992
25.0 29.0 36.3 42.5
Years
Historic Penetration
Penetration Ratio
1989 1990 1991 1992
25.0 29.0 36.3 42.5
0.333 0.408 0.571 0.740

100
S-Curve Methodology (2 of 3)

• Take the natural log of the years and the
  penetration ratio
• Regress the log of years vs. the log of the
  penetration ratio
• Use results to calculate predicted penetration
  ratio
• use formula for a line, and take anti-log
• antilog of ( ln(year) x x-coefficient b )

Predicted Penetration Ratio
Years
Historic Penetration
Penetration Ratio
ln(years)
ln(penetration ratio)
1989 1990 1991 1992 1993 1994 etc.
25.0 29.0 36.3 42.5
0.333 0.408 0.571 0.740
7.595 7.596 7.596 7.597 7.597 7.598 etc.
(1.099) (0.895) (0.561) (0.301)
0.966 1.268 etc.

101
S-Curve Methodology (3 of 3)

• Calculate predicted penetration using the
  predicted penetration ratio and saturation point
• ((predicted penetration ratio x saturation point)
  / (1 predicted penetration ratio))

Predicted Penetration Ratio
Historic Penetration
Penetration Ratio
Predicted Penetration
Years
ln(years)
ln(penetration ratio)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
1999 2000
25.0 29.0 36.3 42.5
0.333 0.408 0.571 0.740
7.595 7.596 7.596 7.597 7.597 7.598 7.598 7.599 7.
599 7.600 7.600 7.601
(1.099) (0.895) (0.561) (0.301)
49.1 55.9 62.5 68.6 74.1 79.0 83.1 86.6

0.966 1.268 1.664 2.182 2.863 3.755 4.924 6.45
7

102
S-Curve Example Examining how quickly medical
practices change (1 of 2)

• In 1994, NIH said a bacteria called H. Pylori
  causes ulcers
• In 1997, the U.S. Patent Office granted a patent
  for a breath test for H. Pylori detection
• In 1998, a private equity firm considered buying
  the firm owning the patent

Situation

• How large is the market for H. Pylori breath
  tests over time?

Key Question

103
S-Curve Example Examining how quickly medical
practices change (2 of 2)
Primary and secondary sources are used to
determine historic penetration points and the
projected saturation point

• A search of the existing literature revealed that
  in 1991 1 used the test but that by 1995 5 used
  it
• Doctors surveyed in 1997 said
• 60 were testing their suspected ulcer patients
  for H. Pylori
• 15 treated all suspected ulcer patients with a
  course of antibiotics and had no need for testing
  products of any kind

Research

• Historic penetration
• 1991 1
• 1995 5
• 1997 60
• Saturation point 85

Penetration Curve Data