week2_handouts - 42001 Competitive Strategy Industry Analysis and the Five Forces Thomas R Covert [email protected] Week 2 Agenda Industry

week2_handouts - 42001 Competitive Strategy Industry...

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42001: Competitive Strategy Industry Analysis and the Five Forces Thomas R. Covert [email protected]
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Week 2 Agenda: Industry Analysis Announcements / reminders • Moneyball recap What is industry analysis? Why do we care? The “Five Forces” of Competitive Strategy • Break Case – Cola Wars •2
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Moneyball recap (1) Baseball is seemingly complicated but 80+% of variation in wins is due to OBP and SLG. OBP generates more wins but cost less (back then, anyway) Why is SLG is more costly to acquire than OBP? − Hitting ability is (at least somewhat) about physique: scarce − Hitting discipline can be learned: not so scarce Case/discussion about wins but not all wins are the same − Fans might prefer flashy SLG-based wins to boring OBP-wins − Because fans like SLG, TV stations and owners do too •3
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Moneyball recap (2) What did the A’s have that was valuable and/or scarce? − An idea: value players using the “win production function” − An asset: a manager willing to learn it and ignore a sensible revealed preference argument Was it really valuable? Yes. Did it turn out to be scarce? No. Good reasons why the A’s learned the baseball production function early and the Yankee’s (for example) didn’t The way baseball teams are managed today much closer to what the A’s did then than the Yankees (or anyone else) did •4
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What industries do we think are profitable? (1/2) Guess a few at the top Guess a few at the bottom
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Ghemawat & Rivkin (2014)
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What industries do we think are profitable? (2/2) Some highly profitable industries − Tobacco − Pharmaceuticals − Software Soft drinks Less profitable industries − Oil and gas exploration − Financial services − Steel − Entertainment
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Industry Analysis: where do profits come from? Why are some industries generally more profitable than others? - Structural features (“a model”) - “exogenous” facts about how the industry works - observable reasons that match our micro-economic intuitions about the world - Everything else (“errors in the model”) - Why is software more profitable than entertainment? - Why is pharma more profitable than biotech?
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Some uses for industry analysis Evaluate new markets to enter, old markets to leave - If you were to become an “average” firm in an industry, how well would you expect to perform? - If you are a poor performer, is it you or is it them? Predict how “structural changes” might affect profits - New technologies make entry less costly - Changes to your customers’ preferences - Consolidation amongst your suppliers
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Perspective (1) Industry analysis and the five forces are the “first sign” of economics in a strategy classroom - Alfred Chandler argued that “correct” business organization structure was the cause of high profits - mostly about successful examples in large scale industries - chemicals manufacturing (Dupont) - autos (GM) - oil exploration (Standard Oil) - retail (Sears) - Michael Porter argued that industrial organization ideas could explain industry profitability
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