MGT51-M3CR1-Critical Thinking

Name

CT_Rubric_100

Description

100 Points

Rubric Detail
Levels of Achievement
Criteria

Exceeds Expectation

Meets Expectation

Some Expectations

Unsatisfactory

Content

33 to 35 points

29 to 32 points

26 to 28 points

0 to 25 points

Demonstrates
substantial and
extensive knowledge of
the materials, with no
errors or major
omissions.

Demonstrates adequate
knowledge of the
materials; may include
some minor errors or
omissions.

Demonstrates fair
knowledge of the materials
and/or includes some
major errors or omissions.

Fails to demonstrate
knowledge of the
materials and/or
includes many major
errors or omissions.

33 to 35 points

29 to 32 points

26 to 28 points

0 to 25 points

Provides strong thought,
insight, and analysis of
concepts and
applications.

Provides adequate
thought, insight, and
analysis of concepts and
applications.

Provides poor though,
insight, and analysis of
concepts and applications.

Provides little or no
thought, insight, and
analysis of concepts and
applications.

15 to 15 points

13 to 14 points

11 to 12 points

0 to 10 points

Sources go above and
beyond required criteria
and are well chosen to
provide effective
substance and
perspectives on the
issue under
examination.

Sources meet required
criteria and are
adequately chosen to
provide substance and
perspectives on the issue
under examination.

Sources meet required
criteria but are poorly
chosen to provide
substance and perspectives
on the issue under
examination.

Source selection and
integration of knowledge
from the course is clearly
deficient.

15 to 15 points

13 to 14 points

11 to 12 points

0 to 10 points

Project is clearly
organized, well written,
and in proper format as
outlined in the
assignment. Strong
sentence and paragraph
structure, contains no
errors in grammar,
spelling, APA style, or
APA citations and
references.

Project is fairly well
organized and written
and is in proper format as
outlined in the
assignment. Reasonably
good sentence and
paragraph structure, may
include a few minor
errors in grammar,
spelling, APA style, or APA
citations and references.

Project is poorly organized
and written and may not
follow proper format as
outlined in the assignment.
Inconsistent to inadequate
sentence and paragraph
development, and/or
includes numerous or
major errors in grammar,
spelling, APA style or APA
citations and references.

Project is not organized
or well written and is not
in proper format as
outlined in the
assignment. Poor quality
work; unacceptable in
terms of grammar,
spelling, APA style, and
APA citations and
references.

Analysis

Sources

Demonstrates
college-level
proficiency in
organization,
grammar and
style.

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Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 1
The Concept of Strategy

The Concept of Strategy
Outline
• The role of strategy in success
• The basic framework for strategy analysis
• What is strategy? Why do firms need it?
• How is strategy made? The strategy process
• Strategic management of
• not-for-profit organizations

1-2

The Role of Strategy in Success (1 of 2)
Ingredients of Success
QUEEN ELIZABETH &
THE HOUSE OF WINDSOR

LADY GAGA &
THE HOUSE OF GAGA

GOALS

Life-long dedication to role of monarch and head of
state

Single-minded quest for stardom through her
Lady Gaga persona

UNDERSTANDING THE
ENVIRONMENT

Alert to the changing political and social
environment .
Sensitive to the mood and needs of the British
people

Awareness of:
• new economics of the music business
• marketing potential of social networking
• needs of Generation Y

RESOURCE APPRAISAL

Recognized lack of formal authority and need to
exploit traditional loyalties and informal influence

Exploited her innate theatricality, eccentricity,
design capability, and musical skills

IMPLEMENTATION

Resolute commitment; strong self-discipline;
building an effective family team supported by loyal
professionals

Devotion to living the Lady Gaga character;
engagement in continually creating new
images for herself
1-3

The Role of Strategy in Success (2 of 2)
What Makes a Successful Strategy?

1-4

The Basic Framework for Strategy Analysis (1 of 2)
Strategy as the Link between the Firm and its Environment

1-5

The Basic Framework for Strategy Analysis (2 of 2)
Ryanair’s activity system

1-6

What is Strategy? Why Do Firms Need It? (1 of 5)
The Evolution of Strategic Management
Adapting to Turbulence and Complexity:

Emergence of Strategic Management:

• New business models

• Industry analysis and competitive positioning

• The quest for flexibility and risk containment

Corporate planning:

• Social and environmental responsibility

• Corporate plans based on medium-term economic
forecasts

The Quest for Competitive Advantage:
• Emphasis on resources & capabilities

Financial budgeting:

• Shareholder value maximization

• Operational budgeting

• Refocusing, outsourcing, cost cutting

• DCF capital budgeting

1950

1960

1970

1980

1990

2000

2010

2020
1-7

What is Strategy? Why Do Firms Need It? (2 of 5)
What is Strategy?
• Distinguishing strategy from tactics:
o Strategy is the overall plan for deploying resources to establish a favorable position.
o Tactic is a scheme for a specific maneuver

• Characteristics of strategic decisions:
o Important.
o Involve a significant commitment of resources.
o Not easily reversible

1-8

What is Strategy? Why Do Firms Need It? (3 of 5)
Definitions of Strategy
Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect.
— Wordsmyth Dictionary (
The determination of the long-run goals and objectives of an
enterprise, and the adoption of courses of action and the
allocation of resources necessary for carrying out these goals.
— Alfred Chandler, Strategy and Structure (MIT Press, 1962)

Strategy: “a cohesive response to an
important challenge.”
——Richard Rumelt, Good Strategy / Bad Strategy
(Crown Business, 2011)

Lost Boy: “Injuns! Let ’s go get ‘em!”
John Darling: “Hold on a minute. First we must have a strategy.”
Lost Boy: “Uhh? What’s a strategy?”
John Darling: “It’s, er … it’s a plan of attack.”
— Walt Disney’s Peter Pan
1-9

What is Strategy? Why Do Firms Need It? (4 of 5)
Why Do Firms Need Strategy?

1-10

What is Strategy? Why Do Firms Need It? (5 of 5)
Sources of Superior Profitability

1-11

Locating and Describing Strategy
Describing Strategy: Current Positioning, Future Direction
Strategy As positioning

Strategy As Direction

• Where are we competing?

• What do we want to become?

o Product market scope
o Geographical scope
o Vertical scope

• How are we competing?
o What is the basis of our competitive advantage?)

o Vision statement

• What do we want to achieve?
o Mission statement
o Performance goals

• How will we get there?
o
o
o
o

Competing for the Present

Guidelines for development
Priorities for capital expenditure, R&D
Growth modes: organic
growth, M&A, alliances

Preparing for the Future
1-12

How is Strategy Made? The strategy process (1 of 2)
Strategic Making: Design or Process?

Mintzberg’s Critique of Formal Strategic Planning:
• The fallacy of prediction—the future is unknown
• The fallacy of detachment—impossible to divorce formulation from implementation
• The fallacy of formalization—inhibits flexibility, spontaneity, intuition and learning.
1-13

How is Strategy Made? The strategy process (2 of 2)
Applying Strategy Analysis

1-14

Strategic Management of Not-For-Profit
Organizations

Applying Strategy Analysis to Not-For-Profits

1-15

Summary
• The role of strategy in success
o
o

Strategy important to the success of individuals and organizations
Successful strategies embody clear goals, fit with the external environment and internal resources, and sound
implementation

• The framework for strategy analysis
o

Envisages strategy as a link between the firm and its environment

• What is strategy? Why do firms need it?
o
o

Strategy describes where a firm is competing, how it is competing, and the direction in which it is developing
Strategy allows firms to make better, more consistent decisions and facilitates coordination

• How is strategy made?
o

Through combining purposeful planning (rational design) and flexible responses to changing circumstances
(emergence).

• Strategic management of not-for-profit organizations
o

Most of the tools of strategy analysis are applicable to not-for-profits
1-16

Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 2
Goals, Values, and Performance

Goals, Values, and Performance
Outline
• Strategy as a quest for value
• Putting performance analysis into practice
• Beyond profit: values and corporate social responsibility
• Beyond profit: strategy and real options

1-2

Strategy As a Quest for Value (1 of 3)
What is Business For?
• Every business has a unique purpose—often reflecting the motives of the founder(s)
E.g. Henry Ford (Ford Motor Company), Steve Jobs (Apple), Jack Ma (Alibaba) were each
motivated by a distinct vision.
• Common to every business enterprise: the desire/need to create value
• Value is the monetary worth of a product. Hence, the purpose of business is
1. to create value for customers
2. to appropriate some of that value in the form of profit—in order to ensure the survival of the firm

1-3

Strategy As a Quest for Value (2 of 3)
Value for Whom? Shareholders v s Stakeholders
ersu

1-4

Strategy As a Quest for Value (3 of 3)
Value Creation

1-5

Profit, Cash Flow, and Enterprise Value (1 of 5)
What is Profit? Different Measures Give Different Rankings (data for 2020)
Company

Market
capitalization
($ billion)

Net income
($ billion)

ROS
(%)

ROE
(%)

ROA
(%)

Return to
shareholders (%)

Apple

2150

57.4

23.8

73.7

17.3

+185

Amazon

1580

21.3

5.9

27.4

7.8

+107

Alibaba

655

21.5

18.7

23.9

13.1

+24

JPMorgan Chase

459

29.0

28.7

10.7

0.9

+27

Roche Holding AG

281

15.6

30.4

41.4

16.9

+34

Wal-Mart Stores, Inc.
Toyota Motor Corp.

371
208

13.5
19.6

4.0
7.9

17.3
10.3

5.5
4.0

+25
+18

1-6

Profit, Cash Flow, and Enterprise Value (2 of 5)
Linking Profit to Enterprise Value
Profit maximization an ambiguous goal:
o
o
o
o

Total profit v s. Rate of profit
Over what time period?
What measure of profit?
Accounting profit versus economic profit
ersu

Maximizing enterprise value is clearer:
Enterprise value (V) =

Net present value of free cash flows:

1-7

Profit, Cash Flow, and Enterprise Value (3 of 5)
Value Maximization and Strategy Choice
In principle, DCF approach to enterprise value maximization is the correct approach to choosing a strategy:
•

Identify strategy alternatives

•

Estimate cash flows and cost of capital for each strategy

•

Select the strategy which generates the highest NPV.

But in practice:
•

Difficult to estimate cash flows more than 2 or 3 years ahead

•

Hence, value maximization may encourage short-termism.

Implications for strategy analysis:
• Simple guidelines can approximate value maximization, example
a) On existing assets—maximize rate of return
b) On new investment—ensure rate of return > cost of capital

•

Use qualitative strategy analysis to evaluate future profit potential.
1-8

Profit, Cash Flow, and Enterprise Value (4 of 5)
Profitability Ratios

1-9

Profit, Cash Flow, and Enterprise Value (5 of 5)
Enterprise Value and Shareholder Value
Enterprise value =
Market capitalization of equity
+ Market value of debt
Reasons for preferring maximization of enterprise value over maximization of
shareholder value:
• Not always easy to distinguish debt from equity
• Shareholder value maximization has become discredited by its misapplication by
managers (example in emphasizing short-term profits and in seeking to manipulate
reported earnings).
1-10

Putting Performance Analysis Into Practice (1 of 6)
Profitability Ratios

1-11

Putting Performance Analysis Into Practice (2 of 6)
Performance Diagnosis: Disaggregating ROA

1-12

Putting Performance Analysis Into Practice (3 of 6)
Why UPS (U) earns
a higher ROA than
and Fedex (F)

1-13

Putting Performance Analysis Into Practice (4 of 6)
Linking Value Drivers to
Performance Targets

1-14

Putting Performance Analysis Into Practice (5 of 6)
Balanced Scorecard for a Regional Airline

1-15

Putting Performance Analysis Into Practice (6 of 6)
The Pitfalls of Pursuing Shareholder Value: Boeing
• 1970-1995. Boeing’s strategy based upon “building great planes”—despite little
emphasis on financial management, its financial performance was strong as a result
of huge investments in a series Of highly successful planes: 707, 737, 747, 777
• 1996-2004. Under Phil Condit Harry Stonecipher & James McNerney Boeing focused
on creating shareholder value. Outcome: R&D was cut, Boeing diversified into
electronics and defense, it lost market leadership to Airbus, and then the 737-MAX
debacle

Lesson: Long-run profitability is achieved not by pursuing profit, but by pursuing the
factors that create profit.

1-16

Beyond profit: Values And Corporate Social Responsibility (1 of 2)
Values and Principles
Values and principles commit an organization to certain ethical precepts,
provide guidelines for the behavior of its members, and shape its character
and identity.
Deeply-held, widely-shared values and principles are conducive to superior
organizational performance through:
• Motivating employees
• Reinforcing strategic direction
• Enhancing organizational unity
1-17

Beyond profit: Values And Corporate Social Responsibility (2 of 2)
Efficacy Arguments for Corporate Social Responsibility
The Evolutionary Argument:
The firm as embedded within an ecosystem of social and natural environments, sensitivity to this
ecosystem enhances the firm’s adaptability (Arie De Geus, The Living Company)

Michael Porter and Mark Kramer’s “Shared Value”:
Firms should “create economic value in a way which also creates value for society.”
The benefits to the firm include:
• By sustaining its natural and social environment, the firm improves its opportunities for survival and
growth
• Enhancing the firm’s reputation
• Endowing the firm with a license-to-operate.
1-18

Beyond Profit: Strategy As Options Management
Real Options
What are real options?
•

They are investments whose value is in that creating opportunities for a firm.

•

In a turbulent world, strategy is increasingly about creating and managing options.

What are the main types of real option?

•

Growth options: small investments to create the right but not the obligation to make bigger subsequent investments (example
research)

•

Flexibility options: investments that permit adaptability to a wider range of circumstances (example a dual-fuel power plant).

How do we value real options?
1.

Black-Scholes formula. Values real options the same way as financial options (example option value increases with volatility,
time, project value, interest rate)

2.

Binomial pricing model creates an event tree for a project that is converted into a decision tree which allows project value to be
calculated.
1-19

Chapter 2 Goals, Value and Performance (1 of 2)
Summary
1. Strategy as a quest for value
• Creating value is the core purpose of business: but value for whom: shareholders or all
stakeholders?

• For the purpose of strategy formulation, it’s helpful to view firms as seeking to maximize
lifetime profits—or equivalently, enterprise value

2. Putting performance analysis into practice
• Starting point for strategy formulation is to appraise the firm’s current performance and
diagnose sources of underperformance
• Setting performance targets: better to target the drivers of long-term performance than the
performance indicators themselves.
1-20

Chapter 2 Goals, Value and Performance (2 of 2)
Summary
3. Beyond profit: values and corporate social responsibility
• Values and principles valuable in shaping an organization’s character and and identity,
motivating employees, and reinforcing unity and direction

• CSR not only a goal in itself, it help a firm create long-term profit through
• Enhancing adaptability, reputation, and legitimacy

4. Beyond profit: strategy and real options
• Strategy creates value not only by generating cash, but also creating real options

1-21

Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 4
Further Topics in Industry and Competitive Analysis

Further Topics in Industry and Competitive Analysis (1 of 2)
Outline
• Objectives
• The limits of industry analysis
o
o
o

Does Industry Matter?
Hypercompetition
Winner-Take-All Industries

• Beyond the five-forces
o
o
o

Complements
Ecosystems
Business Models

• Competitive interaction
o

o

Game Theory
Competitor Analysis

• Segmentation and strategic groups
4-2

Further Topics in Industry and Competitive Analysis (2 of 2)
Objectives
• To recognize the limits of the Porter five forces framework
• To extend industry analysis to include the role of complements, business
ecosystems, and business models
• To understand competitive interaction using game theory competitor
analysis
• To apply segmentation analysis and strategic group analysis to examine
industries at a more disaggregated level

4-3

The Limits of Industry Analysis (1 of 3)
Does Industry Matter? The Sources of Profitability Differentials between Firms

4-4

The Limits of Industry Analysis (2 of 3)
Competition as a Dynamic Process: Hypercompetition
Porter framework assumes:
(a) industry structure drives competitive behavior
(b) Industry structure is (fairly) stable.

But, competition also changes industry structure:
• Schumpeterian Competition: A “perennial gale of creative destruction” –market leaders overthrown by innovation
• Hypercompetition: “intense and rapid competitive moves…. continuously creating new competitive advantages
and destroying existing competitive advantages”
Implication: –Within 5-forces framework:
INDUSTRY STRUCTURE
COMPETITION
–Under dynamic competition:
COMPETITIVE STRATEGY
INDUSTRY STRUCTURE
4-5

The Limits of Industry Analysis (3 of 3)
Winner-Take-All Industries
• In some industries, the notion of “industry attractiveness” is meaningless
because one firm takes all the industry’s profits and other firms earn little
or no profit
• These “winner-take-all” industries tend to be those with extreme scale
economies (e.g. search engines) or network externalities (online auction
sites, social networks)

4-6

Beyond The 5-Forces (1 of 3)
Five Forces or Six?
Introducing Complements

4-7

Beyond The 5-Forces (2 of 3)
Business Ecosystems: Managing Value Migration
• A business ecosystem is the “community of organizations, institutions,
and individuals that impact the enterprise”
• Change within a business ecosystem causes value to migrate between
firms and groups of firms
• A firm can influence value migration within a business ecosystem in order
to increase its share of value within the system. E.g. by becoming a
“guardian of quality”, becoming irreplaceable, exploiting changing
customer needs, or reconfiguring the value chain.
4-8

Beyond The 5-Forces (3 of 3)
Using Business Models to Manage the Ecosystem
• A business model is a simplified description of a business that specifies the core logic for creating value
• Business models are useful for developing strategies that can exploit the opportunities available in
complex business ecosystems

• The Business Model Canvas is a graphical tool for designing business models:

4-9

Competitive Interaction (1 of 2)
The Contribution of Game Theory to Competitive Analysis
1. Frames strategic decisions as interactions between competitors
2. Predicts outcomes of competitive situations involving a few, evenly-matched players
3. Provides key insights into the nature and determinants of interactions among competitors. E.g.:
a) Competition and Cooperation—Game theory can show conditions where cooperation more advantageous than
competition
b) Deterrence—changing the payoffs in the game in order to deter a competitor from certain actions
c) Commitment—irrevocable deployments of resources that give creditability to threats
d) Signaling—communication to influence a competitor’s decision

Problems of game theory:
•

Able to explain past competitive behavior—weak in predicting future behavior.

•

Lack of an integrated general theory— Many different models; outcomes highly sensitive to small changes in assumptions
4-10

Competitive Interaction (2 of 2)
A Framework for Competitor Analysis

4-11

Segmentation and Strategic Groups (1 of 9)
Segmentation Analysis: The Principal Stages
1. Identify key variables and
categories

Identify segmentation variables
Reduce to 2 or 3 variables
Identify discrete categories for each variable

2. Construct a segmentation matrix
3. Analyze segment attractiveness
4. Identify KSFs in each segment
5. Analyze benefits of broad v s.
narrow scope
ersu

Potential for economies of scope across
segments
Similarity of KSFs
Differentiation benefits of segment focus
4-12

Segmentation and Strategic Groups (2 of 9)
Customer and Product Characteristics as Segmentation Variables

4-13

Segmentation and Strategic Groups (3 of 9)
Segmenting the Global Automobile Industry

4-14

Segmentation and Strategic Groups (4 of 9)
Vertical Segmentation & Industry Profit Pools: The US Auto Sector

4-15

Segmentation and Strategic Groups (5 of 9)
Vertical Segmentation: A Profit Pool Mapping of the Electric Vehicle Industry

4-16

Segmentation and Strategic Groups (6 of 9)
Segmentation and Key Success Factors: The U.S. Bicycle Market

4-17

Segmentation and Strategic Groups (7 of 9)
Strategic Group Analysis
A strategic group is a group of firms in an industry that follow the same or
similar strategies
Identifying strategic groups:
• Identify principal strategic variables which distinguish firms.
• Position each firm in relation to these variables.
• Identify clusters.

4-18

Segmentation and Strategic Groups (8 of 9)
Strategic Groups within the World Automobile Industry

4-19

Segmentation and Strategic Groups (9 of 9)
Strategic Groups within the World Petroleum Industry

4-20

Summary
• Conventional industry analysis is limited to the extent that:
a) Industry membership is a minor influence on firm profitability
b) It assumes industry structure is stable—the competitive process can transform industry structures
c) In “winner-take-all” industries, the notion of industry attractiveness is meaningless
• We can extend our analysis of industry and competition to take account of:
a) complementary products
b) platform-based competition
c) business ecosystems
• Competitive interactions between close rivals can be analyzed:
a) game theory
b) competitor analysis—which is less formal than game theory, but can help us to understand competitors and
predict their behavior
• Segmentation analysis and strategic group analysis allows us to understand industries at a more detailed level

4-21

Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 3
Industry Analysis: The Fundamentals

Industry Analysis: the Fundamentals
Outline
• Introduction / Objectives
• From environmental analysis to industry analysis
• Analyzing industry attractiveness
• Applying industry analysis to forecast industry profitability
• Using industry analysis to develop strategy
• Defining industries: Where to draw the boundaries
• Identifying Key Success Factors
3-2

Introduction / Objectives
The Objectives of Industry Analysis
• To appreciate that the form’s industry forms the core of its external environment
• To identify the main structural features of an industry and understand how they
determine competition and profitability.
• To apply industry attractiveness to predict industry profitability
• To develop strategies that
a) Position the firm favorably in relation ot competitive forces
b) Influence industry structure to enhance industry attractive
• To identify opportunities for competitive advantage(Key Success Factors)
3-3

From Environmental Analysis to Industry Analysis
At the Core of the Macro Environment is the Industry Environment

The Macro Environment impacts the firm through its effect on the Industry Environment
3-4

Analyzing Industry Attractiveness (1 of 9)
Profitability of Selected US Industries
(median ROCE)
High Profitability
Tobacco

%
64.5

Low Profitability
Airlines

%
15.5

Computers & Peripherals

53.0

Hospitals, Healthcare Facilities

14.7

Aerospace, Defense

50.2

Oil & Gas (integrated)

14.3

Household Products

38.6

Publishing, Newspapers

13.6

Pharmaceuticals

36.2

Telecom Services

13.5

Beverages (soft drinks)

33.4

Food Retailing

11.1

Information Services

29.1

Steel

11.0

Semiconductors

26.6

Electrical Power

6.0

Software

26.6

Motor Vehicles

5.7

Food Processing

21.1

Airlines

15.5
3-5

Analyzing Industry Attractiveness (2 of 9)
The Determinants of Industry Profitability
3 key influences:
1. The value of the product to customers
2. The intensity of competition
3. Relative bargaining power at different stages of the value chain

3-6

Analyzing Industry Attractiveness (3 of 9)
The Spectrum of Industry Structures

3-7

Analyzing Industry Attractiveness (4 of 9)
Porter’s Five Forces of Competition Framework

3-8

Analyzing Industry Attractiveness (5 of 9)
The Structural Determinants of Competition

3-9

Analyzing Industry Attractiveness (6 of 9)
Threat of Substitutes
Extent of competitive pressure from producers of substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of substitutes.

3-10

Analyzing Industry Attractiveness (7 of 9)
Threat of New Entry
Entrants’ threat to industry profitability depends upon the height of barriers to entry.
The principal sources of barriers to entry are:
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation
3-11

Analyzing Industry Attractiveness (8 of 9)
Bargaining Power of Buyers

NOTE: analysis of supplier
power is symmetric
3-12

Analyzing Industry Attractiveness (9 of 9)
Rivalry Between Established Competitors
The extent to which industry profitability is depressed by aggressive price
competition depends upon:
• Concentration (number and size distribution of firms)
• Diversity of competitors (differences in goals, costs strategies, etc )
• Product differentiation
• Excess capacity and exit barriers
• Cost conditions
etera

o Ratio of fixed to variable costs
o Extent of scale economies
3-13

Applying Industry Analysis to Forecast Industry Profitability
Applying Five-Forces Analysis to Forecast Industry Profitability
• Perform a Five Forces Analysis to understand why the industry’s current level of
profitability is what it is
• Identify the changes in industry structure that are likely to occur over the next
few years. E.g.
o Is new entry likely?
o Will concentration increase as a result of mergers and acquisitions?
o Will additions to industry capacity outpace the growth in demand?
o Will innovation create new substitutes?

• Use the Five Forces Framework to predict the impact of these structural changes
on competition and profitability
3-14

Using Industry Analysis to Develop Strategy
Using Industry Analysis to Develop Strategy
Strategies to Improve Industry Profitability
• Which of the structural variables that are depressing profitability can we
change by individual or collective strategies?
Strategic Positioning
• Once we know which structural features of the industry support
profitability and which depress profitability, we can choose a favorable
positioning within the industry.
3-15

Defining Industries
Drawing Industry Boundaries
• What industry is Ferrari in?
o The Motor Vehicle industry (SIC 371)
o The Automobile industry (SIC 3712)
o The performance car industry
o Is its industry global, regional (Europe) or national (Italy)?

• Key criterion: SUBSTITUTABILITY
o On the demand side : are buyers willing to substitute between types of cars and across countries
o On the supply side : are manufacturers able to switch production between types of cars and across
countries

We may need to draw industry boundaries differently for different types of decision
3-16

Identifying Key Success Factors (1 of 4)
Identifying Key Success Factors

3-17

Identifying Key Success Factors (2 of 4)
KSFs in Steel, Fashion Clothing, and Supermarkets
Steel

Fashion clothing

WHAT DO CUSTOMERS WANT?

HOW FIRMS SURVIVE COMPETITION?

KEY SUCCESS FACTORS

Low price
∙
Product consistency
Reliability of supply
Specific technical specifications for special
steels
∙ Demand segmented by garment type, style, ∙
quality, color

Strong price competition and cyclical
demand require low costs and financial
strength

∙ Cost efficiency requires either large plants
in low-cost locations, or hi-tech, flexible,
mini-mills close to customers

∙
∙
∙
∙

∙ Quality and service differentiation
Intensely competitive due to low entry
barriers, low seller concentration, and
strong retail buying power

∙ Price premium for brand, style, exclusivity,
and quality
∙ Differentiation can yield substantial price
premium, but imitation rapid
∙ Mass market highly price sensitive

Super-markets

∙
∙
∙
∙

Low prices
∙ Markets localized
Convenient location
∙ Intensity of price competition depends on
Wide product range adapted to local tastes
number and proximity of competitors
Fresh produce, good service, pleasant
∙ Bargaining power essential to low input
ambience, easy parking
costs

∙ Combining differentiation with low-costs

∙ Key differentiation variables: design,
speedy to fashion trends, brand
reputation, quality
∙ Cost efficiency requires low labor costs
∙ Low-costs require operational efficiency,
efficient supply chain, buying power, low
wage costs.

∙ Differentiation requires wide product
range (hence, large stores), convenient
location, easy parking
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Identifying Key Success Factors (3 of 4)
Identifying KSFs Through Modeling Profitability: The Airline Industry

NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles
3-19

Identifying Key Success Factors (4 of 4)
Identifying KSFs by Analyzing Profit Drivers: Retailing

3-20

Summary (1 of 2)
From Environmental Analysis to Industry Analysis:
• The industry is the core of a firm’s external environment. Political, economic, social, and
technological forces impact the firm through its industry
Forecasting Industry Profitability
• Past profitability a poor indicator of future profitability.
• If we can forecast changes in industry structure we can predict likely impact on
competition and profitability
Strategies to Improve Industry Profitability
• Influencing industry structure by individual or collective strategies
• Positioning the firm to shelter from the forces of competition
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Summary (2 of 2)
Defining Industry Boundaries
• Key criterion: substitution
• Industry definition depends upon the strategic issues being considered
Key Success Factors
• Gateway to the analysis of competitive advantage

3-22

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