Week 8/ Chapter 8: Complements and Industry Attractiveness Flashcards
eBook - Read pages 103-104 Industry VS Firm Effects in determining firm performance
eBook - Read pages 103-104 Industry VS Firm Effects in determining firm performance
Firm performance is determined primarily by two factors:
1) Industry effects
2) Firm effects
1) Industry effects
Firm performance attrib-uted to the structure of the industry in which the firm competes.
Describe the underlying economic structure of the industry.
- They attribute firm performance to the industry in which the firm competes.
- The structure of an industry is determined by elements common to all industries, such as entry and exit barriers, number and size of companies, and types of products and services offered.
2) Firm effects
Firm performance attributed to the actions strategic leaders take.
Industry effects explain roughly ___ percent of overall firm performance
20%
Firm effects (i.e specific managerial actions) explain about ____ percent of firm performance
55%
External and internal factors combined explain roughly ____ percent of overall firm performance. The remaining ___ percent relates partly to business cycles and other effects
75%
25%
Industry
A group of incumbent companies that face more or less the same set of sup-pliers and buyers
Industry analysis
A method to (1) identify an industry’s profit potential and (2) derive implications for a firm’s strategic position within an industry.
Strategic position
A firm’s strategic pro-file based on the difference between value creation and cost (V − C).
Thompson, Peteraf, Gamble, Strickland (2018). Crafting & executing strategy: Evaluating industry attractiveness
Thompson, Peteraf, Gamble, Strickland (2018). Crafting & executing strategy: Evaluating industry attractiveness
Step 1: Evaluating industry Attractivness
1) Does each industry the company has diversified into represent a good market for the company to be in– does it pass the industry attractiveness test?
2) Which of the company’s industries are most attractive, and which are least attractive?
3) How appealing is the whole group of industries in which the company has invested
The more attractive the industries (Both individually and as a group) that a diversified company is in, the better its prospects for good long-term performance
Calculating Industry-Attractiveness Scores
A simple and reliable analytic tool for gauging industry attractiveness involves calculating quantitative industry-attractiveness scores based on the following measures
Based on following measures (card above)
1) Market size and projected growth
2) The intensity of competition
3) Emerging opportunities and threats
4) The presence of cross-industry strategic fit
5) Resource requirements
6) Social, political, regulatory, and environmental factors
7) Industry Profitability
1) Market size and projected growth
Big industries are more attractive than small industries, and fast growing is more attractive than slow-growing
2) The intensity of competition
Weak competitive pressures are more attractive than strongly competitive pressures
3) Emerging opportunities and threats
Industries with promising opportunities and minimal threats on the near horizon are more attractive than industries with modest opportunities and imposing threats
4) The presence of cross-industry strategic fit
The more one industry’s value chain and resource requirements match up well with the value chin activities of other industries which the company operates, the more attractive the industry is
5) Resource requirements
Industries in which the Resource requirements are within reach are more attractive than industries in which capital and other resource requirements could strain corporate financial resources and organizational capabilities
6) Social, political, regulatory, and environmental factors
Industries that have significant problems in such area as consumer health, safety, or environmental pollution or those subject to intense regulation are less attractive than industries that do not have such problems
7) Industry Profitability
Industries with healthy profit margins and high rates of return on investments are generally more attractive than industries with historically low or unstable profits
Each attractiveness measure is then assigned a weight reflecting its relative importance in determining and industry’s attractiveness, since not all measures are equally important
The intensity of competition in an industry should nearly always carry a high weight (say 0.20 to 0.30) (important)
The importance of weights must add up to
1! (important)
Each industry is rated on each of the chosen industry-attractiveness measures, using a rating scale of 1-10
Where a high rating means high attractiveness
Low rating meanings low attractiveness
The more intensely competitive an industry is,
the lower the attractiveness rating for that industry
The more the resource requirements associated with being in a particular industry are beyond the parent company’s reach
the lower the attractiveness rating
The presence of good cross-industry strategic fit should be given a very high attractiveness rating
Since there is good potential for competitive advantage and added shareholder value
Weighted attractiveness scores are then calculated by:
Multiplying the industry’s rating on each measure by the corresponding weight
Example: Rating of 8 times a weight of 0.25 = 2
Industries with a score much below ___ do not pass the attractiveness test
5 (important)
Step 2:
Evaluating Business Unit Competitive Strength
Grant, Robert ((2013). Contemporary strategy analysis
Grant, Robert ((2013). Contemporary strategy analysis
Porter’s five forces does not consider:
Complements!!
Complements have the ______ effect to substitutes
Opposite
While substitutes reduce the value of an industry’s product, complements _________
Increase it
Hypercompetition
Intense and rapid competitive moves, in which competitors must move quickly to build new advantages and erode the advantages of their rivals
Game theory points to five aspects of strategic behaviour through which a firm can improve its competitive outcomes:
1) Cooperation
2) Deterrence
3) Commitment
4) Changing the structure of the game being played
5) Signaling
Brandenburger, A. M., & Nalebuff, B. J. (1995). The right game: Use game theory to shape strategy.
Brandenburger, A. M., & Nalebuff, B. J. (1995). The right game: Use game theory to shape strategy.
Looking for win-win strategies has several advantages
First, because the approach is relatively unexplored, there is greater potential for finding new
opportunities.
Second, because others are not being
forced to give up ground, they may offer less resistance to win-win moves, making them easier to implement.
Third, because win-win moves don’t force
other players to retaliate, the new game is more
sustainable.
And finally, imitation of a win-win move
is beneficial, not harmful.
Coopetition
It means looking for
win-win as well as win-lose opportunities
Value Net
a schematic map designed to represent
all the players in the game and the interdependencies among them
Customer (north)
Complementors (East)
Suppliers (south)
Substitutors (west)
Interactions take place along two dimensions
The Vertical dimension
The horizontal dimension
The Vertical dimension
the company’s customers and suppliers. Resources such as labor and raw materials flow from the suppliers to the company, and products and services flow from the company to its customers.
The horizontal dimension
are the players with whom the company interacts but does not transact
They are its substitutors and complementers.
Substitutors
are alternative players from whom
customers may purchase products or to whom suppliers may sell their resources
Coca-Cola and PepsiCo are substitutors
Complementors
are players from whom customers buy complementary products or to whom
suppliers sell complementary resources
For example, hardware and software companies are classic
complementors
The Value Net describes the various roles of the
players.
It’s possible for the same player to’ occupy
more than one role simultaneously
The Value Net reveals two fundamental symmetries in the game of business:
First) between customers and suppliers
Second) between substitutors and complementors
First step in changing the game
Drawing the Value Net for your business
The second step is
identifying all the elements of the game. According to game theory, there are five: players,
added values, rules, tactics, and scope - PARTS
for short.
Players come first
As we saw in the Value Net,
the players are customers, suppliers, substitutors,
and complementers
Added values
what each player brings to the
game.
There are ways to make yourself a more
valuable player-in other words, to raise your added
value. And there are ways to lower the added values
of other players.
Tactics
moves used to shape the way players
perceive the game and hence how they play. Sometimes, tactics are designed to reduce misperceptions; at other times, they are designed to create or
maintain uncertainty
Scope
describes ,the boundaries of the game. It’s
possible for players to expand or shrink those
boundaries
Complements and attractiveness are in the
Industry section of the corporate ecosystem (third highest)
Dumb quote for this (QUIZ)
“Beauty is in the eye of the beholder”
Vector (aka Force Field) Analysis
Visual representation of forces impacting industry players (or individual company)
-Competitive forces
-Driving forces
-Ease of achieving KSF
Size, growth and evolution stage of industry
Vector represents:
- Direction: Favorable or unfavorable
- Length: Higher importance/priority/impact have longer arrows
Use as many different vectors as needed to represent forces and gain new insights
-May create multiple vectors to represent different buyer categories, entry barriers, etc
Factors for Assessing Industry Attractiveness
Overall financial performance for the industry
Market size and growth potential
Overall degree of risk and uncertainty in future
Impact and implications due to changes in the remote environment
If competitive forces are conducive to rising/falling industry profitability
If profitability will be favorably or unfavorably impacted by driving forces
If there are opportunities and strategies to achieve more favorable positioning in key markets, or potential to capitalize on vulnerabilities of others
How easy/difficult is it to deliver on industry KSFs
Severity of problems facing industry
Industry’s competitive environment isideal from a profit-making standpoint when
Rivalry is moderate
Entry barriers are high and no firms are likely to enter Good substitutes do not exist
Suppliers and customers are in a weak bargaining position
Driving forces represent positive change and are manageable
Competitive environment is unattractive from the standpoint of earning good profits when
Rivalry is vigorous
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power
Driving forces negatively impact industry and require costly and dramatic change
