New Venture Strategies
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Transcript of New Venture Strategies
PIRNAY Fabrice NVS 2002-2003 1
New Venture Strategies
PIRNAY Fabrice2002 - 2003
Session # 4 - 7
Industry structure and strategy
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Le « menu du jour »
1. What is an industry ?
2. Drawing the structure of a given industry
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1. What is an industry ?
1.1. Industry Boundaries1.2. Industry Life Cycle
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1.1. Industry Boundaries
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What is an industry? Collection of firms whose products (or
services) are perfect or near perfect substitutesSimilarity of products/services is key
Importance of industry boundaries Helps managers understand arena of
competitionEnables identification of competitorsHelps managers identify key success factorsProvides basis to evaluate firm goals
1.1. Industry Boundaries
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Problems with industry definition Industries evolve
Structure and firms change over time At what level of aggregation?
For example, beer vs. craft beer segment Industries emerge from industries
For example, electronics industry of 60’s is now multiple industries -- TV, VCR, computers
Domestic versus global in scope
1.1. Industry Boundaries
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Question : What industry is BMW in ?
world auto industry ? European auto industry ? world luxury car industry ? world sports car industry ?
1.1. Industry Boundaries
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An industry is a group of companies offering products or services that are close substitutes for each other
Key criterion: SUBSTITUTABILITY
On the demand side: are buyers willing to substitute between types of cars (across countries) ?
On the supply side: are manufacturers able to switch production between types of cars (across countries) ?
Drawing Industry Boundaries: Identifying the Relevant Market
1.1. Industry Boundaries
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ConcentrationConcentrationConcentrationConcentration
Entry and ExitEntry and ExitBarriersBarriers
Entry and ExitEntry and ExitBarriersBarriers
ProductProductDifferentiationDifferentiation
ProductProductDifferentiationDifferentiation
InformationInformationInformationInformation
Perfect Perfect CompetitionCompetition
Perfect Perfect CompetitionCompetition OligopolyOligopolyOligopolyOligopoly DuopolyDuopolyDuopolyDuopoly MonopolyMonopolyMonopolyMonopoly
Many firmsMany firmsMany firmsMany firms A few firmsA few firmsA few firmsA few firms Two firmsTwo firmsTwo firmsTwo firms One firmOne firmOne firmOne firm
No barriersNo barriersNo barriersNo barriers Significant barriersSignificant barriersSignificant barriersSignificant barriers High barriersHigh barriersHigh barriersHigh barriers
HomogeneousHomogeneousProductProduct
HomogeneousHomogeneousProductProduct Potential for product differentiationPotential for product differentiationPotential for product differentiationPotential for product differentiation
PerfectPerfectInformation flowInformation flow
PerfectPerfectInformation flowInformation flow Imperfect availability of informationImperfect availability of informationImperfect availability of informationImperfect availability of information
The Spectrum of Industry Structures
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The Spectrum of Industry Structures
FragmentedFragmentedMany firms,Many firms,no dominantno dominant
firmfirm
Few firms,Few firms,shared dominanceshared dominance
(oligopoly)(oligopoly)
Consolidated Consolidated One firm or oneOne firm or onedominant firmdominant firm(monopoly)(monopoly)
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1.2. Industry Life Cycle
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Four Major Stages :
I. Emergence II. GrowthIII. Maturity IV. Decline
1.2. Industry Life Cycle
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Dem
and
•Growth slowGrowth slow•buyers unsurebuyers unsure•high priceshigh prices•barriers aboutbarriers about•knowledge, knowledge, standard standard setting setting
•Demand Demand takes offtakes off•prices fallprices fall•barriers to barriers to entry lowentry low•rivalry low rivalry low
•Growth slowsGrowth slows•rivalry increasesrivalry increases•excess capacityexcess capacity•price dropsprice drops•firms exitfirms exit
•No new demandNo new demand•barriers to entry barriers to entry highhigh•rivalry increasesrivalry increases•prices downprices down•cost cutting cost cutting •industry industry consolidationconsolidation•usually oligopoliesusually oligopolies
•Demand fallsDemand falls•rivalry increasesrivalry increases•price cutsprice cuts•exit barriers are keyexit barriers are key
1.2. Stages of the Industry Life Cycle
GrowthGrowth
EmbryonicEmbryonic
MaturityMaturity
ShakeoutShakeout DeclineDecline
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I. Emergence :
New product or concept How to enter and refrain subsequent entry?
Consequence :
Fixing the price level Convince or educate prospective customers Determine the segment to enter Generate barriers to entry (price, segment, preemption
actions and investments,…)
1.2. Industry Life Cycle
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II. Growth :
The rate of growth is increasing The analysis of diffusion is critical Entry starts to occur
Consequence :
Build capacity Innovate entry option Create new segment Develop partnerships and strategic alliances « Take the money and run »
1.2. Industry Life Cycle
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III. Maturity :
Rate of growth is declining Development of a replacement market Increasing market segmentation
Consequences :
Effort for differentiation Develop market niches Reduce costs Manage exit
1.2. Industry Life Cycle
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IV. Decline :
Big variations across segments possible
Consequence :
Manage the withdraw
1.2. Industry Life Cycle
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Limitations of Life Cycle
it is just a generalization tends to focus on sales, market share, and
investment in the industry Life cycle model can help to anticipate
industry change, but it is dangerous to assume any pre-determined pattern of industry development
1.2. Industry Life Cycle
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2. The structure of a given industry
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How to describe industry structure? Industry size / growth Industry life cycle Industry concentration (Is the industry dominated by a few
players?) The industry structure is a product of and
defines the rules of competition Industry structures constantly change Transformation can just as easily undermine
industry attractiveness as enhance it Opportunities and threats arise from changes in
industry structure
2. The structure of a given industry
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2.1. The B.C.G. Matrix 2
2.2. The Five Forces Model (M. PORTER)
2.3. The Strategic Groups
2. The structure of a given industry
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2.1. The B.C.G. Matrix 2
Number of Approaches to
Achieve Advantage
Size of the Advantage
Many
Small
Fragmented
FewStalemate
Large
Specialization
Volume
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Number of Approaches to Achieve Advantage
Size of the Advantage
Many
Small
Few
Large
Fragmented
Stalemate
Specialization
Volume
ROI
Share
ROI
Share
ROI
Share
ROI
Share
2.1. The B.C.G. Matrix 2
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The “Five Forces” :
I. Threat of New EntrantsII. Intensity of Competitive RivalryIII. Bargaining Power of SuppliersIV. Bargaining Power of BuyersV. Availability of Substitute Products
2.2. The “Five Forces” Model (PORTER)
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAINING POWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising from
the jockeying for better marketposition and a competitive
advantage.
The Model :
2.2. The “Five Forces” Model (PORTER)
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAININGPOWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising from
the jockeying for better marketposition and a competitive
advantage.
I. Threat of New Entrants
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New Entrants... Bring more capacity to industry Can 'shake up' industry
I. Threat of New Entrants
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Entry Barriers Entry barriers stem from...
Economies of scaleProduct differentiationCapital requirementsSwitching costsAccess to distribution channels
Cost advantages not related to scaleProprietary technologyAccess to raw materialsFavorable locationsGovernment subsidies
I. Threat of Entrants Depends Upon …
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Entry Barriers (Cont.) Government policy
Regulation restricting capacity, playersStandards; safety, anti-pollutionTesting; delays
Expected Retaliation of Industry Incumbents
I. Threat of Entrants Depends Upon …
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAININGPOWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising fromthe jockeying for better market
position and a competitiveadvantage.
II. Intensity of Competitive Rivalry
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The Intensity of Competitive Rivalry Is Greatest When... There are numerous, or equally balanced
competitors Industry growth is slow Incumbents have high fixed costs Buyers have minimal switching costs Capacity is augmented in large increments
II. Intensity of Competitive Rivalry
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The Intensity of Competitive Rivalry Is Greatest When... (Cont.) Competitors are diverse
Family owned businessesForeign owned competitors
Competitors have high strategic stake in industry
Industry has high exit barriersSpecialized assets---low liquidation valueFixed costs of exit---unions, suppliers, warrantiesEmotional barriersGovernment restrictions
II. Intensity of Competitive Rivalry
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Entry Barrier
s
Exit Barriers
High
Low
HighLow
Low, Stable
Returns
Low, Stable
Returns
High, Stable
Returns
Low, Stable
Returns
High, Stable
Returns
Low, Risky
Returns
High, Risky
Returns
Low, Stable
Returns
High, Stable
Returns
Low, Risky
Returns
High, Risky Returns
Low, Stable Returns
High, Stable
Returns
Low, Risky Returns
II. Intensity of Competitive Rivalry
Effects of Entry Barriers and Exit Barriers on Industry Profits
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Four firm Concentration ratio (CR4) - Add the market shares held by the 4 largest companies in the industry (= % of total industry sales accounted by the 4 largest firms)- Minimum theoretically near 0- Maximum = 100% (or 1.00)
Logging = 18%Cigarettes = 85%
II. Intensity of Competitive Rivalry
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Herfindahl Index (HI) - a measure of the balance in an industry
HI = 10,000 * (The Sum of (the square of each firms market share))
Example: 3 firms with market shares of 0.50, 0.25, 0.25HI = 10,000 ((0.50)^2+(0.25)^2+(0.25)^2) =
3750
= 0 Perfectly Competitive = 10,000 Monopoly > 1,800 Industries with reduced rivalry
II. Intensity of Competitive Rivalry
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAININGPOWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising fromthe jockeying for better market
position and a competitiveadvantage.
III. Bargaining Power of Suppliers
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Suppliers Affect Industry By... Raising prices Reducing quality
III. Bargaining Power of Suppliers
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Suppliers Are Most Powerful When... Supplier industry is concentrated, or
dominated by a few large firms Buying industry is fragmented Substitutes are not available The industry is not an important customer of
suppliers The suppliers' product is an important input
to the buyer's business
III. Bargaining Power of Suppliers
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Suppliers Are Most Powerful When... (Cont.) The supplier can vertically integrate forward Suppliers are unified
Trade associationsCartelsTrade unions
III. Bargaining Power of Suppliers
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAININGPOWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising fromthe jockeying for better market
position and a competitiveadvantage.
IV. Bargaining Power of Buyers
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Buyers Affect Industry By... Forcing prices down Bargaining for higher quality Bargaining for more favorable terms Playing competitors off against each other
IV. Bargaining Power of Buyers
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Buying Groups Are Most Powerful Under the Following Circumstances... Buyers are concentrated and/or large
compared to industry Industry is fragmented The product purchased from industry is
undifferentiated Buyers face few switching costs Buyers earn low profits Buyers can integrate backwards Buyers have full information
IV. Bargaining Power of Buyers
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AVAILABILITY OF SUBSTITUTE PRODUCTS
BARGAININGPOWER OF BUYERS
THREAT OF NEW ENTRANTS
BARGAINING POWEROF SUPPLIERS
RIVALRY AMONGCOMPETING SELLERS
Competitive forces arising fromthe jockeying for better market
position and a competitiveadvantage.
V. Availability of Substitute Products
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Firms Are Not Only Competing Against Firms in Their Own Industry, but Also Firms in Industries Producing Substitute Products. Substitutes limit profits in normal times Substitutes reduce bonanza in boom times May be countered by industry collectives
V. Availability of Substitute Products
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Forms of substitution: Product-for-product Substitution of need Generic substitution Doing without
V. Availability of Substitute Products
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Rivalry (Business Professors) Low rivalry due to:1. Strong growth of demand2. Relatively few rivals3. Significant differentiation4. Low exit barriers
Potential Entrants(Future Business Professors)
1. High entry barriers2. Low return on investment
Substitutes (Experience and non-university education)1. Excess demand for professors’ services2. Price-performance ratio difficult to measure
Buyers (Students and Executives)1. High demand2. Relatively many buyers3. Limited substitutes at present4. Some backward integration
Suppliers(Students and Executives)
1. Suppliers are the buyers2. Low differentiation
Lowbargaining
powerof suppliers
Lowbargainin
gpower
of buyers
Low threatof entry
Moderate threatfrom substitutes
The Case of Business - Research Industry
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It makes it possible to diagnose the competitive forces and characterize the position of a company.
To a large extent, the forces influences the rules of the game of the competitors and the strategies which are potentially available.
To an extent, it determines the profit potential of the industry.
The implications of the five forces model
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Does not foretell the future, nor does it eliminate uncertainty for any organization.
Does not guarantee organizational effectiveness.
Is static and ignore innovation Is dynamic only to a limited extent, e.g. the industry
conditions take on punctuated equilibrium. Can it be applied to complex business landscape and/or
hypercompetitive business environment?
The limitations of the five forces model
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The focus is on industry rather than individual companies Innovation creates change in industry structures, altering
the competitive environment. Industry structure cannot fully explain the performance
differences between industry competitors. Academic studies suggest that there can be enormous
variance in the profit rates of individual companies within an industry, with industry effects accounting for only 10 to 20 percent of the variance in company profit rates.
Although this does not mean that the five forces are irrelevant, it does indicate that their usefulness is limited. A company will not be profitable just because it is based in an attractive industry; much more is required.
The limitations of the five forces model
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2.3. The Strategic Groups
a. The concept of Strategic Groups
b. Strategic Groups Mapping : Guidelines
c. Some Examples
d. Usefulness of Strategic Groups
e. Implications of Strategic Groups
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Within an industry, a competitor grouping using similar strategies that differ from other industry groups.
=> a strategic group is a set of firms within an industry pursuing similar strategies
Requires answering two questions:
- What industry (or business) are we in?
- What are the dimensions which are relevant to the firms’ performance within the industry?” (“what is important to the customer?”)
a. The concept of Strategic Groups
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STEP 1: Identify the competitive characteristics that differentiate firms in the industry :
• price/quality (high, medium, low)
• geographic coverage (local, regional, national, global)
• degree of vertical integration (none, partial, full)
• product line breath (wide, narrow)
• degree of service offered (limited, full service)
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
b. Strategic Groups Mapping : Guidelines
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STEP 3: Assign firms that fall in about the same strategy space to same strategic group
STEP 4: (if possible) Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales
b. Strategic Groups Mapping : Guidelines
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- Variables selected as axes should not be highly correlated
- Variables chosen as axes should expose big differences in how rivals compete
- Variables do not have to be either quantitative or continuous
- Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
- If more than two good competitive variables can be used, several maps can be drawn
b. Strategic Groups Mapping : Guidelines
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c. Some Examples
Strategic Groups in the U.S. Strategic Groups in the U.S. Pharmaceutical IndustryPharmaceutical Industry
High
HighLow
Low
Pri
ces
Ch
arg
edP
rice
s C
har
ged
R&D SpendingR&D Spending
Merck Pfizer
Eli Lilly
Proprietary Proprietary GroupGroup
Generic Generic GroupGroup
Marion Labs Carter Wallace
ICN
Strategic Groups in the U.S. Airline Strategic Groups in the U.S. Airline Industry (1996)Industry (1996)
High
HighLow
Low
Qu
alit
yQ
ual
ity
Cost Cost
Southwest
NorthwestTWA
USAir
AmericanUnitedDelta
Am. WestContinental
Strategic Groups in the Strategic Groups in the Video Game Industry
Typ
es o
f V
ideo
Gam
e S
up
plie
rs/D
istr
ibu
tio
n C
han
nel
s
Overall Cost to Players of Video Games
Low(Coin-operated
equipment)
Medium (Video players
cost $100-$300)
High (Use PC)
Video arcades,Coin operated
machines
HomePCs
Video gameconsoles
OnlineVideo games
sites
Sony, Sega, Nintendo, several
others
Arcade operators
Publishers of games on CD-ROMs
MSN Gaming Zone, Pogo.com,
America Online, HEAT, Engage, Oceanline, TEN
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- Preserve info characterizing individual competitors that may be lost in studies using averaged and aggregated data;
- Allow for the investigation of multiple competitors concurrently;
- Allow assessment of the effectiveness of competitors’ strategies over a wider range of variation than a single organization’s experience affords;
- Provide a means of summarizing info to bring key dimensions of strategy in high relief; and
- Capture the intuitive notion that “within-group” rivalry and “between-group” rivalry differ.
d. Usefulness of Strategic Groups
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- Mobility barriers inhibit the movement of competitors from one strategic group to another
=> the closest industry competitors are those in the group
- The various industry groups are differentially and competitively advantaged and positioned
=> competitive analysis varies across strategic groups
- Can encounter a semantic problem in defining an industry versus a group
e. Implications of strategic groups