Hello, and welcome to today's session of corporate strategy.
Today we are going to cover industry and competitive analysis, which is a standard tool, a standard
framework to analyze the industry companies in.
What we are going to do today is looking at the Porter's Five Forces framework that
analyzes the structural characteristics and the features of the industry that are shaping
the attractiveness of an industry and thereby the profit a firm can make in a specific industry.
Theoretically, this goes back to the marketplace view that we already covered, so under the
label of structural conduct performance model, this is essentially the basis for what we
are trying to do here.
But let's first look at what an industry is.
We define industry rather simple and broad by saying it's a group of firms that produce
products that are close substitutes for each other.
That's a pretty kind of sounds easy and simple.
But when it comes to actually defining an industry, the devil is in the details because
cars might be an industry, but is a fiat really a close substitute for a Porsche?
This might be part of the same industry, but it also might belong into different industries
depending on how you define close substitute.
Then we use typologies existing classification systems to define a specific industry and
the abbreviations that you should have heard there is the SIC, the Standard Industry Classification
System, which is rather old and which assigns it to a four digit number to each industry.
This is essentially one way to define or characterize an industry or the North American Industry
Classification System.
There's more the UN has one.
There's a couple of classification systems which can help us to define what an industry
is, but we're not going in there.
Also when we identify industry structure, it could be useful to look at an industry
globally, but it could also be necessary that we limit our analysis to specific regions
because industry structures for the same type of products might work very differently
in other in different regions.
Just take bookstores, physical book resellers or book resellers in general in Germany, which
have a fixed price that they have to take and cannot deviate from, which is very different
from selling books in the UK, for example.
When we want to analyze the book retailing industry, then it might make sense to perform
an industry analysis specific to some region.
Now we know what industry is.
What's competitive strategy?
We've been there already.
Competitive strategy is on a business unit level.
What we can do here is not do one analysis for all of Philips, but for the business units
that Philips has and competitive strategy, the one on the business unit level is relating
our company, the organizational boundaries to the environment, to position ourselves
within an environment.
Theoretically, this all goes back to the market-based view that we already covered.
We do know that in the market-based view, the profit that a firm can reach is based
on A, how attractive is the industry, and B, how do we position ourselves in the market
compared to our competitors.
These are basically the two determinants of industry of firm profit in the end.
We've seen that slide that we call the SCP model.
The course we set, the industry structure that is given for all players in the industry,
which is the same for all players in industry, then we have firm specific conduct.
This is basically the strategic positioning of firms in that industry, and that leads
to some kind of firm performance, however we want to measure firm performance.
The Portis Five Forces model helps us to identify the industry structure of a specific industry
and analyzing whether it's an attractive industry or not.
Later when we go to strategy groups and we cover that, we also look at firm conduct and
positioning within an industry, but identifying and evaluating the industry structure.
This is what the industry and competitive analysis Portis Five Forces model tries to
do.
So let's go there and have a look at the Portis Five Forces model that does exactly that.
It identifies the structural features of the industry, the industry structure, and these
determine five competitive forces that we're going to look at in more detail.
How strong or weak these five forces are determines the profit potential in the industry.
Mostly we'll see if these forces are very strong, they will diminish the profit potential
in the industry because the competition gets much less attractive.
But we'll get to these five forces in a second.
Profit potential doesn't mean quarterly returns one time, but a long-run return on invested
capital.
So it's about having a sustainable competitive advantage over a longer time.
What's the purpose?
What do we want to achieve with an industry and competitive analysis?
Of course, we want to identify industry structure, right?
This is essentially what we want to do with that.
But with that, we can get an overview of an industry and the main players, or the main
players' position, what are the main players?
We find out, is it an attractive industry or not?
In essence, that will help us make a decision, should we enter that industry if we are not
in there, or should we exit it if we are already in there, or should we remain in there?
Is it an attractive industry or not?
Some industries in Western banking, at least a couple of years ago, was really, really
attractive in terms of profit.
That being an airline was kind of not very attractive.
Do you know one of the most attractive industries in terms of profit?
It's academic publishers.
Those commercial companies that earn a lot of money by publishing the results of academics.
It also helps us to understand the drivers of profit in an industry.
Where does profit come from?
What are the strategic dimensions that are maybe important, which are not?
It will help us to evaluate strategies of firms.
Strategies means how firms position themselves on the market, so how they conduct themselves
and evaluate that of mine, but also of the competitors' firms.
It might help to develop strategies on how we should position ourselves in the market.
We've been there.
In the end, it answers the question, is it an attractive industry, is it one that we
should enter or not?
Let's give me a visual overview over the Portis 5 forces model and show you each of these
single blocks and explain them a little.
So we have five forces that shape the profit potential of an industry, that are the forces
that result of the industry characteristics, this industry structure.
That's the industry competitors, how the field looks like, how intense is the rivalry among
firms, and that's the big block in the middle.
It's about the potential new entrants that might enter our industry and how credible
is the threat of new entrants, how dangerous is it?
There might be a threat of substitute products which endanger, which threaten the whole industry.
So if they're substitutes, then that might be a danger and might make me much less attractive
as an industry.
And the bargaining power of both buyers and suppliers is important to understand the attractiveness
of an industry as well.
Let's go through these block by block.
Let's start with the one in the middle, the industry competitors, and look at the rivalry
that exists within the industry and how intense the rivalry is.
Of course, the thinking is the more intense the rivalry among existing firm is, the much
less profitable the industry is as a whole.
An industry which barely sees any rivalry is one where you can earn comfortable profits.
One where competitors try to kill each other with a vengeance is one where profits will
rarely be seen.
So what are the determines or how can we see how intense the competition in an industry
is?
One is about market structure, so how numerous and equally balanced are competitors.
They have lots of competitors that are equally sized somehow.
In this case, there will be healthy competition on the attractiveness, the profits will go
down.
If the industry grows very fast in the market volume, increases year by year, then the cake
as a whole gets much bigger and it's much easier to earn an easy profit.
If the cake doesn't grow and you want to grow, basically you have to diminish your
competitors or share piece of the cake and that is much more expensive, much more difficult
and will intensify the rivalry.
So industries which stagnate or even shrink are really not attractive in terms of industry
profits.
Let me give you an example.
If you look at the number of German households with computers and you can see these lines
interesting in this case is the black one which is the percentages of households with
desktop PCs.
So starting in 2000 with something around 40%, it goes up to 2006 when we reach something
like 60% and then the number of desktop PCs or the number of households with desktop PCs
shrinks over the years basically until 2000 to 2020.
Interestingly enough, during the corona time in 2021, it increases a little again, but
we can safely say for more than a decade the desktop PC market was really not attractive
in terms of market growth.
And you can think or you can easily understand that the average profit that firms can get
on the desktop PC market are rather small when the markets are shrinking.
So numerous and equally balanced competitors and industry growth are indicators for attractiveness
determine impact the attractiveness.
The contrary to the equally balanced and numerous competitors is an oligopoly or monopoly where
a single firm dominates the market and the rest is not so important and rather rather
small.
These are cases which are rather attractive for the big ones, perhaps not so attractive
for the smaller competitors.
What else impacts the rivalry and thereby the attractiveness?
There are industries that have very high fixed costs and industries that suffer from
overcapacity.
We'll cover these two in one go because overcapacity is often a consequence of industries with
a high fixed cost, but let's first go there.
Industries with high fixed costs are those, imagine you have run a power plant, a nuclear
power plant, nuclear power plants cost the same to run if you run them at 50, 80 or 100%
capacity.
The costs are basically the same.
They even cost the same when they don't produce any electricity at all.
So you have really, really high fixed cost in this case.
Now what would you do if fixed costs are rather high?
You have an incentive to use your full capacity to spread the fixed cost that you have over
the sales volumes.
So you want to sell as many things as possible to spread the fixed cost that you have over
that.
Even if you have to reduce the price below the total cost of manufacturing, but just
to kind of as long as it's higher than the variable costs, you are still able to kind
of spread your fixed costs a little.
So industries with high fixed costs as a consequence often have firms producing overcapacity,
even at the risk of kind of having to decrease prices a lot.
And thereby we see often in these industries overcapacity.
The car manufacturing industry is one of those nuclear power plants, but there's plenty of
examples of these.
But not only high fixed costs, but it could also be high storage costs or no possibility
of a long-term storage that leads companies to sell off even if they have to lower their
prices to unhealthy levels.
Imagine the truffled season when you harvest truffles and they simply will go bad after
a rather short time.
So if your shelves are full with truffles, you will sell them off at the after some time,
even below cost or below just to get rid of them before they turn bad.
So cost structure in an industry, the storage costs or the possibility to store products
will lead to, can lead to overcapacity, which will reduce the attractiveness of an industry
as a whole.
If products in your industry are differentiated and customers prefer one type to the others,
then that is okay if there's many competitors, because each competitor might cater to a subset
of customers that prefer their products.
On the other hand, if you have products that are commodities that don't differ from each
other and customers can simply choose by cost or convenience, then that will reduce the
overall profit in the industry because customers will only shop for price and nothing else.
When you book an air flight and you search your flight price engine for the cheapest
flight from A to B and you don't care about which airline you fly with, then this is exactly
a case where airlines really compete on price only, reducing it to the lowest possible level
and thereby having a really, really tough competition with low profit margins.
Also switching costs are important.
So if it is really expensive for me to switch from one product to the other, then the supplier,
the firms are a bit protected from me switching away from them.
Think about Steene at the University of Hamburg, which is used to administer grades and students.
Switching away from the Steene system to some other system would involve such high costs
that the manufacturers of the Steene software can rest assured that the University of Hamburg
will never switch away from that nice piece of software.
We've covered overcapacity.
Just as we can talk about non-differentiated products, commodities, we can also look at
the low diversity of competitors.
So are competitors really similar and we can't distinguish them one from the other?
We don't care which we buy from, that will increase the intensity of rivalry and reduce
the overall profit margin in the industry of course.
We can see that because over time competitors tend to become rather similar and imitate
each other in terms of strategy, in terms of product range and marketing approaches
and other things.
We look at that when we look at strategic groups in a second.
So if competitors aren't really distinguishable, that leads to more cutthroat competition.
Then there might be the case that for some firms there are really high strategic stakes at play
and they want and need to remain in the industry at all price.
They really for whatever reason, in this case they will remain in the industry even
if it doesn't make sense, even if they don't make a profit, if that leads to price dumping
and that will decrease the overall attractiveness of the industry.
What examples could we think of of high strategic stakes?
Well think of when Microsoft wanted to enter the video console market and they sold the
Xbox when they started selling that at a loss.
But for Microsoft it was so important to be part in that video console market industry
and they said despite making big losses in the beginning we need to stay in that crucial
and important area.
You could think of other examples of firms that really think this is a market that we
need to kind of stay in at all price.
There are many reasons why firms might want to do that.
And sometimes it's not only there's barriers to enter a market but there are also barriers
to exit a market and if these exit barriers are high then if the market stops being attractive
these firms will still hang around on the market destroying the industry profits and
not being able to leave the market.
What could be examples of these high exit barriers?
For example if you have very specialized investments into manufacturing machinery that would be
lost some costs it would be lost if you abandon the market so it really hurts and you really
don't want to exit that market and just write off all the machinery that you've bought.
If you have very high fixed exit costs so you have for example contracts that you would
have to pay some fees because you've underwritten some long term suppliers contract and if you
want to get out of that you have to pay these costs.
For fixed exit costs if you want to abandon your nuclear power plant well somebody will
be busy in the next 40 years to just ripping down and discarding that power plant so there's
a high fixed exit cost if you want to exit that market.
Sometimes there might be strategic linkages between firms or functions that don't really
allow you to exit a market despite not being so attractive.
If you sell medical scanners and you do medical training of hospital staff for these medical
scanners you better should remain in both markets because from a strategic sense it
makes sense even if you make a loss at one or the other of these businesses.
So there might be emotional barriers.
An example of that is Intel before it made CPU chips it made computer memory, ROM and
around in the 1980s ROM became really not so other companies started doing that cheaper
and better and Intel made more and more CPUs.
In the mid 1980s Intel called themselves a memory company and they still spent 30%
of their R&D on memory research but the turnover with memory was only 3%.
So it didn't really make any sense to remain in that industry anymore but because they
still had that identity as we are a memory company that they simply had emotional barriers
to exit that market.
Kodak which exited the analog photography market way too late is one of those companies
that went under partly because of these emotional barriers.
Only if you want to exit a market sometimes it might not be possible.
Reasons might be regulation.
Let's take the example of the power plant again you just can't exit the energy production
market because the regulator basically has to allow you to shut down your power plant
so that there won't be any blackouts in the electricity nets or there might be social
restrictions you just can't fire all your employees that made a certain product and
ditch that business because of social reasons, regulator reasons.
I think that's quite a number of examples there are reasons that could prevent us from
exiting an industry.
I think you understood what the intensity of competition in that middle block in the
Portis Five Forces model is now.
Let's move one up and look at the force coming from the top basically which is the potential
new entrance into the market.
potential new entrance or can be seen as a threat or let's ask the other way around
are barriers to entry so hurdles to enter a new market is that a good thing or bad thing.
It depends of course on whether you are in the market already or whether you want to
enter it.
If you are in a market barriers of entry are very good for you because it protects
you from new entrance entry barriers surrounding an industry can be viewed as a collective
capital good generating joint profits for the going firms and companies.
So entry barriers a good if you are in the industry but bad if you want to enter it.
What are reasons determinants that firm use to decide whether they want to enter market
or not they will of course look at industry profit they will look at how will the other
firms that are already on the market react will they fight me to the death with price
dumping anti competition be well legal and illegal means so or will they simply say okay
one more easy no no worries the cake is big enough for all of us so that will be part
of the considerations that you take when you want to decide whether to enter market.
But it will also be the reaction of other potential entrance where if we enter the markets
will 20 others also enter the market because they kind of see that how easy it is that
could be one determined.
We have the resources and knowledge that it takes to enter the market of course there
might be cost one-time costs that occur just to do the research the analysis to get the
decision should we enter or not and of course how easy is it to enter the market and these
barriers of entry these are the ones that we want to look at a little bit more in detail
let's go there first of all economies of scale economies of scale we have that already is
basically if you produce many things within one period of time then you can produce cheaper
than as if you only produce a smaller quantity of things in any specific time if you enter
a market you are likely to be smaller than the big existing firms that are already on
the market and that means you will have some cost disadvantage if you are the small new
firm you will be more expensive because you make fewer units per time that will disadvantage
you what other barriers do we have product differentiation so if products if you don't
just compete on cost with commodity products then you need to become better or different
to the existing products overcome for example existing reputation of existing products and
firms that are already on the market if you want to enter the higher end of the cola market there
is Pepsi and there's coca-cola with brands that are very hard to beat so that will is something
that you will have to think about how to be different and kind of cheaper if you have
the lower end of the market etc if you have to compete with cars that look like this well you
have to invent something that's even cooler so that people want to buy your thing and say like
okay why should I switch to a new firm the next barrier to entry is the money it takes to enter it
the capital requirement in some industries that is really little if you want to sell ice cream
from a when you just have to rent or buy a when get a make some ice cream and start going if you
want to enter the nuclear power plant industry you should better have a bit of money left to build
and get permission for for building your power nuclear power plant if you want to develop a new
drug that can take a billion us dollar sometimes two billion us dollar to develop a new drug and
get the permission to actually sell it that's a lot of capital that you need if you want to enter
that market switching costs are also barriers if you enter a market you want the customers in
that market consumers in that market to switch to you and the switching costs are really really
high you will have a hard time to convince people to buy your product instead of the incumbent ones
we already had steen as a system so a new offer of student administration software has a hard time
because the switching costs are so so high switching costs can be a lot of different things
they can't be by the price of the product but it can also be training of staff to work with
a new product it could be recertifications that you need to do with a new product it need to be
you need might need to redesign products or transfer data from from one to to the other
system you might need to redesign your your data flows to take that that new product integrated
into your your information flows in your organization but it could also be psychological costs
take the car market if you want to get a purchaser of mercedes to buy a different car
there is some brand loyalty that you have to overcome and this these are switching costs
that you need to overcome so that the mercedes drivers want to buy your new car instead
distribution channels are also a hurdle because sometimes they are limited limited availability
if you want to sell fast food at central locations well you will have a hard time
because burger king and mcdonald's have rented all the nice properties already that you would
like to have and there's not so many free places in surround that as you might want to have
if you want to sell mobile phone applications your distribution channels will be google play
or the apple store and if they don't take you you have bad luck that actually happened when
google maps wanted to have their app on the iphones and apple said no we are not taking google maps
into our store without giving clear reasons really for quite some time and google had a
hard time getting on the iphones things like like that shelf space in the supermarket if you enter
if you have a new um a new um what shampoo or perfume and you want to get into the
discounters on the shelves of discounters you will discover that it's really hard to
get into their product range that they sell i think that is pretty clear and and easy and it's
a clear barrier to enter the market you as a company might also have cost disadvantages
independent of your size economies of scale were about the size and the amount of units
you manufacture per time period but there are also cost disadvantages independent of how big you are
these might be in factor costs that are inputs into your uh manufacturing processes
if you need lots of electricity then the price of electricity is something that will affect you
and you will you can see in this bit older um a graph that in sweden electricity was at least in
2015 was way way cheaper than in germany so if you need lots of electricity and you are a german
company you are at a disadvantage what in in that respect you don't even have to go to these
across nations even within the us there are big big differences in terms of electricity prices
but that's just a footnote there are other factors that might affect your cost disadvantages
independent of size if you have a patent that makes certain things more efficient
then you have an advantage if you don't have that patent well you will be less efficient and you
will have a cost disadvantage by the way look at that illustration of a patent perhaps you will
find out what this is about last but not least there's the experience curve which can also provide
you with cost disadvantages or will which can pose cost disadvantages independent of your size
if we we talked about the experience curve that you go through as you produce uh over time and
become more efficient and cheaper in in cost uh production cost per unit
if you're a new entrant you're still at the beginning of that curve and you have to travel
it down all the time it's related but not the same as economies of scale
last but not least the government will have a word and an opinion on whether it's easy to enter a
market think about um swiss air when it still existed which wanted to enter the important
european market but because switzerland is not in the u they had a hard time to land in european
union countries so it couldn't pick up when it flew syric frankfort new york it couldn't pick up
um uh passengers there and it couldn't sell uh tickets for some sections of their flights
but there's other kind of limit limits to enter market by government policy just think about
entering the taxi market uh which which requires licenses most of the time becoming a mobile phone
operator with your own net which requires you to to get some spectrum of radio frequency
some countries liquor sales which you cannot simply enter the market but you have to be licensed
or it's a forbidden as to as a private company to sell liquor at all so these could also pose
barriers to entry
we'll not talk about the limits that economies of scale and limits of experience post
let's fast forward and look at the next block that impacts industry attractiveness
and that's the threat from substitute products so substitutes are the the block from the low and
if your industry is threatened by substitute products that reduces of course the attractiveness
of your industry let's assume that petrol cars and electric cars we consider that as two different
industries then electric cars are threat to me as a manufacturer of petrol cars
it also shows how difficult it is to define how important it is to define your industry well
because if we just say the car market then electric cars are not a substitute
um for for petrol cars but they're just a different type of of car within the same market
what's also important is that substitutes are product group that threatens the whole industry
so if i am forward partially is not a substitute for forward but it's just a competitor within
the same industry so we are really talking about better example might be the non cow milks
if they are allowed to be called milk that threaten the cow milk market because the last
statistics i've seen is that 10 of all sold milk is non cow milk by now or the milk no milk
vegan drink or however they have to be called
substitutes reduce the attractiveness of an industry of course because they're
false prices and profit down often this is new uh technology that uh kind of
is nicer better electric cars but it not necessarily so the no cow milk for example
is a nice example of a possible substitute which is not based on a new technology
and it's really difficult for management of incumbents to deal with that first you have
to notice substitutes and then you have to decide how should we react to that should we
embrace the substitute so if we are philip morris should we embrace vaping uh and ditch
old-fashioned cigarettes or should we fight them
this is a difficult decision to make and how to how to deal with that of course and that's pretty
trivial substitutes are a threat to our industry if it's easy to switch that to them the price of
them is low and the quality and performance of them is good enough equal or even better
than the old the products the focal products switching cost if you call an uber rather than
a taxi then basically the switching costs are super low no problem switching from one system
to the other these are things like that last but not least let's talk about the bargaining power
of both suppliers and buyers these are two forces coming from in our visual overview
from the left and the right but in essence the arguments are pretty similar because they are two
sides of the same coin first of all let's look at the relationship um the bargaining power
of suppliers and then look at the bargaining power of buyers or more correctly buyer groups
and supplier groups the idea is of course if suppliers and buyers have a high bargaining power
then the industry attractiveness goes down because the products go
go because they have the power to manipulate prices and change prices
making it less attractive reducing our profits and bargaining power bargaining is really the
capacity the the to influence the price and purchasing conditions thereby making it less
attractive for us let's think about suppliers a group of suppliers a type of suppliers is very
powerful if it it's dominating the market and is more concentrated than we if our supplier is a
monopolist we have to buy from him and he's very powerful if there's a hundred possible suppliers
all equally sized then they're less powerful in the price negotiations
if they're if they don't have to deal with other substitute products they're more powerful
no doubt about that if we are not an important customer of the supplier group then they're
rather powerful because they can always say if you don't want to deal with us we won't deal with
you at all no problem there and that is of course a strong position if their product their input
is extremely important for us then they are very powerful if we want to sell
luxury rings and and jewelry we will have to buy diamonds no way around that
so the suppliers of diamonds which is are rather concentrated probably are rather powerful when it
comes to price negotiations as long as we want the real deal and not the fake diamonds
if the products are very differentiated that the suppliers offer then they are rather powerful
of course we can't simply switch between suppliers the same reason is if there's very
high switching costs then if we can't switch suppliers easily they are rather powerful in
their negotiations the last argument is one that is worth thinking about a little bit more in
detail think about the value chain and with different companies along these value chain
if the suppliers have the ability to forward integrate into our industry then they are pretty
powerful because they can always say if you don't want to deal with us well we'll just do the thing
ourselves if you are dhl and your supplier along the value chain is amazon wanting to ship their
stuff with us then amazon has the ability to just do their own logistics and build up their own
fleet which is actually what they are doing and thereby they become much more powerful in
negotiating prices with us with dhl i think this should uh suffers for the suppliers bargaining
power of course the reasoning is the more powerful suppliers are the more expensive
the supplies will be then the input that we take into our production process will be
and the less attractive the industry the lower the profits will be when we do an industry
competitive analysis it might make sense to look at different groups of suppliers
so types of suppliers for different inputs if we are coffee house then of course the suppliers of
the beans are a group of suppliers we can use nearly the same arguments turned on the head
when we want to talk about the bargaining power of our buyers our customers
buyer groups are very powerful if they purchase nearly everything that we sell
so if we are a supplier of Volkswagen and Volkswagen buys 99 of what we produce
then Volkswagen is very powerful in the price negotiations because they take
make up all of our revenue basically
if the products that we offer are standardized and undifferentiated they are commodities
then buyers in a good position because they can now always buy from somebody else
if we sell screws which are very much standardized then buyers as long as they adhere to the standards
might not care where they buy their screws from and will easily switch from one to the other
and we are in a bad position with not lots of bargaining power the same argument of course if
switching costs are low for the buyers they will can always switch from one to the other supplier
and we are not in a good position to negotiate high prices we also have the value chain argument
if the buyer can backwards integrate into our industry they are pretty powerful
so when um let's find a good example when which is not DHL and Amazon in this case
or perhaps let's use DHL again the step before the logistics is for example warehousing
so if DHL can backward integrate into into the warehousing part of things they are in a pretty
good position to negotiate with the actual warehouse companies and of course they can always
say okay we can do could do it ourselves other examples of forward and backward integration
are of course media production and media distribution Netflix creating media is a backward
integration from because Netflix essentially was a video rental company before they made cool
content and they backward integrated into the production of media
if the products that we sell are not important or critical inputs for buyers
well we are in a bad position to negotiate high prices because the buyers can always say okay
if you don't want to sell at that price we don't take it no worries and if buyers have
full market transparencies all the information price information that is of course good for the
buyers when they want to negotiate and bargain such engines for flight prices have made the life
for travel agencies and airlines pretty miserable because buyers now have pretty
good overview of what it costs to fly from A to B now that's perhaps a bad example because
airline prices flight prices are one of the most in transparent things in the world but
you get the point these are the five forces that determine industry attractiveness
and of course bargaining power the higher suppliers and buyers bargaining powers
the less attractive our industry i think so much so so far so good let's go to the next topic
which is strategic groups which is now about the positioning of companies in that industry in the
industry within the industry structure that we have just analyzed the logic goes as following
firms earn different levels of profit because of their conduct their strategy their market
positioning remember in the market based view the structure conduct performance model
if you are in the same industry the same industry structure and you position yourself similar
the logic goes that your performance will also be similar but if we see that two different firms
earn different levels of profit well it might make sense to that other firms follow similar
strategy as the more profitable ones and also benefit from from that it could be attractive
for other firms to imitate the most profitable firms and their positioning on the market
and then we end up with firms that have very similar strategies and along strategic dimensions
and these are called strategic groups strategic groups is a group of firms in the industry
that follow the same or similar strategies along the street a specific strategic dimensions
what strategic dimension is depends a lot on the industry that you look at we will see one example
but essentially these are all the strategic knobs that we can turn if you go back to our
scp model all the conduct dimensions are strategic dimensions pricing how much do we invest into
rd how many distribution channels we have what are our distribution channels
these are all strategic dimensions or could be strategic dimensions
an example is a couple of our what could strategic dimensions technological leadership so are we
really the pioneers when it comes to developing technology or are we rather following the lead
we offer very high product quality or not do we have a service level that that's high or low
what's our pricing strategy are we low priced or high priced on the market what's our distribution
channels do we just sell online like tesla does or do we have a dense network of retail stores in
which we try to sell our products these are examples for strategic dimensions again which
ones you choose and which one you analyze depends a lot on the specific industry
one more example that i've taken from an article is these are biotech companies and strategic
dimensions were collaborations so the partnering level do we do our things alone or do we do it
with lots of partners and collaboration diversification so how many areas do we try to cover
at the same time in terms of product range so are we treating one illness or are we in lots of
therapeutic areas at the same time performance uh size and control variables is something that's
perhaps a bit tricky because remember strategic dimensions are things that part of the conduct
behavior so there's strategic knobs that we can control and change and turn in response to
our strategy size for example the number of employees measured by that it's not really a
conduct dimension i can't really well up to a degree i perhaps can but i can't really say i
want to become big now and my strategy is to have a million employees so this is perhaps not
the strategic dimension but i can't can up to a degree i can say like i want to be rather lean
and not ever have many employees or i i want to do everything in-house and and grow and grow and
grow in terms of employees remember strategic dimensions are those that you can actually control
that are part of firm conduct this article that used these strategic dimensions then clustered
biotech companies um according to in this case they look at level of partnering level of
diversification and size and found three clusters um one partner small biopharm diversified big
biopharm and medium-sized partner biopharm um which are strategic groups how you get to these
stretch strategic groups simply by eyeballing them or by using algorithms to uh automatically
calculate strategic groups that's up and that's another topic but in essence we could just look at
different dimensions and so like okay price low high that's a strategic dimensions number of
distribution channels um one to many on them we draw our competitors on on that strategic map
within the industry and see groups that are very close to each other then we see groups like group
a and group b one it has a very low price policy one has a high price policy and at the same time
they they kind of try to have an image that's they don't care about that and save a lot rather money
or they try to have a very reputable image and be the bang and olufsen of all loudspeakers
now if you see if you are in group a and you see the profit in group b is much higher
and those luxury sellers are making more return on equity than we do that might be a reason to
switch groups and try to build up my image and also become more expensive could also be that
customer preferences change and that what was acceptable at some point is not attractive anymore
and thereby we we decide to to switch groups if the fixed costs are uh different in in different
groups that could also on the cost structure in general could be a reason to switch it might be
that if i switch groups it opens up the possibility of strategic corporations could be a reason to
switch or i think oh in that low cost segment then that group a that i'm in now where the
competition is going to be extremely dense and horrible in a couple years now because soon we
are selling mobile phones there's so many chinese manufacturers of mobile phones trying to
compete on price that this is going to be a horrible group to be in in a couple years so
let's switch to another group and kind of avoid that intense competition
these are all reasons to switch groups there could be other reasons so that's not an
complete list of of reasons but so there there there these are called mobility drivers
between switching that can make us switch from one strategic group to another
but even if i discover i'm in group a and i discover in group b the profits are higher
there could be reasons to remain in group a these reasons are called mobility barriers
so perhaps reorienting ourself is really expensive from becoming the cheap discount coca cola
no not coca cola but from becoming the moving from a cheap discount cola to the next luxury
cola it takes a lot of building up reputation which is going to be very costly
so that could be reason to avoid doing that changes are always tricky and difficult and
organizations are sometimes like a big oil tanker that's really hard to turn around
that's called organizational inertia and that could be a reason that we simply don't change
things because it's difficult to change things sometimes it might be tricky to understand how
or what competitors actually did to get positioned themselves on a market and we don't know how to
repeat what they did so that we also get there and sometimes these strategic positioning might
require intangible assets just think about reputation brand as an intangible asset a patent
as an intangible asset and it might be very hard to imitate that to also kind of get to that and
invent that protect that and that could prevent us from moving from between strategic groups
i hope you got an idea about what strategic groups are we could go much much deeper there
and have lots of examples of strategic groups in industries and perhaps that is something
that we should be doing at one of the tutorials or in one of the examinations
we are done for now we have looked at portland five forces model as a way to evaluate industry
structure and look at positioning in a market by companies we have looked at strategic groups
which are clusters of companies or firms of organizations that position themselves similarly
along strategic dimensions we have seen that the profitability the average profitability of an
industry is determined by these five forces a new entrance the intensity of competition
the possible substitutes and the bargaining power of both suppliers and buyers we've seen that
entry barriers are collective goods that protect incumbent firms make it harder for new firms to
enter in industry we have seen that strategic groups are often associated with similar levels
of profitability what we often see that there's an average profitability that for each of these
strategic groups and we've seen there's reasons to switch between groups but also that there's
hurdles mobility barriers that might prevent us from doing so
that is industry and competitive analysis in a nutshell michael porter and his framework are
one of the standard tools that strategists use and you might perform part of what they do under
the label of market and analysis and try to find out about the the competitors etc
porter's five forces model is really standard and a classic it's still being used and it's still
being useful let me end by begging you to never never ever write about porter's five horses model
as i've already seen in examinations because this is not about writing it's about the five forces
that determine industry profitability and attractiveness thank you goodbye and see you
you