© 2015 Hart E. Posen 1

SESSION 04Prof. Hart E. Posen

hposen@wisc.educalendly.com/hposen/20min

• Turn-off and put away laptops, tablets, phones.

• Use name cards in every class session. I will not call on students without name cards.

• Sit in your assigned seat.Prof. Hart E. Posen University of Wisconsin

SupplierThreat

Rivalry Threat

Buyer Threat

Substitute Threat

EntrantThreat

Rivals and Potential Rivals

UNDERSTANDING AND ASSESSING INDUSTRY ATTRACTIVENESS?

— VALUE CAPTURE ACROSS INDUSTRIES IN A SUPPLY CHAIN —

s02 s03

Prof. Hart E. Posen University of Wisconsin

TODAY

Cemex's board of directors has approached your for advice. What strategy would you recommend for expansion in the US?

Prof. Hart E. Posen University of Wisconsin

Assuming conditions around the year 2000 (with market shares per Exhibit 5)

CEMEX — HOLDERBANK

Prof. Hart E. Posen University of Wisconsin

CONCENTRATION AND MARKET POWER

— Concentration — Usually measured as the market share of top X firms, or by the Herfindahl (sum of square market shares of all firms in industry)

EBITDA/Sales

Prof. Hart E. Posen University of Wisconsin

IDENTIFIES A PROBLEM& SOLVES IT

• Many features of the industry lead to high rivalry threat.• Be clear that rivalry is about competitive actions and reactions that diminish value capture

by firms in the industry

• Limited differentiation (other than location).• Low concentration• High exit barriers• Growth slow at times (tied to business cycle)

• Many features of the industry engender high entry threat.• Be clear that we are not talking about firms interest in entry (e.g., highly profitable

incumbents) but rather, conditional on the desire to enter, the ease/difficulty of doing so.

• Low buyer switching costs• Weak brand identity• No barriers to distribution• No absolute cost advantage

Prof. Hart E. Posen University of Wisconsin

Reminder: Study the Five-Forces teaching note — you will need to know what each of the mechanisms are and how they function to impact industry attractiveness.

IDENTIFIES A PROBLEM& SOLVES IT

Did the strategy you recommended solve this problem and allow Cemex to capture a

substantial share of the value?

Prof. Hart E. Posen University of Wisconsin

IDENTIFIES A PROBLEM& SOLVES IT

• Geographically focused growth to limit rivalry• Competition is very local — consolidate by quietly acquiring dominant position in

specific geographic markets.• Market power in local markets increases prices (away from perfect competition

towards monopoly)

• Still need to reduce entry threat• Excess capacity to limit entry or expansion by rivals.• (See Spence 1977 for a discussion of this strategy in the economics literature, available

on Moodle in “Grounded in Research (Optional reading)”.

• Which captures the benefits when one firm improves the attractiveness of an industry?• Firm with largest market share

Prof. Hart E. Posen University of Wisconsin

FIVE-FORCES ANALYSIS• Industry analysis is about value capture, not value creation.

• Value may be captured buyer or supplier industries, as well as current, distant (subs), or potential (entrants) rivals.

• Level of analysis is the industry, not any particular firm.• The key question in industry analysis: Is the industry attractive for incumbents?• Why do some industries capture more value than others?

• Formal analysis would proceed as follows:• Identify the focal industry — define set of firms in that industry (rivals sell goods buyers consider as close substitutes)• Identify substitute industries — define the set of firm in those industry.• Identify buyer and supplier industries — define the set of firms in those industry.

• Analyze each of the five forces.• Porter identifies many factors that drive each of the five forces — consider them all.

• Be sure that you understand how each factor functions to change value capture.• Conclude: Rivalry high, med, or low? Buyer power? Supplier power.? Threat of entry?, Threat of substitutes?

• Analysis must conclude with…• An answer to the questions: Is the industry attractive for incumbents? Why?

• You must decide what is important, the five forces are not equally important in all industries.• The answer to “why” is centrally important.

• Different “why” imply different problems/opportunities and thus different actions. Prof. Hart E. Posen University of Wisconsin

REMIN

DER

NEXT?Session 05

Module 2: Competitive Advantage

No case (three reading)

Reminder: Quiz on s01 & Module 1 in s07 (Feb 10)

Prof. Hart E. Posen University of Wisconsin