TABLE 4.1 What determines interfirm differences in profitability? The role of industry Percentage of variance in firms’ return on assets explained by: Industry effects Firm effects | Unexplained (%) (%) variance (%) Schmalensee (1985) 19.6 06 79.9 Rumelt (1991) 40 44.2 44.8 McGahan & Porter (1997) 18.7 317 48.4 Hawawini et al. (2003) 81 358 52.0 Roquebert et al. (1996) 10.2 55.0 32.0 Misangyi et al. (2006) 76 438 na Notes: “Firm effects” combine business unit and corporate effects. The rows do not sum to 100% because other sources of variance are not reported. Sources. R. Schmalensee, “Do markets differ much?” American Economic Review 75 (1985): 341-51; RP. Rumelt, “How much does industry matter?” Strategic Management Journal 12 (1991): 167-85; ‘A.M, McGahan and M. E, Porter, “How much does industry matter, really?" Strategic Management Journal 18 (1997): 15-30; G. Hawawini, V. Subramanian, and P. Verdin, “Is Performance Driven by Industry or Firm-Specific Factors? A New Look at the Evidence,” Strategic Management Journal 24 (2003): 1-16; J. A. Roquebert, RL. Phillips, and P. A. Westfall, "Markets vs. Management: What ‘Drives’ Profitability?” Strategic Management Journal 17 (1996): 653-64; V. F Misangyi H. Elms, T. Greckhamer and J. A. Lepine, “A New Perspective on a Fundamental Debate: A Multilevel Approach to Industry, Corporate and Business Unit Effects,” Strategic Management Journal 27 (2006): 571-90.SUPPLIERS: The suppliers of complements create value for the industry and can exercise bargaining power Bargaining power J of suppliers INDUSTRY COMPETITORS COMPLEMENTS POTENTIAL |_Threat of ENTRANTS “new entrants = SUBSTITUTES Rivalry among substitutes existing firms Bargaining power Jof buyers BUYERS | FIGURE 4.1 Five forces, or six?Big Advertising Budget Small Advertising Budget COCA-COLA (Payoffs in $ millions) Small Advertising Budget Big Advertising Budget In each cell, the lower-left number is the payoff to Pepsi; the upper-right the payoff to Coke.STRATEGY How is the firm competing? OBJECTIVES What are competitor's current goals? Is performance meeting these goals? How are its goals likely to change? PREDICTIONS © What strategy changes will the competitor initiate? ‘© How will the competitor Tespond to our strategic initiatives? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES AND CAPABILITIES. What are the competitor's key strengths and weaknesses? FIGURE 4.2 A framework for competitor analysis® Size Industrial © Technical buyers sophistication © OEM/replacement Characteristics of the Buyers aT ‘© Demographics ees Lifestyle © Purchase occasion Distribution . © Distributor/broker © Exclusive/nonexclusive Opportunities for Geographical © General/specialist Differentiation location © Physical size © Price level Characterist © Product features of the Product @ Technology design © Inputs used (ag., raw materials) ‘© Performance characteristics © Pre-sales and post-sales services FIGURE 4.3 The basis for segmentation: the characteristics of buyers and productsvancooxe North | Westen | Easter | Asia Latin | Australia | Africa America | Europe | Europe America | & NZ. Luxury cars Fullsize cars Mid-size cars Small cars Station wagons Minivans Sports cars Sport utility Pickup trucks HybridsService and repair Aftermarket Gasoline parts Auto manufacturing ‘Auto insurance Auto rental New car Auto loans dealers Used car dealers Operating margin 100% Share of industry revenue Source: O. Gadiesh and J. L. Gilbert, “Profit Pools: A Fresh Look at Strategy,” Harvard Business Review (May-June 1998): 142, © 1998 by the Harvard Business Schoo! Publishing Corporation, all rights reserved, Reproduced with permission FIGURE 4.4 The U.S. auto industry profit poolBroad GLOBAL, BROAD-LINE PRODUCERS. e.g., GM, Ford, Toyota, Renault-Nissan, Honda, VW, DaimlerChrysler, REGIONALLY FOCUSED, Hyundai-Kia BROAD-LINE PRODUCERS a GLOBAL SUPPLIERS OF NARROW MODEL RANGE eg,, Subaru, Isuzu, ATONE CLINE Suzuki, Saab, Daihatsu PRODUCT PRODUCERS RANGE e,g., Tofas, Hindustan Motors, LUXURY CAR SAIC (China), Proton, Maruti MANUFACTURERS eg., Jaguar, Rolls Royce, BMW NATIONALLY FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (Ur), Garscfoaaer PEREORANCE CAR (US) Morgan (UK) eg. Porsche, Narrow Maserati, Lotus National GEOGRAPHICAL SCOPE Global FIGURE 4.5 Strategic groups within the world automobile industryINTERNATIONAL Apache UPSTREAM Premier companies Oil) INTEGRATED OIL MAJORS 2 Se ee INTERNATIONAL Kat ae UPSTREAM, ioe ous INTEGRATED REGIONALLY NATIONAL DOMESTIC FOCUSED g Iran PRODUCTION) OIL COMPANIES DOWNSTREAM 5 NOC COMPANIES 3 | ~~ Statoil le BP a7 a Pemex Patronas Chevron a § __ Lukoil PetroChina Conoco Phillips sure ee SF in Indian Oil potrobras ENI Total majors Shell =o Repsol YPF ona Neste emma Asad DOWNSTREAM o Ashiand J OlL COMPANIES 0 10 2 30 40 50 60 70 80 NATIONALLY FOCUSED Geographical Scope DOWNSTREAM COMPANIES FIGURE 4.6 Strategic groups within the world petroleum industry