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Environment Matters
When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact. Warren Buffet
The industry in which a company operates has a strong influence on its economic performance 10% 20% of the variation in businesses accounting profitability reflects the industries in which they operate
Two-Dimensional Landscape
Exhibit 2.1 Average Economic Profits of U.S. Industry Groups (1989 2006)
Three-Dimensional Landscape
Exhibit 2.2 A Three-Dimensional Business Landscape
Landscape Metaphor
The profitability of direct competitors tends to have a common industry-specific component Businesses in some industry groups (e.g., pharmaceuticals) have generally operated on profit plateaus Others (e.g., airlines) have mostly remained stuck in deep troughs
Landscape Metaphor
Past industry performance is not always a predictor of what will occur in the future Managers need to understand the reasons behind such effects in order to:
decide where and how their firms will compete assess the implications of major changes in the relevant parts of the business landscape, and adapt to or, better yet, shape the business landscape
Supply-Demand Analysis
Alfred Marshall (late 19th Century)
created the first supply-demand diagram price determined by equilibrium point in supply and demand debated whether Marshallian scissors values are governed by
supply-side costs demand-side utility
Supply-Demand Analysis
Exhibit 2.3 Supply-Demand Analysis
Supply-Demand Analysis
Incorporated relatively quickly into economics and marketing courses at business schools Less impact on teaching and practice of business strategy until the recessions of the 1970s and early 1980s
Supply-Demand Analysis
Limitations of Marshallian supply-demand analysis
Pushes boundaries of reality to treat the hospitals in the local market as:
individually small lacking market power
Violates the assumption of homogeneity Useful to generalize assumptions associated with supply-demand analysis
Enabled growth of industrial organization (IO) Several hundred empirical studies by IO economists (mid1970s)
Entry barriers
Each generalizes its predecessor(s) by bringing new types of players into the analysis Can additional improvements be achieved by further broadening the types of players considered?
non-market relationships
To understand the reasons for such variations To incorporate them into strategic action
Summary
Landscape analysis elucidates opportunities and threats
not confined to direct competitors involves looking beyond them to the generality of the analytical framework employed
Summary
Five forces framework extends the analysis to three-stage vertical chains
supplier competitor buyer
Summary
The value net draws complementary relationships into the picture
more groups of players may need to be added, depending on the context fit the framework used to the situation being studied, rather than the other way around
Summary
Group-level profitability analysis must be dynamic
relationships between groups of players can and do change over time
cycles, trends, shocks, and other factors
Key Terms
business landscape buyer power complementors cooperation demand curve dynamic thinking entry barriers extended competition five forces framework geographic scope horizontal scope industrial organization or IO nonmarket relationships oligopolistic competition price-elasticity of demand rivalry strategic groups substitutes supplier power supply curve supply-demand analysis value net vertical scope