Mapping the Business Landscape - Ghemawat and Collis

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  1. Buffet: the profitability of a company is usually derived from industry in which the company is in, and not the manager that is running the company
    1. There is some evidence that the profitability of different industries varies quite significantly
    2. What managers should learn from this information?
      1. figure out why profitability varies so much and use this information to determine how their firms wil compete
      2. assess implications of major changes in business landscape
      3. shape the business landscape
  2. Ways to think about the business landscape
    1. Supply Demand Analysis
      1. Issues with the analysis:
        1. the players in the market and change the curve by acting unilaterally or by acting with a few other players
        2. the players are not homogeneous therefore, some players might provide better services in some areas than others do.
    2. Five forces framework
      1. Joe Bain study
        1. large firms are more profitable than smaller firms
        2. established sellers can sell for higher than the competitive rate
        3. entry barriers
          1. cost advantage for established firms
          2. significant degree of cost differentiation
          3. economies of scale
      2. Framework developed by Richard E. Caves
        1. benefits over traditional supply and demand analysis
          1. relaxed assumptions of homogeneity and large numbers
          2. considers suppliers, rivals, and buyers
      3. The five forces
        1. The degree of rivalry
          1. How much of the industry will be dissipated through direct competition
          2. Can be measured through:
            1. number of competitors
            2. size of competitors
            3. level of capacity utilization
            4. growth rate
            5. degree of product differentiation
            6. level of fixed cost
            7. diversity of competitors
            8. exit barriers
          3. In general a small number of big competitors will restrain their rivalry, and a large number of small competitors will have an unrestrained rivalry
        2. Threat of entry
          1. this measures the difficulty for an outsider to replicate an incumbent's position (often this is the amount of irreversible resource commitments
          2. these barriers can be either legal of physical
          3. usually the barrier is the amount of money needed
        3. The threat of substitutes
          1. This depends on the relative price to performance ratios of the substitutes (used to fulfill the same need)
          2. Substitution often follows an S-Shaped curve
          3. In analyzing substitution one must look at products that have similar functions (not just physically similar)
        4. Buyer power
          1. Factors:
            1. Number of buyers
            2. Quantity purchased by buyers
            3. How educated the buyers are about the product
            4. The buyers willingness/incentive to use their purchasing power
        5. Supplier power
          1. Size and concentration of suppliers relative to competitors
          2. degree of differentiation of inputs to the product
        6. 6th factor? - relationships between the buyers and the suppliers
  3. Value Net
    1. Developed by Brandenburger and Nalebuff
    2. Way of generalizing the 5-factor framework so that other players can be brought into the analysis
    3. Highlights the role of non-market relationships
    4. Highlights the role that complementors play
    5. factors that determine the bargaining power of complementors
      1. concentration of complementors as compared to competitors
      2. the cost for buyers and suppliers to switch
      3. the cost for competitors and complementors to switch
      4. the relative costs for the complementors and competitors to integrate each others businesses
      5. How fast is the industry growing
  4. How to map a business landscape
    1. Gathering information
    2. Drawing the boundaries
      1. horizontal boundaries
        1. inside out approach - start with served market and then move to unserved segments with which has shared customers and tech
        2. include complements
      2. vertical boundaries
        1. if competitive market for third party sales exist at vertical stages --> stage can be studied separately
        2. if no competitive market --> analyzed together
        3. how many supplier buyer chains should be considered?
      3. geographic scope - do you look just at the USA or internationally as well?
        1. you have to look at the market integration
        2. what considerations are being studied?
          1. sales forces --> local
      4. In general it is hard to create proper boundaries so it is better instead to make sure that the boundaries are clearly defined and consistently applied
    3. Identifying groups of players
      1. direct competitors
      2. potential entrants
      3. substitutes
      4. complements
      5. buyers
      6. suppliers
    4. understanding group level bargaining power
      1. focus on groups or sub groups that can greatly change the payoff
    5. thinking dynamically
      1. think about how the landscape will change or is changing
      2. think about both short run cycles and long run cycles
      3. think about industry life cycles and general business cycles and economy wide business cycles
      4. trends such as market growth, changes in buyer needs, rate of innovation, changes in input costs
    6. Responding to/Shaping the business landscape