Inter-Industry Differences

Pharmaceutical Industry Return on Equity

35

30 30 29.4
28
25 25
24
22.48 23
22
Percent ROE

21 20.3
20 20
19 18.32 18.2
18 18 18
17 17.1
16 15.515.515.5 15.515.515.5 15.515.5 16 15.8 15.24
15 14.513.7514 15 15 14.64
14 14 14 13.7613.7 14.03
12 11.64
10 10 10 10.5 11 10.5 10
11 11 10.3
9 9

Pharma. Industry All Industries

Porter’s Five Forces Model

Threat of Entry

Competitive
Rivalry Buyer Power
Supplier Power

Substitutes

Barriers to Entry

• Brand loyalty, advertising

• Absolute cost advantages
• Scale economies (also scope and experience)
• Regulation
• Capital
• Product Differentiation
• R&D investments
• Others: Exit barriers, channel preemption

3
 Competitive Rivalry

• Fragmented or consolidated industry

• Growth rate
• Extent of differentiation
• Lumpiness of additions to capacity
• Fixed costs

Barriers and Profitability

Exit Barriers
Low High

Low, stable Low, risky

Low returns returns

Entry Barriers
High, stable High, risky
High returns returns

Power of Buyers

• Relative concentration
• Few vs many customers facing few vs many sellers
• Purchase volume as % of focal industry output
• Large vs small purchase decisions
• Availability of substitute products
• Buyer industry substitutes
• Threat of forward/backward integration
• Ability of focal industry or buyer industry to become a
competitor
• Switching costs
• Threat of switching suppliers

6
 Power of Suppliers

• Relative concentration
• Few vs many sellers facing few vs many buyers
• Purchase volume as % of supplier industry output
• Large vs small purchase decisions
• Availability of substitute products
• Supplier industry substitutes
• Threat of backward integration
• Ability of focal industry to become a competitor
• Switching costs
• Threat of switching suppliers

Power of Substitutes

Focal Industry
 Direct substitution
A
Other with same
Industry functionality
C D – diesel vs gas engines
B
 Eliminating need for
product
– water meters vs flat rate
Customers
 Reduce product
usage

Strategic Implications of
Industry Analysis

• Invest in customer relationships

• (e.g., build customer loyalty)
• Manage the supply chain
• (e.g., multiple sources, or strategic alliances)
• Avoid excessive rivalry
• (e.g., attack emerging vs entrenched segments)
• Raise barriers to entry
• (e.g., make preemptive investments)
• Reduce the threat of substitution
• (e.g., incorporate their benefits)

9
 Weaknesses of Porter’s model

• No people in the model

• Role of technology
• Firm effects ignored
• Static
• Zero-sum game, supply chain issues
• Role of complementors

10

Integrating Industry and Firm

Industry
Competitive Opportunities • Analyze industry structure
Analysis • Create product/market
positioning

Create
sustainable
STRATEGY competitive
advantage

Capability • Analyze firm resources

Assessment • Develop unique firm-
Firm Resources specific positions
& Capabilities

11