Industry Analysis, Value Net & RBV-VRIO

Industry Analysis
(Porter’s Five Forces Framework)

The Value Net
Resource Based View (RBV)
Prof Saurabh Pandya

PESTEL Framework
Macro-environment constituents:
• Political
• Economic
• Social
• Technological
• Environmental
• Legal
INDUSTRY ANALYSIS
Porter’s Five Forces
Framework…
This framework helps to understand:
• The industry structure – Five core elements
• The weak and the strong forces in the industry
• The industry attractiveness
• The profitability or rather the “profit potential” of
the industry
• Remains the same irrespective of whether it is done

from the point of view of incumbent organizations or
prospective entrants – because it is for an INDUSTRY
Porter’s Five Forces
Framework
1. The Intensity of Rivalry among
Competitors
This is affected by:
• Numerous or equally balanced competitors
Concentration ratios of an industry
• 4-firm C ratio = total market share of top 4 firms
• Herfindahl index (H-index or HHI) – sum of squares of
market shares of all firms in an industry
• Slow industry growth
• High fixed costs
• Lack of differentiation or switching costs
• Extra capacity in large increments
• High exit barriers
2. The Threat of New Entrants
• This refers to new competitors entering an
industry and reducing its profitability
• New entrants will be attracted to industries that
earn profits in excess of their cost of capital
• The threat of entry will depend on:
• the existence and level of barriers to entry (BTE)
• the reaction of existing competitors.
• High barriers to entry (BTE) make the threat of
entry low (inverse relationship)
• Expected retaliation (from incumbents) will deter
firms from entering the industry
The Threat of New Entrants
• The following factors are sources of higher
Barriers to Entry (BTE) and hence reduce the
threat of new entrants:
• Economies of scale
• Network effects
• Switching costs
• High capital requirements
• Incumbency advantages (e.g. raw materials
access, brand, location, proprietary technology)
• Unequal access to distribution channels
• Government regulations
3. The Threat of Substitute Products
and Services
• The threat from products and services that can
meet similar needs
• It does not refer to competition from new
entrants
• Substitutes limit the potential returns of an
industry
• The price-value of substitute products will
determine the extent of their threat
4. The Bargaining Power of Suppliers
(The buyer is the firm in the industry and the

supplier is the producer of that firm’s input)
Supplier power increases when:
- the supplier industry is dominated by a few
companies
- It is more concentrated than the industry it sells to
- suppliers are faced with few substitutes
- suppliers’ products are differentiated
- suppliers pose a credible threat of forward
integration
5. The Bargaining Power of Buyers
Buyer power increases when:
• buyers are concentrated, i.e. the buyers (few in numbers)
purchase in large volumes, relative to a single vendor
• the industry product is standard or undifferentiated
• the costs of switching are low
• buyers pose a credible threat of backward integration
• buyers’ purchases from the industry represent a
significant fraction of their cost structure / procurement
budget
• quality of the buyers’ products / services is not affected
much by the industry’s products / services
• buyers earn low profits or are strapped for cash
Impact of Porter’s Five Forces
Sr. No. Five Forces Level Industry
Attractiveness
1 Intensity of Rivalry High Low
2 Threat of New High Low

Entrants (BTE Low)
3 Threat of Substitutes High Low
4 Bargaining Power of High Low

Suppliers
5 Bargaining Power of High Low
Buyers
Criticisms of Porter’s Five Forces
• The five forces framework assumes a zero-sum
game
• It is static and assumes stable markets
• Many strategies are not deliberate but emerge
• (The concept of Emergent Strategy by Henry
Mintzberg)
• The government might constitute a “sixth force”
• Porter counter-argues that the effects of
government actions and policies play out through
any of the other five forces in the industry
VALUE NET & “PARTS” FRAMEWORKS
The Value Net…*
• The value net includes:
• a map of the competitive game
• the players in the game
• their relationship to each other
• Complementors supply complements to an industry
and thereby increase its value
• Successful business strategy is about actively
shaping the game you play, not just playing the game
you find
*The Right Game: Use Game Theory to Shape Strategy by

Brandenburger & Nalebuff (HBR, July-Aug 1995)
The Value Net Framework
The original
paper uses the
word
“Substitutors”
for
Competitors;
(Not to be
confused with
“Substitutes”
as per Porter’s
Five Forces)
The Value Net – PARTS framework
• The PARTS framework:
• Players – in the Value Net
• Added Values – increasing own or reducing others’
added values
• Rules – e.g. one price to all
• Tactics – managing perceptions – reducing, creating
or maintaining uncertainty (lifting the fog)
• Scope – expand or shrink, linkages with other games
You can try to win the game by managing any of the

above components and players, including “yourself”
RESOURCE-BASED VIEW (RBV)
Strategically Valuable Resources*
• Strategically valuable resources enable your
enterprise to perform activities better or more
cheaply than rivals
• Give your organization a competitive
edge/advantage (competitively valuable resources)
• Such “resources” can be:
• Physical (tangible) assets – e.g. a prime location, land,
buildings, machinery
• Intangible assets – e.g. a strong brand, goodwill, patents
• Capabilities – e.g. a brilliant manufacturing process,
systems
*Competing on Resources by Collis & Montgomery (HBR, July-Aug 2008)
What Makes a Resource Valuable?
Value
Creation
Zone
Three Fundamental Market Forces
• Demand (Test # 5)
• Does it meet customers’ needs, and is it
competitively superior?
• Scarcity (Tests # 1, 2 & 4)
• Is it imitable or substitutable, and is it
durable?
• Appropriability (Test # 3)
• Who owns the profits?
Five Tests for the Resources
1. They are difficult for rivals to copy (Inimitable)
2. They depreciate slowly (Durable)
3. Your company – not the employees, suppliers or
customers – controls their value
• Value creation and Value appropriation (capture)
4. They cannot be easily substituted for, hence
(Non-substitutable)
5. They are superior to similar resources that your
competitors own (competitive superiority)
The VRIN/VRIO framework…
Resources should be:
• Valuable
• Rare
• Inimitable (cannot be copied easily or quickly)
• Non-substitutable / Organized
• Organized – Firm must be organized to utilize the
resources
The VRIN/VRIO framework
List of Valuable Rare Inimitable Organi CD/CP/
Resources Non- zed TCA/UCA/
substitutable SCA
Tangible
resources
(list)
Intangible
resources
(list)
Capabilities
(list)
VRIO Decision Tree
Test of Inimitability (hard to copy)
Characteristics of such resources:
1. Physical uniqueness
• Cannot be copied by definition
2. Path dependency
• Built over time, path taken to accumulate
3. Causal ambiguity
• Mostly capabilities, e.g. culture, etc.
4. Economic deterrence
• Sizable investment limits the market potential for
competitors
Implications for Strategy
• Investing in resources
• Acquire on the market or develop internally
• Upgrading resources
• Add new competencies sequentially over
time – Learn to exploit the virtuous circle of
“Seeds & Needs” (Japanese concept)
• Leveraging resources (company’s scope)
• Into markets in which they contribute to
competitive advantage or new markets that
improve corporate resources
Seeds & Needs
Integration/Coupling
Case on “Sharp Corporation: Technology Strategy”, HBS Publishing

Industry Analysis, Value Net & RBV-VRIO

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What are the five forces in Porter's Five Forces Framework?

What are some factors that affect the threat of new entrants?

Industry Analysis

(Porter’s Five Forces Framework)

Prof Saurabh Pandya

• Remains the same irrespective of whether it is done

(The buyer is the firm in the industry and the

2 Threat of New High Low

4 Bargaining Power of High Low

*The Right Game: Use Game Theory to Shape Strategy by

You can try to win the game by managing any of the

Case on “Sharp Corporation: Technology Strategy”, HBS Publishing

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